4QFY06 Results Update SECTOR: CEMENT

Shree Cement STOCK INFO.

BLOOMBERG

5 May 2006

BSE Sensex: 12,360 SRCM IN

Buy

REUTERS CODE

S&P CNX: 3,664

Equity Shares (m) 52-Week Range 1,6,12 Rel. Perf. (%)

Rs1,050

Previous Recommendation:Buy

SHCM.BO

34.8

YEAR

NET SALES

PAT

EPS

EPS

P/E

P/ B V

ROE

ROCE

EV/

EV/

END

(RS M)

(RS M)

(RS)

GROWTH (%)

(X)

(X)

( %)

( %)

SALES

EBITDA

2/82/89

03/06A

6,677

1,141

32.7

12.9

32.1

10.4

31.8

24.3

6.2

17.5

36.6

03/07E

10,340

2,586

74.2

126.7

14.1

5.5

47.2

30.1

4.0

10.1

0.8

03/08E

14,340

3,266

93.7

26.3

11.2

3.8

39.8

27.8

2.8

8.2

1,187/322

M.Cap. (Rs b) M.Cap. (US$ b)

?

4QFY06 results were better than our expectation. EBITDA was Rs836m v/s our expectation of Rs779m. Revenues up 38% to Rs2.3b; volumes up 6.9% to 0.93mt owing to production from the new plant. But volume growth was lower v/s our expectation due to late commissioning of the new plant. YoY realization up 29.1% to Rs2,427 per ton. ? Significantly higher realization led to strong EBITDA growth. YoY EBITDA was up 75.8% to Rs836m. YoY EBITDA margin also expanded 798bp, from 29.1% to 37.1%. YoY EBITDA/ton was up Rs353 to Rs900/ton. ? Mega cement capacity expansion announced: proposed to take the current 4.5m ton capacity to 9.1m ton by endFY09. Shree Cement aims to attain volumes of 4.5m ton in FY07, 6.5m ton in FY08 and 9.1m ton in FY09, which would make the company record highest volume growth in the next three years. ? On the expectation of higher-than-estimated realizations, we are upgrading FY07E EPS by 20% to Rs75.1/share. On account of the higher-than-expected FY08 volumes (company guidance has upped from 5.6m ton to 6.5m ton), we are upgrading our FY08 EPS estimate by 62% to Rs93.8/share. Stock is trading at PER of 14.1x FY07E and 11.2x FY08E. Maintain Buy. QUARTERLY PERFORMANCE

(Rs Million)

Y/E MARCH

FY05 1Q

Sales Dispatches (m ton) YoY Change (%) Realization (Rs/ton) YoY Change (%) QoQ Change (%) Net Sales YoY Change (%) Total Expenditure EBITDA Margins (%) Depreciation Interest Other Income PBT before EO Exp Extra-Ord Expense PBT after EO Exp Tax Deferred Tax Rate (%) Reported PAT Adj PAT YoY Change (%) Margins (%) E: MOSt Estimates

0.72 6.3 1,974 15.3 7.7 1,427 22.6 923 504 35.3 111 57 8 344 62 281 22 0 7.8 259 317 139.7 22.2

2Q

0.75 4.7 1,864 15.3 -5.6 1,405 20.7 1,013 392 27.9 111 47 13 247 62 184 14 0 7.8 170 228 423.0 16.2

FY06 3Q

4Q

1Q

2Q

3Q

4Q

0.72 7.7 1,854 13.2 -0.5 1,344 21.9 949 395 29.4 111 47 4 241 62 179 14 0 7.8 165 222 84.5 16.6

0.87 11.9 1,880 2.6 1.4 1,634 14.8 1,158 476 29.1 131 47 15 312 130 182 -26 0 -14.3 208 357 82.3 21.8

0.73 1.0 1,952 -1.1 3.9 1,425 -0.1 982 443 31.1 123 39 3 284 0 284 24 0 8.4 260 260 -18.0 18.2

0.78 3.1 1,998 7.2 2.3 1,554 10.6 1,032 522 33.6 123 33 8 374 0 374 0 0 0.0 374 374 64.2 24.0

0.72 -0.9 2,010 8.4 0.6 1,443 7.4 894 549 38.0 123 33 7 400 112 288 3 0 1.1 284 395 77.8 27.4

0.93 6.9 2,427 29.1 20.8 2,255 38.0 1,419 836 37.1 207 23 17 624 20 604 -3 0 -0.5 607 607 70.2 26.9

Nirbhay Mahawar (Nirbhay@Motilal Oswal.com ); Tel: +91 22 3982 5412

© Motilal Oswal Securities Ltd., 3 Floor, Hoechst House Nariman Point, Mumbai 400 021 Tel: +91 22 39825500 Fax: 2281 6161

