Chettinad Cement

Industry : Cement Price Target : Rs. 225

August 17, 2005 Analyst: Rajan Kumar +91 22 22836307 rajan@networthstock.com Previous Recommendation CMP (INR) Target Price (INR) Key Data www.chettinadcement.com Bloomberg code NCHC@IN Reuters code CHET.BO BSE code 590001 NSE code CHETNADCEM Face Value (INR) 10.0 Market Cap. (INR mn.) 5310.0 52 Week High (INR) 185.0 52 Week low (INR) 71.3 Scrip Scan Equity Rs mn FY06 E EPS FY06 E P/E FY06 E EV/EBIDTA FY06 EV/TON (USD) Shareholding (01.04.05) 295.0 16.4 11.0 6.2 81.8

CMP : Rs. 180

Buy Investment Rationale

Chettinad Cement Ltd (CCL) is the third largest cement company in Tamil Nadu after India Cements and Madras Cement and has a 12% share of the cement capacity in the state. The company has an installed capacity of 2.2mn MT and is coming up with 0.5 MT grinding unit at a cost of about Rs.450mn to be financed through internal accruals. It is expceted to be operational by March 2006. Located on the Kerala -TN border, CCL plants are strategically placed (freight cost) to take advantage of spurts in cement demand in Tamil Nadu and Kerala. Currently 70% of its sales are derived from TN while Kerala contributes the remaining 30%. During FY05, CCL commissioned a 15 MW coal based captive power plant at its Karikal unit which is expected to bring down its fuel and power consumption from Rs.630 per ton to Rs.510 per ton. In operating terms i.e Power consumption and operating cost per ton, CCL happens to be one of the most efficient cement companies in south. Higher volumes and realizations would have a multiplier effect on its earnings leading to CAGR of 49% over next two years. On the back of increased thrust on infrastructure, construction and planned capital expenditure from manufacturing sector, outlook for cement demand in South India remains robust. Cement consumption in South India grew by 22 percent during the Q1FY06 as compared to Q1FY05. This trend is expected to continue during the remaining part of FY06 given the low base of last year. With the narrowing demand supply gap, cement prices have remained firm even after arrival of monsoon as compared to a sharp drop witnessed during previous years. The industry is operating at an inventory of just around 20 days. This firming up of prices is expected to substantially improve operating margins as well as the bottom line of CCL.

BUY 180 225

(%)

Promoters 76.21 Non promoter corporate 3.66 Foreign 0.03 FIs, Mutual Funds, Banks etc 8.50 Others & Public 11.60 Total 100.00
Relative Performance of Chettinad Cement
300.00 250.00 200.00 150.00 100.00 50.00 Nov-04 Jan-05 Jun-05 Aug-04 Sep-04 Feb-05 Apr-05 Jul-05 May-05 Aug-05 Dec-04 Mar-05 Oct-04

Valuation
We expect earnings of CCL to grow at a CAGR of 49% for the next two years on the back of improved demand outlook in south, efficiency gains from new captive power plant and capacity expansion. At Rs.180, the stock is trading at a 11 and 8.3 times its FY06E and FY07E earning and EV of 6.2xFY06E and 4.9x FY07 E EBITDA. On asset valuation terms the stock is trading at EV/Ton of $81. We believe the stock is trading at a substantial discount to its peers and recommend a BUY with a one year price target of Rs.225.
Initiating Coverage

