Cement

India

CAUTIOUS
APRIL 09, 2014
UPDATE
BSE-30: 22,343

Global merger, local implications. Lafarge and Holcim, the two largest cement
manufacturers globally, have announced a merger to create to a concrete behemoth.
From an India perspective, ACC and Ambuja (Holcim group) will take under common
management Lafarge India with ~8 mtpa of capacity, a presence in North and East India
and the potential to incrementally strengthen pricing discipline in East Indiaan
important market for Ambuja, with Lafarge India its key competition.

Merger of equals will create concrete behemoth, regulatory hurdles will have to be overcome
The merger of two of the largest cement conglomerates in the world will create a concrete
behemoth with combined cement capacity of 427 mtpa, revenues of EUR31 bn and operating
profit of EUR6.6 bn. Rising debt in an environment of under-utilized capacities had forced both
cement majors to embark on a cost-cutting spreea possible motive for the merger, to monetize
potential synergy benefits of EUR1 bn.
We note that the conclusion of the transaction is likely to be subject to regulatory hurdles,
especially owing to anti-trust regulations as the two cement majors would meaningfully
consolidate their market standing in several developed markets. The cement majors have proposed
to divest capacities that contributed ~10% of operating profits, to overcome regulatory hurdles
due to combined market shares.
India operations will benefit from more consolidation in East India
From an India perspective, Lafarge India has a dominant presence in East India (8.6 mtpa of
cement capacities). ACC and Ambuja Cement (of the Holcim group) have a presence in East India
with 5 mtpa and 6 mtpa of capacities respectively. The eastern region also enjoys superior
pricingaverage prices of `330/bag against an all-India average of `310/bag due to paucity of
supply in the region. In our view, the merger of the two parent companies, implying common
ownership, could meaningfully increase consolidation in this region and have an incremental
impact on pricing discipline in the region (to the extent not exploited).
We note that the merger is likely to have to obtain approval of the Competition Commission of
India, owing to the dominant market share that the combined entity will have in relevant markets
(specifically East India) as well as on an all-India basis.
CMP factors most optimistic earnings recovery; still leaves no upside
Consolidation in East India and consequent pricing discipline notwithstanding, the CMP of ACC
and Ambuja factors an optimistic combination of (1) 10% growth in cement volumes and (2) 25%
improvement in profitability over the next two years.
The Street appears to have hinged its optimism on a stable political regime that will yield improved
volume and earnings trajectory, even as consensus earnings continue to be downgraded over time,
and as cement-company valuations have reached historical peaks. We maintain our cautious
stance on cement namesACC (REDUCE, target price: `1,070) and Ambuja Cement (SELL, target
price: `150).

Murtuza Arsiwalla
murtuza.arsiwalla@kotak.com
Mumbai: +91-22-4336-0870

Avinash Ranjan
avinash.ranjan@kotak.com
Mumbai: +91-22-4336-0869

Kotak Institutional Equities Research

kotak.research@kotak.com
Mumbai: +91-22-4336-0000
For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL.

India

Cement

Exhibit 1: Holcim and Lafarge will create a concrete behemoth with 427 mtpa of combined capacity
Key operational and financial metrics for Holcim and Lafarge, CY2013
Holcim

Lafarge

Holcim+Lafarge

Operational parameters
Capacity (mn tons)

221

206

427

Production (mn tons)

137

139

276

62

67

65

15,198

16,022

31,220

3,102

3,520

6,622

Capacity utilization (%)

Financial parameters (EUR mn)
Revenues
EBITDA
Net income
Net debt

782

1,297

2,079

10,330

7,687

18,017

3.3

2.2

2.7

Net debt/EBITDA (X)

Source: Company, Kotak Institutional Equities

Exhibit 2: Holcim and Lafarge combined would have over 40% market share in the eastern region
Capacity details of Holcim and Lafarge in India (mn tons)

Market share

Lafarge
8.6

Holcim+
Lafarge
20

14.6

15

45

32

6.0

51

12

9.9

15.8

2.6

18

73

25

10.9

11

136

28

58

11

69

352

20

East

ACC
4.9

Ambuja
6.0

Holcim
10.9

West

4.0

10.6

Central

4.5

1.5

North

5.9

South

10.9

Total

30

Industry
47

(%)
41

Source: Company, Kotak Institutional Equities estimates

Exhibit 3: Current market price assumes significant improvement in volume growth and EBITDA/ton
Scenario analysis for valuations of ACC and Ambuja based on CY2015E earnings

ACC
Volume
Growth (%)
Profitability (Rs/ton)
Growth (%)
EBITDA (Rs bn)
Multiple (X)
Enterprise value (Rs bn)
Net debt (Rs bn)
Fair value

CY2013
23.93
(2.8)
572
(28)
13,683

Bull
29
10
893
25
25,869
9
233
(40)
1,453

Ambuja
CY2013
Bull
21
25
(2.0)
10
751
1,174
(33)
25
15,773
29,821
9
268
(38)
201

Notes:
(a) Bull case is based on CY2015E.
(b) Growth rates for the bull case are CAGR for the two years from CY2013 to CY2015E.
Source: Company, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Cement

