Cement Is One Of The Core Industries


02 Nov 2017

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Chapter 1


Cement is one of the core industries which plays a vital role in the growth and expansion of a nation. The industry occupies an important place in the Indian economy because of its strong linkages to other sectors such as construction, transportation, coal and power. India is the second largest producer of quality cement in the world.

The cement industry in India comprises 139 large cement plants and over 365 mini cement plants. Currently, there are 40 players in the industry across the country. The demand for cement, being a derived one, depends mainly on the industrial activities, real estate business, construction activities and investment in the infrastructure sector.

The industry is involved in production of several types of cement such as Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement, etc. They are produced strictly as per the Bureau of Indian Standards (BIS) specifications and their quality is comparable with the best in the world.

Indian cement majors - ACC Ltd, Shree Cement Ltd and Ultratech - have signed a cooperation pact to support low-carbon investments in India. The pact was signed in Geneva with member companies of the World Business Council (WBC) for Sustainable Development's Cement Sustainability Initiative and International Finance Corporation (IFC). Under the pact, a Low Carbon Technology Roadmap for the Indian cement industry is to be launched this year-end. The roadmap will outline a possible transition path for the cement industry to reduce its direct emissions by 18 per cent by 2050.

Market Size

India is the second largest cement producing country in the world after China with an installed capacity of more than 300 million tonnes per annum. Also, it is one of the fastest growing cement markets, ahead of China and emerging African countries. The Indian industry has been growing at a rate of 9 per cent year- on-year for more than a decade.

Demand for cement in the country is expected to grow from 174 metric tonnes in 2008 to 260 metric tonnes in 2012 at a CAGR of 10.6 per cent. India has enough capacity to fulfil the demand, with expected capacity of 322 MTPA against the demand of 260 metric tonnes by year 2012.However, the Indian cement industry is grappling with problems like fluctuating demand, environ- mental impact and reduced availability of raw materials like limestone.

Cement Market


Most of the demand for cement is from the housing sector (65 per cent), followed by infrastructure (20 per cent), commercial/real estate (10 per cent) and industrial investments (5 per cent). In the housing sector, total shortage during the eleventh five-year plan (2007-12) is estimated at 70 million units, with about 50 million units in rural areas and 20 million units in urban areas. The government spending in infrastructure (roads and highways, ports, railway and power) peaked to Rs 3841 billion in year 2010 as against Rs 1104 billion in year 2002. The total target for the eleventh five- year plan is Rs 23,000 billion. Around 21 per cent of this investment (Rs 4830 billion) will be used for developing the rural infrastructure. Eleventh five-year plan also estimates 10-15 per cent of the total domestic demand for commercial real estate and civil facilities (office space, IT parks, hotels, hospitals, shopping centres, educational institutions, etc). So far 373 SEZs have been notified and approvals granted to 582 SEZs. On an average, cement price has steadily gone up over the years, from Rs 137 per 50 kg in FY 2004 to Rs 243 per 50 kg in FY 2010.

Nation-wise Cement Demand-Supply Scenario


Demand (MT)

Capacity (MTPA)







USA UK Germany Brazil UAE













































*Estimates; **CAGR=Cumulative average growth rate; Source: Asia Cement Summit 2011


The sector, cement and gypsum products attracted foreign direct investments (FDI) worth US$ 2,617.78 million between April 2000 to May 2012, according to the data published by the Department of Industrial Policy and Promotion (DIPP).

Cement sales increased by 14 per cent to 16.26 million tonnes (MT) in May 2012, as against 14.20 MT registered in the same period in 2011, as per the Cement Manufacturers Association (CMA). Installed cement production capacity of the country increased to 307.6 MT with the addition of 700,000 tonnes by Century Textiles.

Robust sales from industry majors indicate that India's cement sector is back on a double-digit growth trajectory. Surge in housing activities, especially in the semi-urban and rural regions helped the industry post better growth. The industry sold 20.25 MT of the building material during the month of May 2012.

Why Cement Industry

Cement is one of the core industries which plays a vital role in the growth and expansion of a nation. It is basically a mixture of compounds, consisting mainly of silicates and aluminates of calcium, formed out of calcium oxide, silica, aluminium oxide and iron oxide. The demand for cement depends primarily on the pace of activities in the business, financial, real estate and infrastructure sectors of the economy. Cement is considered preferred building material and is used worldwide for all construction works such as housing and industrial construction, as well as for creation of infrastructures like ports, roads, power plants, etc. Indian cement industry is globally competitive because the industry has witnessed healthy trends such as cost control and continuous technology up gradation.

The Indian cement industry is extremely energy intensive and is the third largest user of coal in the country. It is modern and uses latest technology, which is among the best in the world. Also, the industry has tremendous potential for development as limestone of excellent quality is found almost throughout the country.