Chettinad

Sensex

Chettinad Cement

Scripts ACC Gujarat Ambuja Madras Cement India Cement

CMP 459.0 65.0 1328.0 93.0

Capacity Mn Tons 18.3 15.0 6.0 7.7

EV/Tons USD 119.6 145.9 86.9 96.7

EV/EBIDTA FY 06 12.5 10.7 10.5 10.8

FY06 E PE(x) 15.0 14.6 15.2 NA

FY07 E PE(x) 12.0 11.9 11.0 NA

Chettinad Cement

180

2.2

81.8

6.2

11

8.3

Company Background

Chettinad Cement ltd (CCL) is part of the Chennai based Chettinad Group whose interest spans Manufacturing (Cement, Silica, Quartz, Grits), Services (Construction, Transports, Steel Fabrication, Ship Management and Stevedoring, Clearing & Forwarding) Trading, Power Generation, Plantation, Farms and Logistics. With combined revenue of Rs 8.5 billion, the group is one of the most respected business houses in South India. CCL started its first manufacturing facility with a 0.2 million MT capacity at Karur district of Tamil Nadu in 62 and came up with another Greenfield Plant at Karikali village at Dindigul District of TN during 2001. Today with a combined annual capacity of 2.2 mn tons, CCL is the third largest cement player in Tamil Nadu. Besides the company has got 30 cum/hr capacity of RMC and 17 MW capacity of Wind Power in Coimbatore in TN. In October 2005, the Company commissioned a 15 MW coal fired captive power plant at its Karikali unit and plans to add a 0.5 Million MT Grinding unit by March 2006.

Strategic Location

Being located near Kerala-TN CCL is in an ideal position to cater to demand in Kerala which is a deficit state. Company derives 70% of its cement sales from Tamil Nadu and 30% of its Sale from Kerala.

Chettinads Karur Plant

Chettinads Dindigul Plant

August 17, 2005

Initiating Coverage

Chettinad Cement
Product Mix
The companys product mix consists of cement (97%), clinker (2.4%) and ready mix concrete (0.6%). The company sells 30% cement as OPC and 70% as PPC and expects to maaintain this ratio after expansion. This translate into a blending ratio of 1.23. South Indias Cement demand which grew with a CAGR of 7.5% between FY98 and FY04 de-grew during FY05 mainly on account of assembly elections which delayed the implementation of Infrastructure Projects in AP and Karnataka. However against the industry trend, Chettinad Cement managed to increase its production and despach figures by an impressive 14% during FY05. With the demand drivers like Housing, Infrastructure and Planned Capital expenditure of manufacturing sector back in place, cement demand in South India has started showing an impressive upturn. During Q1FY06 cement consumption in southern states showed a y-o-y increase of 22% compared to all India consumption growth of 11.5%. Demand scenario in Tamil Nadu and Kerala also witnessed a similar kind of upturn with the consumption growing by about 22% and 20% during Q1FY06.At current levels plants in TN, Kerala and Karnataka are operating almost at par with the All India levels. The surplus demand supply situation in south is mainly on account of Andhra Pradesh where capacity utilization still remains 74.2%.
FY07 E

Demand Upturn In South India

Cement Demand Estimate of South India
40000 35000 30000 25000 20000 15000 10000 5000 0 FY02 FY03 FY04 FY05 FY06 E FY07 E

Demand (000 tonnes)

Demand Supply Scenario in TN/Kerala

20000 15000 10000 5000 0 FY04 FY05 Cement Demand FY06 E Production Capacity

Demand Supply Scenario in South India 000 tones TN Kerala Andhra Pradesh Karnataka South India Capacity (Annual) 14564.0 620.0 21831.0 10086.0 47681 Production Q1FY06 3451.1 166.8 4047.4 2497.4 10162 Capacity Utilization Q1FY06 94.8 107.6 74.2 99.0 86 Consumption Q1FY06 2404.0 1632.0 2349.0 2107.0 8729

Demand Supply Scenario in TN/Kerala Market For Chettinad Cement 000 tones Capacity (Annual) TN Kerala TN/Kerala Combine 14564.0 620.0 15184 Production Q1FY06 3451.1 166.8 3617.9 Capacity Utilization Q1FY06 94.8 107.6 95.28 Consumption Q1FY06 2404.0 1632.0 4036.0