FY05

FY06

3.07 8.1 1,895 13.8 13.8 5,821 23.0 4,055 1,766 30.3 526 198 41 1,082 771 311 24 -4 6.6 291 1,010 240.3 17.4

3.15 2.7 2,040 7.6 0.6 6,677 14.7 4,327 2,350 0.4 575 128 35 1,682 1,410 272 29 59 32.2 184 1,141 12.9 17.1

Shree Cement

Firm cement prices drive revenues 38% Revenues for the quarter were up 38% to Rs2.3bn. Realizations were up by 29.1% YoY to Rs2,427 per ton. Sequentially also, realization was higher by 20.8% on account of steep price increases in the northern and central markets.

to Rs836m. EBITDA margin also expanded 798bp YoY from 29.1% to 37.1%. EBITDA per ton moved up by Rs353 YoY to Rs900 per ton — highest in the industry. PER TON ANALYSIS (RS/TON)

Net Realization Raw Material Cost

TREND IN REALIZATIONS

Realization (Rs/ton) - LHS

YoY Grow th (%) - RHS

2,500

39

2,200

28

4QFY06

3QFY06

2QFY06

1QFY06

4QFY05

3QFY05

-16 2QFY05

1,000 1QFY05

-5 4QFY04

1,300 3QFY04

6

2QFY04

1,600

1QFY04

17

Source: Company/Motilal Oswal Securities

Cement volumes were up 6.9% to 0.93mt on account of production from Shree Cement’s new plant. However, volume growth was lower than our expectation owing to the delayed commissioning of its new plant. TREND IN DISPATCHES

Ditpatches (m ton) - LHS

YoY Grow th (%) - RHS 20

1.0 0.9

10 0.8 0 0.7

4QFY06

3QFY06

2QFY06

1QFY06

4QFY05

3QFY05

2QFY05

1QFY05

4QFY04

3QFY04

2QFY04

-10 1QFY04

0.6

Source: Company/Motilal Oswal Securities

Strong realization growth boosts margins Significant improvement in YoY realizations resulted in strong EBITDA growth, which moved up by 75.8% YoY 5 May 2006

4QFY05

YOY (%)

3QFY06

2,427 106

QOQ(%)

1,880

29.1

2,010

20.8

284

-62.7

209

-49.3

Staff Cost

110

116

-5.1

111

-0.6

Power & Fuel

513

434

18.1

403

27.5

Freight & Selling Exp

425

321

32.4

329

29.3

Other Exp

373

177

110.5

195

91.3

Total Exp

1,527

1,332

14.6

1,246

22.6

900

547

64.5

764

17.9

37.1

29.1

EBITDA

1,900

4QFY06

EBITDA Margin (%)

38.0

Source: Company/Motilal Oswal Securities

FY06 PAT lower on account of extraordinary items For the full year FY06, the company has provisioned for extraordinary expenses up to Rs1.41b. This includes additional depreciation of Rs1.1b to align the written-downvalue of the fixed asset in their books with the writtendown-value as per the Income Tax department; Rs212.3m as preoperative expense and Rs112.4m on account of repairs and maintenance. After taking into consideration these extraordinary items, reported PAT for FY06 stood at Rs184m (63% lower YoY). However, adjusted profit for the full year FY06 moved up by 12.9% to Rs1.1b. Capacity increases announced up to 9.1m ton to end-FY09 The company has announced a mega expansion plan, which proposes to increase cement capacity from the current 4.5m ton to 9.1m ton by end-FY09. On account of the substantial increase in capacity, Shree Cement aims to achieve production volumes of 4.5m ton in FY07, 6.5m ton in FY08 and 9.1m ton in FY09. If achieved, this would mean that the company will have the highest volume growth in the next three years. Additional capex incurred will be Rs7b for setting up the following: 1.5m ton clinker capacity, 2m ton grinding capacity and a 38mW power plant.

2

Shree Cement

Upgrading FY07 and FY08 EPS to factor in higher cement prices We note that cement prices countrywide have shot up to levels higher versus our expectation. In line with the higher cement prices, we are upgrading Shree Cement’s FY07 EPS estimate by 20% to Rs75.1 per share. Underpinning our upgrade is the company’s stated capacity expansion plan, which potentially offers higher volume growth visibility for FY08. We have hence changed our FY08 volume estimate from 5.6m ton to 6.5m ton. On account of expected higher realization and higher volume, we are upgrading our FY08 EPS estimate by 62% to Rs93.8 per share.

