Financial Management - I

UltraTech Cement Ltd (Ultra) ACC Ltd (ACC) India Cements Ltd (India) J K Cements Ltd (JK) Mangalam Cement Ltd (Mangalam)

Group O1

Ratio Analysis

Sales and Market Share

Ultra Sales Growth Market Share Rs. Cr. % % 19,236 39.4 17.1 ACC 10,012 21.2 10.2 India 4,631 27.8 4.1 JK 2,547 21.6 2.3 Mangalam 631 27.1 0.7

Source: CRISIL Research

Ultra and ACC are the top 2 players in the Indian Cement industry All the 5 companies have consolidated their position in the industry by clocking healthy growth in their revenues in 2011-12 The other major players in the industry are Ambuja Cements, Jaiprakash Associates, etc.

Profitability Ratios
Ultra Operating margin % PAT margin % 23.8 11.6 ACC 20.9 12.8 India 20.8 6.0 JK 21.7 6.9 Mangalam 18.0 9.0

The largest player Ultra also enjoys the highest operating profitability due to economies of scale and captive raw material sources. Other players too have strong operating profitability However, due to higher leverage leading to high interest costs, the smaller players PAT margin is significantly

lower compared to Ultra and ACC

Leverage and Coverage Ratios

Ultra Debt/Equity Times 0.35 16.16 Interest coverage Times ACC 0.08 16.90 India 0.72 2.33 JK 1.04 2.98 Mangalam 0.05 25.10

The capital structure of India and JK is leveraged compared to the other players as indicated by the debt/equity ratios The high leverage has also led to high interest costs, lower profits and hence low interest coverage ratio The debt protection indicators of other 3 players are very strong

Liquidity Ratios
Ultra Current ratio Quick ratio times times 1.08 0.56 ACC 0.97 0.67 India 1.18 0.67 JK 2.08 1.38 Mangalam 1.80 1.48

Apart from JK and Mangalam, other cos current and quick ratio is significantly less than ideal levels Significant part of the working capital requirement is funded by credit provided by suppliers leading to lower liquidity ratios

Working Capital Cycle

Ultra Inventory holding period Days Debtor collection period Days Creditor deferral period Days 35 12 54 ACC 35 8 90 India 40 18 37 JK 43 9 33 Mangalam 31 10 0

Ultra, ACC and Mangalam have low inventory levels at ~30 days, whereas India and JK hold higher inventory Debtor collection period is highest for India Payables period is significantly high for Ultra and ACC which is also a reason for low current ratio mentioned in the earlier slide

Valuation Ratios
Ultra EPS PE ratio Rs. times 86 17.13 ACC 65 17.23 India 9 12.08 JK 24 6.55 Mangalam 20 6.86

Price to Book ratio

times

3.21 9.9

2.97 41.0

0.95 23.2

0.87 20.0

0.86 28.4

Dividend payout ratio %

The equity markets value the market leaders at a premium PE and Price to Book ratio of Ultra and ACC are significantly higher than that of other cos. Dividend payout is lowest for Ultra it retains higher proportion of profits as compared to other players

Return Ratios and Dupont Analysis

Ultra ACC India JK Mangalam

RoCE
RoE PAT margin

times
times %

19.06
17.35 11.6

21.38
18.38 12.8

9.37
6.98 6.0

15.10
11.49 6.9

16.29
13.06 9.0

Asset turnover

times

1.02
1.47

1.34
1.07

0.64
1.83

0.90
1.86

1.32
1.11

Equity mulitplier times

The return ratios of the large players are far better than the smaller players Dupont analysis shows that the major difference in returns (RoCE and RoE) of Ultra and ACC is contributed by their superior profitability and efficiency indicated by asset turnover ratio

Risk & Return

Returns over past 6 years

Year
2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Average Nifty (Market) 10.03 30.30 -36.26 10.27 -9.11 12.79

Ultra
10.60 8.93

ACC
-7.69 17.28 62.06 24.51 13.15

India

JK

Mangalam
-8.76 3.53 -57.59 180.08 -37.85 14.93 15.72

-5.62 -17.43 21.30 14.30

-28.20 -30.35 -43.01 -74.23 23.65 339.90 13.67 -3.14 18.31 43.17 -1.11 36.29 23.71 13.12 -28.82 -21.82

71.52 115.78

Given above are annual returns over the past 6 years The table shows that the returns have been very volatile, both on individual companies as well as the market.

Beta and Required Return

Year

Nifty (Market) 12.79

36.48 1.00

Ultra

ACC

India

JK

Mangalam

Average
Std dev Beta

23.71
49.67 1.13

13.15
31.19 0.73

-3.14

43.17

15.72
84.86 1.99

27.76 149.12 0.55 3.54

Required rate of return

12.79

13.41

11.52

10.64

24.96

17.54

The high volatility is reflected in high standard deviation of all securities, India has lowest std. dev. and beta; however, returns on it are also the lowest (negative) Taking a risk free rate of 8%, CAPM model is applied to find required rate of return JK has the highest required return; this is to offset risk borne by the investing in the highest beta stock

Portfolio Analysis
Port folio Ultra # 1 2 3 4 5 0.20 0.15 0.15 0.30 0.10 ACC 0.20 0.10 0.30 0.10 0.30 India 0.20 0.05 0.40 0.05 0.40 JK 0.20 0.40 0.05 0.40 0.05 Mangalam 0.20 0.30 0.10 0.15 0.15 Return 18.52 26.70 9.98 27.90 9.58 Beta 1.59 2.28 0.99 2.15 1.03 Required Rate 15.61 18.94 12.72 18.32 12.93

The above portfolios give different combinations of risk and return A risk-averse investor would prefer Portfolio #3 with the lowest beta. However, a risk-taker would consider Portfolio #2 as it provides the highest return

Conclusion
Parameter Sales Profitability Leverage and Coverage Liquidity Working Capital Cycle Valuation Ratios Dividend payout Return Ratios Average Return Beta Ultra 1 2 3 4 2 2 5 2 2 3 ACC 2 1 2 5 1 1 1 1 4 2 India 3 4 4 3 3 3 3 5 5 1 JK 4 5 5 1 4 5 4 4 1 5 Mangalam 5 3 1 2 5 4 2 3 3 4

The above table plots companys performance on each parameter Hence if an investor had to choose between companies he should consider investing in ACC and Ultra as they have performed well on both fundamental and technical aspects

Thank You! Group O1