With the economic growth projected at 6.9 percent and given the low base of cement consumption in FY05, we estimate FY06 and FY07 cement consumption to increase by 14 percent and 8 percent to 36 MT and 39 MT respectively in southern states.
August 17, 2005
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Chettinad Cement
Price Trend in South
This trend is reflected in prices of cement in southern states. Though prices have shown a mixed trend in south, they have been firm in Tamil Nadu and Kerala - Major Markets for Chettinad Cement. On y-o-y basis Q1FY06 prices were up 3% and 2% in TN and Kerala respectively over Q1FY05. We expect the prices in the TN-Kerala combine to remain firm during the year and next on account of robust demand drivers and favorable demand supply situation. Without factoring in the gain from implementation of VAT, we estimate the realization to grow on an average by 4% and 3.5% y-o-y during FY06 and FY07 for the company. Cement Price Trend In Southern Region (Rs/50 Kg Bag) Apr-04 Chennai Calicut/Tiruanantpuram Hyderabad Bangalore 168.6 185.0 135.8 159.0 Apr-05 180.9 190.0 121.4 154.3 May-05 179.6 185.0 113.7 155.5 Jun-05 179.1 185.0 118.2 155.7

Realization to show impressive gain when VAT is implemented in TN

Though Kerala implemented VAT from April 05, Tamil Nadu is yet to implement VAT. Since Sales Tax Rate on cement happens to be highest in TN/Kerala, Implementation of VAT would lead to about 3.5 to 7% increase in realization for cement sold in TN and 2.25 % increase in realization in Kerala assuming 50% of the benefit being passed on to the consumers. Realization Gains Due To VAT Sales Tax Surcharge Add Tax Effective Tax Vat Realization On Gain Ac of VAT 3.5/7 2.25 1.75 1.25

TN Kerala Andhra Pradesh Karnataka

*

16/24 15 16 15

5/5 15

2.5/2.5

19.3/27.7 17.25 16 15

12.5 12.5 12.5 12.5

TN has two tier Sales Tax (ST) structure. ST is 19.3% for OPC sold at Rs.145/kg and PPC sold at Rs.135/kg. For OPC sold above Rs.145/kg and PPC sold above Rs.135/kg, ST is 27.7% (Prices are inclusive of Sales Tax)

Operational Characteristics
Electricity Consumption
100 90 80 70 60 50 40 30 20 10 0 86 86 89 72 83 73

ACC

Gujarat Ambuja

India Cement

Madras Cement

Grasim

Chettinad Cement

CCL happens to be one of the most efficient players in the country. Its power consumption of 73 Kwh/tons of cement is among the lowest in the industry. Besides its per unit operating expenditure at Rs.1340/ton is low compared to its peers in south India like India Cement (Rs.1583) and Madras Cement (Rs.1687). With the improvement in prices of cement from FY04, Its per unit operating profit improved from Rs.284/ton in FY03 to Rs.420/ton in FY04. The company maintained EBIDTA/ton of Rs.420/ton on account of improved realization despite a 105% increase in international coal prices. With savings realised from captive power plant we expect the EBIDTA/ton to further improve to Rs.525/tons and Rs.555/tons in FY06 and FY07.
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August 17, 2005

Kwh/Tonne Clinker

Initiating Coverage

Chettinad Cement
Cost Efficiency Gains from Captive Plant
The company installed 15 MW coal fired power plant in September 04 at its Karikali plant. With the installation of captive power plant, the company will be able to meet its total requirement of power internally. Besides it is expected to bring down power and fuel cost for the company from Rs.630 per ton to Rs.510 per ton. The company supplies the power generated at its wind power mills at Coimbatore, to TNEB and has an arrangement for adjusting the bills against the power used at its cement plant.

Capacity Expansion to drive volume growth

The company is coming up with addition of 0.5 Million Metric tons grinding unit at its karikali unit. The expansion would entail an investment of Rs.450mn and would entirely be funded through internal accruals. This expansion will give the company much needed leverage to increase its volume as its plants are already operating at more than 100% capacity. Both the power plant as well as grinding units is being financed by internal accrual. Among the southern states the limestone reserves are limited in Tamil Nadu and that makes it not a very attractive proposition for others to come up with a cement plant. Other than Brownfield expansion by Dalmia Cement, we see no major threat of new capacity expansion in TN. Coal Linkages : The Company as of now does not have any coal linkages from Coal India Ltd and meets its entire requirement through import. Any increase in International Coal Prices/Freight will adversely impact companys margin. Freight Cost : Since 70% of its a despatches are through roadways any steep hike in petrol & diesel prices could adversly impact companys margin and profitability.

