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    Indian Cement Industry For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material. 1   December 6, 2018 Cement   Initiating Coverage   Recommendation Co. CMP* (INR) TGT (INR) % SGC 675 1,060 57.1 DBEL 2,438 3,010 23.5 UTCEM 4,067 4,616 13.5 ACC 1,514 1,671 10.3 Sector Performance   Index Price Performance*   * Rebased to 100 | Based on daily closing prices Kunal Shah nalyst Name kunal.shah@yessecuritiesltd.in +91-22-3347 9657   Performance (%)* 1M 3M 12M Absolute (%) 2.2 (11.7) (14.6) Rel. to Sensex (%) (2.9) (5.3) (23.8) *As on 3 st  December 2018 Regional dynamics at play: Two Stars Emerge! The Indian cement industry has been facing turbulent times since the past few years. A multitude of headwinds have palpably dented the financial performance of many cement players, and the overcapacity scenario (utilization levels at abysmal lows) has been aggravated by a sharp rise in input costs and the lack of pricing power. To make matters worse, the housing sector is undergoing tremendous stress given the teething woes of RERA and GST coupled with the crippling impact of the demonetization roll out. With poor consumer sentiment and shift of investment funds in favour of other asset classes, the housing sector has suffered a steep decline in new launches, in turn hampering the overall cement demand. Conversely, the beleaguered sector has also relished some tailwinds, emanating from the Government of India (GoI)’s thrust on infrastructure segment and affordable housing projects. Accordingly, investments in cement intensive infrastructure segments have grown by ~13% annually over FY15-FY19BE, while the construction of affordable houses since the launch of Pradhan Mantri Awas Yojana (Gramin and Urban) has been quite impressive: ~7.86 mn units in rural areas and ~0.97 mn units in urban areas (total sanctioning at ~6.04 mn units). We believe the infrastructure segment should continue to be the key demand driver, coupled with the prospective revival in rural housing. We reckon that a normal monsoon and MSP hike for agricultural produce should boost rural purchasing power in this fiscal. Overall, we expect cement demand in India to grow by ~7.6% over FY18-FY21E from 297 MT to 370 MT.  On the supply side, the industry has witnessed a phenomenon which is nowhere closer to what an ideal capital cycle should look like. Since the start of the down-cycle in 2011-12, average ROCEs have declined from ~21% to ~11% currently (weighted average of top four companies). However, during the same time, the industry witnessed a fresh capacity addition of ~161 MTPA and consolidation (M&A deals involving ~72 MTPA of capacity) led by the major players. We expect the Indian cement industry to witness fresh capacities to the tune of ~64 MTPA over FY18-FY21E , thereby increasing the total capacity from ~471 MTPA (our estimates) to ~535 MTPA.  We project capacity utilization levels to rise from ~63.1% in FY18 to ~69.1% by FY21E. Notwithstanding our cautiously optimistic view on the overall cement industry, we hold a positive bias for regions like Central, East and few pockets of South (Andhra Pradesh & Telangana). By virtue of our region-specific assessment of underlying trends pertinent to infrastructure investments, PMAY progress, growth potential and evolving supply-demand situation, we infer that Central, East and South markets (primarily led by AP & Telangana) would outperform over FY18-FY21E with a growth expectation of 7.8%/9.5%/8.4% respectively during the said span. Consequently, we believe that Ultratech Cement Ltd (UTCEM), Dalmia Bharat Ltd (DBEL), ACC Ltd (ACC), Shree Cement Ltd (SRCM), Birla Corporation Ltd (BCORP), Heidelberg Cement India Ltd (HEIM) and Sagar Cements Ltd (SGC) should be the key beneficiaries owing to their higher exposure to these regions.  The cement industry is gearing up for the next up-cycle in demand, as reflected by the massive capacity addition in the pipeline. We prefer to stick to large cap names due to their pricing power, balance sheet strength and ability to tide through overcapacity scenarios and delayed revival in housing activity. Accordingly, we initiate coverage on UTCEM, ACC and DBEL. Further, in the small cap space, we continue to like SGC (on which we have already assumed coverage). 0100200300Apr-14Oct-15May-17Nov-18SensexMaterial    For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material. 2   Contents Company Section  .......................................................................................................................................................... 3 Sagar Cements Ltd ..................................................................................................................................................... 4 Dalmia Bharat Ltd .................................................................................................................................................... 10 UltraTech Cement Ltd ............................................................................................................................................. 