India

Exhibit 4: ACC and Ambuja have a history of earnings

downgrades
Data on consensus earnings for ACC, December year-ends, CY201314E
(Rs/share)
120

100

2013

Exhibit 5: Ambuja reflects the earnings estimate trajectory of

ACC
Data on consensus earnings for ACC and Ambuja, December yearends, CY2013-14E
(Rs/share)
16

2014E

97.8

14

81.6

12

2013

2014E

13.4
11.2

80
10
60

59.1

53.7

40

8.9

7.8

Source: Bloomberg, Kotak Institutional Equities

January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
April
May
June
July
August
September
October
November
December

January
February
March
April
May
June
July
August
September
October
November
December
January
February
March
April
May
June
July
August
September
October
November
December

Source: Bloomberg, Kotak Institutional Equities

Exhibit 6: Comparative valuation of cement companies under our coverage

Company
ACC
Ambuja Cements
Grasim Industries
India Cements
Jaiprakash Associates
Shree Cement
UltraTech Cement

Market cap.
(US$ mn)
4,180
5,142
4,211
328
1,904
3,155
9,837

Company
ACC
Ambuja Cements
Grasim Industries
India Cements
Jaiprakash Associates
Shree Cement
UltraTech Cement

2013
11.7
11.6
7.6
5.7
11.6
11.9
13.5

CMP (Rs)
7-Apr
1,379
209
2,847
66
56
5,615
2,226

Target
price (Rs)
1,070
150
2,800
60
44
3,950
1,600

EV/EBITDA (X)
2014E
17.4
17.7
6.8
7.1
9.9
15.7
17.4

2015E
15.0
14.1
5.4
5.5
6.6
12.2
13.7

Rating
REDUCE
SELL
ADD
ADD
ADD
SELL
REDUCE

2016E
12.6
12.1
4.1
4.5
6.2
9.2
10.3

2013
74
10.3
272
7
2.0
288
101

EPS (Rs)
2014E
2015E
47
46
6.8
9.2
207
227
3
5
3.3
9.0
220
285
69
83

2016E
59
10.8
278
8
10.3
358
111

EV/ton of production (US$)

2013
2014E
2015E
2016E
151
161
148
137
212
214
205
198
NA
NA
NA
NA
87
80
72
66
NA
NA
NA
NA
237
231
213
191
243
242
225
204

2013
19
20
10
10
28
19
22

P/E (X)
2014E
2015E
29
30
31
23
14
13
25
13
17
6
25
20
32
27

2016E
23
19
10
8
5
16
20

EV/ton of capacity (US$)

2013
2014E
2015E
2016E
122
126
113
102
164
157
148
143
NA
NA
NA
NA
57
53
43
38
NA
NA
NA
NA
218
229
206
191
194
194
162
149

Source: Bloomberg, Kotak Institutional Equities estimates

KOTAK INSTITUTIONAL EQUITIES RESEARCH

Disclosures
"I, Murtuza Arsiwalla, hereby certify that all of the views expressed in this report accurately reflect my personal views about
the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be,
directly or indirectly, related to the specific recommendations or views expressed in this report."

Kotak Institutional Equities Research coverage universe

Distribution of ratings/investment banking relationships
Percentage of companies covered by Kotak Institutional Equities,
within the specified category.

70%
60%

Percentage of companies within each category for which Kotak

Institutional Equities and or its affiliates has provided investment
banking services within the previous 12 months.

50%
39.5%

40%
30%

27.2%
19.1%

20%
10%

14.2%
4.3%

4.9%
0.0%

1.9%

0%
BUY

ADD

REDUCE

SELL

* The above categories are defined as follows: Buy = We expect

this stock to deliver more than 15% returns over the next 12
months; Add = We expect this stock to deliver
5-15% returns over the next 12 months; Reduce = We expect this
stock to deliver -5-+5% returns over the next 12 months; Sell =
We expect this stock to deliver less than -5% returns over the next
12 months. Our target prices are also on a 12-month horizon
basis. These ratings are used illustratively to comply with applicable
regulations. As of 31/12/2013 Kotak Institutional Equities
Investment Research had investment ratings on 162 equity
securities.

Source: Kotak Institutional Equities

As of December 31, 2013

Ratings and other definitions/identifiers

Definitions of ratings
BUY. We expect this stock to deliver more than 15% returns over the next 12 months.
ADD. We expect this stock to deliver 5-15% returns over the next 12 months.
REDUCE. We expect this stock to deliver -5-+5% returns over the next 12 months.
SELL. We expect this stock to deliver <-5% returns over the next 12 months.
Our target prices are also on a 12-month horizon basis.

Other definitions
Coverage view. The coverage view represents each analysts overall fundamental outlook on the Sector. The coverage view will consist of one of the following
designations: Attractive, Neutral, Cautious.

Other ratings/identifiers
NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable
regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic
transaction involving this company and in certain other circumstances.
CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
NC = Not Covered. Kotak Securities does not cover this company.
RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient
fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock
and should not be relied upon.
NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
NM = Not Meaningful. The information is not meaningful and is therefore excluded.

KOTAK INSTITUTIONAL EQUITIES RESEARCH

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