Low Limestones Reserves Limits New Capacity Addition in TN Investment Concerns

August 17, 2005

Initiating Coverage

Chettinad Cement
Financial Analysis...
Financials Income Statement Sales Other Income Total Income Operating Exp EBIDTA EBIDTA Margin Interest EBDT Depreciation PBT Tax PAT Balance Sheet (Rs.Cr) Sources of Funds Equity Sh.Cap. Reserves Equity Share holders Fund Loans Deferred Tax Liability Cap. Emp. Appn. of Funds Gross Block Less Depreciation Net Block Inventories Sundry Debtors Cash and Bank Balance Loans & Advances Less Current Liability & Provisions Current Liabilities Provisions Net Current assets Total Assets 608 85 446 4667 733 103 451 4723 844 118 555 4947 1004 141 991 4957 6476 2255 4221 600 151 140 246 6838 2566 4272 724 169 140 255 7318 2926 4392 833 195 196 293 7318 3351 3967 991 232 563 349 295 1035 1330 2891 447 4667 295 1209 1504 2620 600 4723 295 1493 1788 2360 799 4947 295 1863 2158 1735 1065 4957 Mar-04 3248 14 3261 2440 808 25 301 507 283 238 99 140 Mar-04 Mar-05 3865 19 3884 2942 923 24 204 720 311 427 148 280 Mar-05 Mar-06E 4447 19 4466 3168 1279 29 200 1079 360 738 254 484 Mar-06E (Rs. mn) Mar-07E 5293 19 5312 3737 1556 29 180 1376 425 970 333 637 Mar-07E

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Chettinad Cement
Ratios
Mar-04 Basic Ratio EPS (Rs.) CEPS (Rs.) Dividend Per share (Rs.) Dividend(%) BVPS (Rs.) PE (x) P/CEPS (x) P/BV (x) EV/EBIDTA (x) EV/Net Sales (x) EV/Ton(USD) Growth Ratio Net Sales (%) Adjusted Net Profit (%) EBITDA (%) EPS (%) CEPS (%) Profitability Ratio ROCE (%) ROE (%) EBIDTA Margin (%) EBDTA Margin (%) Net Profit Margin (%) Turnover & Capitalization Ratio Average collection period (Days) Average Payment Period (Days) Net Fixed Assets (x) Leverage Ratio Interest Coverage (x) Debt to Equity Ratio (x) 1.8 1.4 3.1 1.1 4.7 0.8 6.4 0.5 16.9 68.4 0.8 16.0 69.3 0.9 16.0 69.3 1.0 16.0 69.3 1.3 11.5 7.9 24.9 15.6 4.3 13.4 13.3 23.9 18.6 7.2 19.0 18.7 28.8 24.3 10.9 23.2 19.8 29.4 26.0 12.0 22.0 68.5 105.2 19.0 100.3 14.3 100.3 39.9 15.1 73.2 38.5 73.2 42.9 19.0 31.5 21.7 31.5 25.8 4.7 14.3 2.0 20.0 45.1 38.0 12.6 4.0 10.5 2.6 9.5 20.0 4.0 40.0 51.0 19.0 9.0 3.5 8.9 2.2 81.9 16.4 28.6 6.0 60.0 60.6 11.0 6.3 3.0 6.2 1.8 64.6 21.6 36.0 8.0 80.0 73.2 8.3 5.0 2.5 4.9 1.5 59.3 Mar-05 Mar-06E Mar-07E

August 17, 2005

Initiating Coverage

Chettinad Cement
Technical View

Scrip has been in a major uptrend. Moving averages are on the rise so as MACD. The volumes are also rising however at higher level volumes have reduced a bit. The momentum and oscillator charts are also rising albeit nearing an over bought zone. In the current uptrend scip has a resistance around 200-220 level in short to medium term which if surpassed with force and volumes then 250 is likely in medium to long term.

August 17, 2005

Initiating Coverage

Chettinad Cement

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August 17, 2005

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