5 May 2006

Valuation and view The northern and central Indian regions are two areas currently in a cyclical upturn — i.e. witnessing short-term deficits in these markets. We believe that Shree Cement, with 86% of its sales arising from northern India and the remainder resulting from central India, is suitably placed to benefit from any upturn in the cement cycle. Operating cost for the company is one of the lowest in industry, and the higher volumes and realizations would have a multiplier effect on its earnings. We believe Shree Cement, with its aggressive expansion plans, will have the highest volume growth compared with peers, for next three years going forward. The stock is trading at EV/EBITDA of 8.2x FY08E and PER of 11.2x FY08E. We maintain Buy.

3

Shree Cement

Shree Cement: an investment profile Company description Shree Cement is the largest single-location integrated cement plant in northern India with an installed capacity of 4.5 ton. It is strategically located in central Rajasthan from which location it can cater to the entire Rajasthan market as well as Delhi and Haryana economically in both operational scale and logistics. It is a significant player in Rajasthan (28.3% of volumes), Haryana (22.6% of volumes), Delhi (21.9% of volumes) and Punjab (12.6% of volumes). Over the years, it has established a reputation as one of the world’s most efficient cement manufacturers. Key investment arguments ? One of the most cost efficient cement producers in the country. ? Highest volume growth for next three years. ? Best positioned geographically (86% volumes from the north and 14% from central India) to benefit from current tightening of supply-demand and consequent upturn in cement prices. ? Best positioned to cater to demand growth, with its new 1.2m ton integrated plant.

Valuation and view ? The stock trades at 11.2x FY08E EPS and 8.2x EV/ EBITDA FY08E. ? We recommend Buy with a target price of Rs1,313 (~14x FY08E EPS). Sector view ? Volume expected to grow by 8% driven by continuous momentum in housing and infrastructure projects. ? Improved supply-demand dynamics due to limited capacity addition in previous years. However greenfield capacity addition can disturb the tight supply-demand scenario envisaged by us.

EPS: MOST FORECAST VS CONSENSUS (RS)

COMPARATIVE VALUATIONS SHREE CEMENT

P/E (x)

Key investment risks ? Being a single location plant, it is overly dependent on the northern region; any downturn in prices in the northern market would adversely impact the company’s profitability. ? Increase in pet coke prices would impact profitability, as Shree uses pet coke as feedstock for its captive power plant as well as for its fire kiln.

FY07E

14.1

GACL

24.7

27.7

FY08E

11.2

21.0

27.6

FY07

P/BV (x)

FY07E

5.5

6.7

7.3

FY08

FY08E

3.8

5.6

6.1

EV/Sales (x)

FY07E

4.0

4.6

2.8

FY08E

2.8

3.9

2.7

FY07E

10.1

14.4

13.2

FY08E

8.2

11.7

12.8

EV/EBITDA (x)

MOST

CONSENSUS

FORECAST

FORECAST

(%)

74.2

57.0

30.1

93.7

63.0

48.7

RECO.

CEMCO

VARIATION

TARGET PRICE AND RECOMMENDATION CURRENT PRICE (RS)

TARGET

UPSIDE

PRICE (RS)

(%)

1,313

25.0

1,050

Buy

STOCK PERFORMANCE (1 YEAR)

1,300

Shree Cement (Rs) - LHS

Rel. to Sensex (%) - RHS 170

1,050

120

SHAREHOLDING PATTERN (%)

Promoters Domestic Institutions

MAR.06

DEC.05

MAR.05

63.7

63.7

63.7

9.6

11.7

9.7

FIIs/FDIs

15.3

13.8

14.8

Others

11.4

10.8

11.8

5 May 2006

800

70

550

20

300 May-05

Aug-05

Oct-05

Jan-06

-30 May-06

4

Shree Cement

I N C O M E S T A T E M ENT

(Rs Million)

RATIOS

Y/E MARCH

2004

2005

2006

2007E

2008E

Y/E MARCH

Gross Sales

5,859

7,030

7,964

12,174

17,000

Basic (Rs)

Less: Excise Duty Net Sales Change (%)

1,127 4,732 3.9

1,209

1,287

5,821

6,677

10,340

14,340

14.7

54.9

38.7

23.0

1,834

2,660

2004

2005

2006E

2007E

2008E

EPS

8.5

29.0

32.7

74.2

93.7

Cash EPS

21.6

44.1

49.2

95.7

119.6

BV/Share

97.6

101.3

100.9

191.7

279.7

3.0

4.0

5.0

5.0

5.0

90.5

54.7

107.8

7.7

6.1

P/E

36.2

32.1

14.1

11.2

Cash P/E

23.8

21.3

11.0

8.8

P/BV

10.4

10.4

5.5

3.8

6.8

6.2

4.0

2.8

22.3

17.5

10.1

8.2

EV/ton (US$-Cap)

314

229

228

227

Dividend Yield (%)

