Grasim / UltraTech::Takeaways Motilal Oswal Annual Global Investor Conferences

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Key Takeaways
Cement volume growth to recover in 2HFY12, but excess supply to persist
for at least two years
 For the cement industry, Grasim expects demand to grow 7.5-8% in 2HFY12, despite
muted growth in 1HFY12, driven by pick-up in infrastructure activity.
 It believes that the long-run demand drivers are intact and would drive strong growth
of 8-10% over the next five years.
 In the worst case, it expects capacity addition of ~100mt in five years and 30-40mt
over the next two years. However, beyond 100mt, it expects capacity addition to be
very difficult, impacted by tightening of regulatory environment.
 The company expects pricing and margins to remain challenging over the next few
quarters. It estimates worst case EBITDA at INR600-650/ton, best case EBITDA at
INR900-1,000/ton and base case EBITDA of INR800-850/ton for FY12.
VSF prices under significant pressure; initial signs of stabilization, as Chinese
players incur cash losses
 Sharp correction in competing fiber (cotton and PSF) prices from peak levels of
March 2011 has resulted in VSF prices correcting by INR30-35/kg from the peak of
April 2011 to INR120-125/kg.
 There are initial signs of stabilization, as Chinese players are operating at 60%
utilization and incurring cash losses.
 This coupled with cotton production in the forthcoming season would be the key
influencing factor for VSF demand and pricing. 2QFY12 demand would be impacted
due to inventory correction in the value chain.
Going ahead with mega capex plans, with investment of INR143.7b
 UltraTech is investing INR110b over the next 3-4 years for adding new capacities,
logistics infrastructure and modernization of its plant.
 It is setting-up a 9.2mt capacity at Chhattisgarh and Karnataka, along with split
grinding units and packaging terminals. This capacity would be operational in FY14.
 Grasim is expanding capacity in VSF by 156,500 tons (greenfield + brownfield). This
is supplemented by caustic capacity addition of 182,500 units. It would be investing
INR33.6b to augment its capacity by 47% to 490,475 tons by FY13.
Other takeaways
 The proposed Land Acquisition Bill could result in 6x increase in land cost, thereby
resulting in increase in replacement cost by USD70-75/ton, necessitating
remunerative cement prices.
 Post Domsjo acquisition, captive pulp contributes 90-100% of its requirement
currently and 65-70% on expanded VSF capacity (FY14 onwards).