16 ACC Ltd ..................................................................................................................................................................... 22 Industry Section  .......................................................................................................................................................... 28 Sector Overview ........................................................................................................................................................ 29 Infrastructure to be the key demand driver .......................................................................................................... 32 Capacity utilizations bound to improve ................................................................................................................ 43 ROCE’s to remain subdued in the near future  ..................................................................................................... 49    Company Section    Sagar Cements Ltd. TP: INR 1,060 - BUY   For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material. 4   December 6, 2018 Cement   Result Update   Key Statistics  CMP (INR)* 675 Upside/downside (%) 57.1 Market Cap (INR/USD mn) 13,770/197 Shares outstanding (mn) 20.4 3 months avg volume (k) 9 Dividend Yield (FY18, %) 0.5 52 Wk high/low 1,175/590 Sensex/Nifty 36,241/10,884 Bloomberg Code SGC IN Stock Price Performance* * Rebased to 100 | Based on daily closing prices Sh. Pattern, % (as on Sep –  2018) Promoter 50.05 FII 3.60 DII 13.91 Other 32.44 Total 100.00 Performance (%)* 1M 3M 12M Absolute (%) 4.7 (10.0) (23.3) Rel. to Sensex (%) (0.3) (3.5) (32.5) *As on 3 rd  December 2018 Sustained pricing pressure! Sagar Cements Ltd   (SGC) is a South India based company with a cement manufacturing capacity of 5.75 MTPA and captive power capacity of 43.35 MW. The company has a 3 MTPA plant in Mattampally, Telangana; 1.25 MTPA plant in Gudipadu, Andhra Pradesh (AP) and 1.5 MTPA grinding unit in Visakhapatnam, AP (increased from 0.3 MTPA to 1.5 MTPA in Q1FY19). We believe that the company is strategically placed with ~60% volume exposure to high-growth regions of AP/Telangana and East. Going ahead, we estimate cement demand in AP/Telangana and the Eastern region to grow at ~12%/9.5% respectively over FY18-FY21E which would make the company one of the key beneficiaries of the growth story. Robust volume growth continues: Volumes for Q2FY19 came in at 0.72 MT as against 0.6 MT in Q2FY18; growth of ~20.1% Y-o-Y. Similarly, volume growth for H1FY19 was robust, at ~18% Y-o-Y, on the back of higher infrastructure activities in AP & Telangana combined with demand pickup in Tamil Nadu. However, pricing continued to remain benign in South with net realizations for the company down by ~9% Y-o-Y. We expect volumes to grow from 2.71 MT to 4.40 MT over FY18-FY21E (~17.4% growth) on the back of ramp up in Vizag unit coupled with healthy demand scenario in AP/Telangana and East. We estimate realizations to improve marginally, increasing from INR 3825 to INR 4003 over FY18-FY21E.  Maintenance shutdown and input cost hike hurt margins: EBITDA/tonne for the quarter stood at INR 294; down 54% Y-o-Y owing to weak realizations, sharp surge in input costs and shutdown (upgradation and maintenance) of Gudipadu unit for 50 days. However, total costs/tonne was flattish at INR 3305 compared to INR 3300 in Q2FY18 as the hike in input costs was offset by efficiency improvement measures. We reckon that this trend would continue with further hike in input costs to be offset by a.) Increase in conversion ratio (cement-clinker ratio) due to higher sales of PSC cement in the Eastern region, b.) Optimization of lead distance post ramp up of Vizag unit, and c.) Commissioning of 18 MW CPP by Q4FY19. Consequently, we estimate EBITDA/tonne for SGC to stand at INR 559 by FY21E as against INR 557 in FY18. Outlook and Valuation: The Company recently announced capacity expansion plan in MP (capacity of 1 MTPA) and Odisha (capacity of 1.5 MTPA) with project cost of INR 4,250 mn and INR 3,080 mn respectively. We believe the move is positive as it will result to geographical diversification in regions with strong growth potential. However, we will update our projections post further clarity on the expansion plan.  We value SGC at EV/EBITDA of 8x and EV/tonne of $70 on FY21E, arriving at a target price of INR 1,060/share resulting into an upside of 57.1% from CMP of INR 675/share. We have a BUY rating on the stock.   Source: Company, YSL estimates; Note: Valuations as on 3 rd  December, 2018   Year End (31 Mar) FY17 FY18 FY19E FY20E FY21E Revenues (INR mn) 8,138 10,381 12,303 14,840 17,598 EBITDA (INR mn) 1,104 1,513 1,564 2,146 2,458 EBITDA Margin (%) 13.6 14.6 12.7 14.5 14.0 APAT (INR mn) (39.2) 263 280 695 1,001 APAT Margin (%) (0.5) 2.5 2.3 4.7 5.7 ROE (%) (0.5) 3.4 3.5 8.1 10.6 ROCE (%) 5.3 8.4 7.8 12.7 15.5 EV/EBITDA (x) 17.3 13.3 11.7 8.1 6.5 EV/tonne ($) 66.8 66.6 45.6 43.1 39.9 05001,000Apr-14Oct-15May-17Nov-18SensexSagar Cement
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