0.4

0.5

0.5

0.5

DPS

Total Expenditure

3,422

4,055

4,327

6,288

9,384

% of Sales

72.3

69.7

64.8

60.8

65.4

1,3 10

1,766

2,350

4,051

4,956

27.7

30.3

35.2

39.2

34.6

EBITDA M argin (%) Depriciation EBIT Int. and Finance Charges Other Income - Rec. P B T before EO Expense

457 853 387 29 494

526

575

1,240

1,775

198 41 1,082

128 35 1,682

748 3,303 301 40 3,042

900 4,056 332 40 3,764

Extra Ordinary Expense/(Income)

277

771

1,410

0

0

PBT after EO Expense

217

311

272

3,042

3,764

17

24

29

456

499

Current Tax Tax Rate (%)

40.0

6.6

32.2

15.0

13.3

Reported PAT

130

291

184

2,586

3,266

P A T A dj for EO items

297

1,010

1,141

2,586

3,266

12.9

126.7

26.3

1,141

2,586

3,266

Payout (%) Valuation (x)

EV/Sales EV/EBITDA

Return Ratios (%) RoE

12.5

37.4

31.8

47.2

39.8

RoCE

14.8

21.6

24.3

30.1

27.8

0.6

0.8

0.7

0.8

0.9

19

12

22

16

16

Working Capital Ratios

Change (%) Net Profit

35.6 297

240.3 1,010

BALANCE SHEET Y/E MARCH

Equity Share Capital Total Reserves Net Worth Deferred Liabilities Total Loans Capital Employed

2005

2006E

2007E

2008E

348

348

348

348

348

3,052

3,181

3,167

5,554

8,621

2004

3,400

3,529

3,515

5,902

8,970

635

631

690

903

1100

3,494

2,971

4,751

6,501

6,501

7,529

7,131

8,956

13,306

16,571

Gross Block

9,874

9,875

12,660

13,160

15,660

3,835

5,043

5,618

6,366

7,266

Capital WIP Investments Curr. Assets Inventory Account Receivables Cash and Bank Balance Others Curr. Liability & Prov.

Debtor (Days) Inventory (Days)

45

46

27

19

19

Working Capital Turnover (Days)

98

49

77

124

106

1.4

1.0

1.1

1.0

0.7

(Rs Million)

Less: Accum. Deprn. Net Fixed Assets

Asset Turnover (x)

6,039

4,832

7,042

216

1,522

500

3,000

4,000

8

0

0

0

0

1,517

2,014

726

500

1,768 588

6,794

4,226 533

8,394

744

239

481

545

762

76

130

232

2,218

2,370

807

421 739

Debt/Equity

CASH FLOW STATEMENT Y/E MARCH

Oper. Profit/(Loss) before Tax Interest/Dividends Recd. Direct Taxes Paid

(Rs Million) 2004

2005

2006E

1,310

1,766

2,350

4,051

29

41

35

40

40

-87

-21

-87

-456

-499

(Inc)/Dec in WC

-263

CF from Operations

988

(inc)/dec in FA CF from investments

-403

541 2,327

-534 1,763

2007E

-112 3,523

4,956

-513 3,984

-1,395

-3,174

- 1,387

- 3 , 174

-85

-527

1,839

1,963

198

-387

-198

-128

-301

-332

-403

-3,000

2008E

-3,000

-3,500 -3,500

5,173

297

503

Leverage Ratio (x)

799

929

1,297

600

7 13

996

(Inc)/Dec in Debt Interest Paid Dividend Paid CF from Fin. Activity Inc/Dec of Cash

Account Payables

328

502

401

514

718

Add: Beginning Balance

Provisions

175

237

199

199

278

Closing Balance

Net Current Assets

1,265

778

1,414

3,512

4,177

Appl. of Funds

7,529

7,131

8,956

13,306

16,571

-159

-199

-590

-118

-886

1,512

1,463

-333

-4

54

102

1,986

152

81 76

-199

-199

76

130

232

2,218

130

232

2,218

2,370

E: M OSt Estimates

5 May 2006

5

Shree Cement

Rated - The Best Local Brokerage House in India by

For more copies or other information, contact Institutional: Navin Agarwal. Retail: Manish Shah, Mihir Kothari Phone: (91-22) 39825500 Fax: (91-22) 22885038. E-mail: [email protected] This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your information and should not be reproduced or redistributed to any other person in any form. The report is based upon information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon such. MOSt or any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations. MOSt and/or its affiliates and/or employees may have interests/ positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report. Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Group/Directors ownership of the stock 3. Broking relationship with company covered

Shree Cement No No No

MOSt is not engaged in providing investment-banking services. This information is subject to change without any prior notice. MOSt reserves the right to make modifications and alternations to this statement as may be required from time to time. Nevertheless, MOSt is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries.

5 May 2006

6