Key Drivers of Cement Industry

Buoyant real estate market

Increase in infrastructure spending

Various governmental programmes like National Rural Employment Guarantee

Low-cost housing in urban and rural areas under schemes like Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Indira Aawas Yojana


Investors and investment banks value companies in order to estimate what price to pay per share ,in the case of investing. Companies also value other companies in order to estimate the value of these companies as a whole for merger or takeover purposes. Valuation is important because in order to pay a price per share or for the company as a whole it is important that you as the investor or as other company don’t pay a too high price, which can affect the return on your investment or the value on your own company.

The concentration is on estimating the price per share for investment purposes. So what value can we count to the company Ultratech? This question has been dealt on the basis of the Discounted Cash Flow method.

Industry fragmentation

Top seven cement companies with a total installed capacity of 173.7 mtpa control around 56.1% of the overall capacity. There has been a consolidation in the industry over the past few years. However, the Herfindahl-Hirschman Index, a commonly used measure of market concentration indicates that, cement industry remains to be mostly fragmented with 641 HHI index. Ultratech with 48.75 mtpa of cement capacity is the largest cement maker in India.

About Ultratech

UltraTech Cement Limited is India's biggest cement company and India’s largest exporter of cement clinker based in Mumbai, India. The company is division of Grasim Industries. It has an annual capacity of 52 million tonnes. UltraTech cement holds the Superbrand status.

Ultratech manufactures and markets ordinary Portland cement, Portland blast furnace slag cement, white cement and Portland Pozzolana cement. It also manufactures ready-mix concrete (RMC) and Autoclaved Aerated Concrete Blocks (AAC Blocks) with brand name Ultratech Xtralite. The export markets span countries around the Indian Ocean, Africa, Europe and the Middle East.

UltraTech is India's largest exporter of cement clinker. The company's production facilities are spread across eleven integrated plants, one white cement plant, one clinkerisation plant in UAE, fifteen grinding units, and five terminals — four in India and one in Sri Lanka. Most of the plants have ISO 9001, ISO 14001 and OHSAS 18001 certification. In addition, two plants have received ISO 27001 certification and four have received SA 8000 certification. The process is currently underway for the remaining plants. The company exports over 2.5 million tonnes per annum, which is about 30 per cent of the country's total exports. The export market consists of countries around the Indian Ocean, Africa, Europe and the Middle East. Export is a thrust area in the company's strategy for growth.

UltraTech's products include Ordinary Portland cement; Portland Pozzolana cement and Portland blast furnace slag cement.Ordinary Portland cement Portland blast furnace slag cement Portland Pozzolana cement Cement to European and Sri Lankan norms.

Ordinary Portland cement Ordinary Portland cement is the most commonly used cement for a wide range of applications. These applications cover dry-lean mixes, general-purpose ready-mixes, and even high strength pre-cast and pre-stressed concrete.

Portland blast furnace slag cement Portland blast-furnace slag cement contains up to 70 per cent of finely ground, granulated blast-furnace slag, a nonmetallic product consisting essentially of silicates and alumino-silicates of calcium. Slag brings with it the advantage of the energy invested in the slag making. Grinding slag for cement replacement takes only 25 per cent of the energy needed to manufacture Portland cement. Using slag cement to replace a portion of Portland cement in a concrete mixture is a useful method to make concrete better and more consistent. Portland blast-furnace slag cement has a lighter colour, better concrete workability, easier finishability, higher compressive and flexural strength, lower permeability, improved resistance to aggressive chemicals and more consistent plastic and hardened consistency.

Portland Pozzolana cement Portland pozzolana cement is ordinary Portland cement blended with pozzolanic materials (power-station fly ash, burnt clays, ash from burnt plant material or silicious earths), either together or separately. Portland clinker is ground with gypsum and pozzolanic materials which, though they do not have cementing properties in themselves, combine chemically with Portland cement in the presence of water to form extra strong cementing material which resists wet cracking, thermal cracking and has a high degree of cohesion and workability in concrete and mortar.

Key players in the Industry

The Southern region of India with a total installed capacity of 120.1 mtpa (38.7% of total India’s cement capacity) dominates the cement space, followed by North with 67.3 mtpa (21.7% of total India’s cement capacity). Meanwhile, the Western region has a total capacity of 44.7 (14.4% of total India’s cement capacity), Central India has a total capacity of 40.2 mtpa (13.0% of total India’s cement capacity) and Eastern India has a total installed capacity of 37.6 mtpa (12.1% of total India’s cement capacity).

India Cements

The India Cements Ltd was established in 1946 and the first plant was setup at Sankarnagar in Tamilnadu in 1949 . Since then it has grown in stature to seven plants spread over Tamilnadu and Andhra Pradesh. The capacities as on March 2010 have reached 14.05 mtpa.

