Asia India
Resources Construction Materials
23 February 2009
Indian Cement Sector
Production shortfall
Manish Saxena
Research Analyst
(91) 22 6658 4034
manish.saxena@db.com
Sandeep Palgota
Research Associate
(91) 22 6658 4056
sandeep.palgota@db.com
Deepak Agrawala
Research Analyst
(91) 22 66584214
deepak-m.agrawala@db.com
Fundamental, Industry, Thematic, Thought-leading
Deutsche Bank Company Research's Investment Policy Committee has deemed
this work F.I.T.T for investors seeking differentiated ideas. Contrary to prevailing
market opinion, we believe the Indian cement sector will experience a sustained
upcycle lasting a few years. Street concerns about oversupply, demand
slowdown, pricing and valuation are overdone, providing what we believe is a
buying opportunity. Our FY10e (Mar) EPS estimates are above consensus.
Deutsche Bank AG/Hong Kong
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm
may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
is available to customers of DBSI in the United States at no cost. Customers can access IR at
http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
FITT Research
Top picks
UltraTech Cement (ULTC.BO),INR419.10 Buy
Grasim (GRAS.BO),INR1,344.20 Buy
Shree Cement (SHCM.BO),INR552.45 Buy
Companies featured
ACC (ACC.BO),INR553.75 Hold
2007A 2008E 2009E
P/E (x) 14.1 9.7 12.9
EV/EBITDA (x) 8.8 5.5 7.9
Price/book (x) 4.6 2.2 2.0
Ambuja Cements Ltd (ABUJ.BO),INR68.10 Hold
2007A 2008E 2009E
P/E (x) 14.1 8.7 11.2
EV/EBITDA (x) 9.0 4.1 5.3
Price/book (x) 4.8 1.9 1.7
Grasim (GRAS.BO),INR1,344.20 Buy
2008A 2009E 2010E
P/E (x) 11.4 6.6 7.3
EV/EBITDA (x) 6.8 3.9 4.3
Price/book (x) 2.6 1.1 1.0
India Cements (ICMN.BO),INR100.05 Buy
2008A 2009E 2010E
P/E (x) 9.0 5.4 4.6
EV/EBITDA (x) 7.0 4.0 3.2
Price/book (x) 1.6 0.7 0.7
Shree Cement (SHCM.BO),INR552.45 Buy
2008A 2009E 2010E
P/E (x) 14.8 4.7 4.1
EV/EBITDA (x) 5.4 2.7 2.3
Price/book (x) 5.6 1.9 1.4
UltraTech Cement (ULTC.BO),INR419.10 Buy
2008A 2009E 2010E
P/E (x) 11.2 5.7 6.0
EV/EBITDA (x) 7.4 4.0 3.9
Price/book (x) 3.6 1.5 1.2
High utilization support cement prices
75
80
85
90
95
100
FY95 FY97 FY99 FY01 FY03 FY05 FY07 FY09e FY11e
110
140
170
200
230
Clinker Utilization (%) - LHS Cement price/bag
(Rs/bag)
(%)
Related recent research Date
Is this the first sign of a pickup in real demand?
06 Jan 2009
This report changes ratings, price targets,
and/or estimates for several companies
under coverage. For a detailed listing of
these changes, see Figure 1 inside
Fundamental: Worries about oversupply are overdone; a buying opportunity
The consensus view (among investors/analysts and some cement companies’
management teams) is that (1) the recent demand surge will likely be short-lived
as it is due to pre-election government spending and (2) industry profitability could
fall sharply after Mar‘09 (as new capacity comes on stream). We disagree and
believe India’s cement production is unlikely to grow beyond a 8% CAGR over the
next two years, even assuming that the entire new capacity orders of 85mnt (42%
of current industry capacity) are commissioned in this period.
Industry: Reduced fly ash availability to constrain cement production
Over the past decade, headline cement production capacity has grown 2.5x,
driven by the addition of up to 30% of fly ash (a final-stage additive). Fly ash usage
rose 15x from <2mnt in 1997 to ~30.5mnt in 2008. Fly ash is an environmentally
hazardous material and was available for free from power generating plants using
Indian coal (with an extremely high ash content of >40%). However, fly ash
sourcing is becoming more difficult due to (1) delays in the commissioning of new
thermal power plants, which generate fly ash and (2) greater use of washed
coal/imported coal, which significantly reduces the fly ash produced in power
plants.
Thematic: Industry utilisation – and profitability – to be sustained
Our research indicates that the cement industry will lose about 22mnt of annual
cement production due to the shortage of fly ash and another 18mnt because
much of the balancing equipment in new capacities has not been installed.
Accordingly, unless cement demand growth falls below 2% – which we believe is
unlikely even if we assume a dramatic decline in India’s GDP growth to <2% –
industry utilisation should remain broadly at the same levels as FY09e, allowing
current profitability to be sustained.
Thought-leading: Rural economy, infrastructure the new pillars of demand
In our proprietary DB survey of 36 cities, we examine how demand drivers in the
sector are fast evolving. Our survey suggests that large scale investments in rural
economies and big ticket infrastructure projects have largely offset the slowdown
in the urban housing segment. This is contrary to the long-prevailing view of urban
housing being the prime driver of cement demand in India by far.
Actionable ideas
We have upgraded our earnings, which are now above consensus. Among large
caps, our top picks are UltraTech Cemco and Grasim; among mid caps, our top
pick is Shree Cement. We upgrade India Cements to Buy (from Hold) and maintain
Hold on Ambuja Cements and ACC.

Table of Contents
Stock recommendations................................................................... 3
Executive summary ........................................................................... 4
New supply dynamics await industry ........................................... 11
Demand – signs of pick-up.............................................................. 18
A new supply-demand scenario emerging.................................... 25
Our estimates are much higher than consensus .......................... 29
DB proprietary model for assessment........................................... 32
Valuations and sensitivity analysis ................................................ 36
Sensitivity and risk analysis ........................................................... 41
ACC ................................................................................................... 42
Ambuja Cements Ltd....................................................................... 48
Grasim .............................................................................................. 54
India Cements .................................................................................. 60
Shree Cement .................................................................................. 66
UltraTech Cement............................................................................ 72
Appendix A: DB survey to model Indian cement demand........... 78
Appendix B: Constraints in fly ash availability ............................. 82
Appendix C: Channel checks for fly ash ........................................ 90
Appendix D: DB model of regional supply-demand ..................... 92
Appendix E: Can companies find cheaper coal options? ............. 93
Appendix F: Cement production process ...................................... 98