Company Highlights

•The Company is the largest producer of cement in South India.

•The Company's plants are well spread with three in Tamilnadu and four in Andhra Pradesh which cater to all major markets in South India and Maharashtra.

•The Company is the market leader with a market share of 28% in the South. It aims to achieve a 35% market share in the near future. The Company has access to huge limestone resources and plans to expand capacity by de-bottlenecking and optimisation of existing plants as well as by acquisitions.

•The Copany has a strong distribution network with over 10,000 stockists of whom 25% are dedicated.

•The Company has well established brands- Sankar Super Power, Coromandel Super Power and Raasi Super Power.

•Regional offices in all southern states and Maharasthra offices/representative in every district.

Shree Cement

The Company's Turnover and Net Profit for 11-12 (15 month period) was Rs. 5,898.12 crores and Rs. 618.50 crores respectively. The Company's cement plants are located at Beawar, Ras, Khushkhera, Jobner (Jaipur) and Suratgarh in Rajasthan and Laksar (Roorkee) in Uttarakhand. It follows a multi-brand strategy and sells its cement under the highly recognized brands of Shree Ultra, Bangur and Rockstrong. Shree sells the majority of the cement it produces in North India.

It presently has a cement production capacity of 13.5 MTPA (million tons per annum). It plans to raise it further and as a first step, has already undertaken work on setting up two new Clinker Manufacturing Units of 2 MTPA capacity each at Ras in Rajasthan. A new Grinding Unit in the state of Bihar and an Integrated Unit in the state of Chattisgarh have also been envisioned and pre-project activities are in their final stages of completion.

Brands of Shree Cement




Jaypee Cement

Jaypee group is the 3rd largest cement producer in the country. The groups cement facilities are located in the Satna Cluster (M.P.), which has one of the highest cement production growth rates in India.

The group produces special blend of Portland Pozzolana Cement under the brand name ‘Jaypee Cement’ (PPC). Its cement division currently operates modern, computerized process control cement plants with an aggregate installed capacity of 28 MnTPA. The company is in the midst of capacity expansion of its cement business in Northern, Southern, Central, Eastern and Western parts of the country and is slated to be a 35.90 MnTPA by FY13 (expected) with Captive Thermal Power plants totalling 672 MW.


The Competition Commission of India (CCI) has slapped around Rs 6,000 crore penalty on 11 cement companies for forming a cartel. The penalty accounts for 50% of their FY10 and FY11 profits. The period of investigation for the 11 companies ranges between May 20, 2009 and March 31, 2011. The cement manufacturers upon whom the penalty has been imposed are ACC, Ambuja Cements Limited, Grasim Cement now merged with Ultratech Cement, JK Cements, India Cement, Madras Cement, Century Cement, Binani Cement, Lafarge India and Jaypee Cements. While imposing penalty, the Commission has considered the parallel and coordinated behaviour of cement companies on price, dispatch and supplies in the market. The Commission has also found that the cement companies have not utilised the available capacity so as to reduce supplies and raise prices in times of higher demand.

Penalties as a % of profit for FY 2012 (source: Macquarie research)


Chapter 2

Review of Literature

NAZLEEN AZWA BINTI NORDIN had done a study on valuation with topic Relative valuation: A study of price/earnings and price/book Valuation accuracies in Malaysia in July 2008. In essence, this study found that the combination of valuation multiples had improved valuation accuracies. The results showed that the performance of the combination of valuation multiples was superior to valuation multiple independently. This meant that financial analysts may want to combine valuation multiples when doing valuation so as to improve their valuation accuracies. This study also showed that selection of comparable companies may not be based on industry category. The results indicated that selection of comparable companies based on industry category did not improve valuation accuracies. As such, financial analysts may utilize other criteria to determine the set of comparable companies. This study utilized trailing Price/Earnings in its valuation method because of the data availability in annual reports. Future research may use forward Price/Earnings in studying valuation accuracies. It also tested the optimal weights still hold when using forward Price/Earning. This was because it was already found by previous works that forward Price/Earning gives more accurate valuations as compared to trailing Price/Earning (Lie and Lie, 2002; Liu, Nissim and Thomas, 2002; Yee, 2004). Therefore it is suggested to study the effects of forward Price/Earning in the Price/Earning and Price/Book combined valuation method. As such, the optimal weight found in this research was the combination of 90% weights on Price/Earning and 10% on Price/Book.

KERSTIN DODEL did valuation of German companies as Valuation of German "Mittelstand" Companies in 2009. This research focused on:

The estimation of discounts for German Mittelstand companies in comparison to public companies

The impact of the subprime mortgage crisis on Mittelstand company valuation

The examination of private company discounts in the US market

The estimation of influence variables on the transaction process and resulting valuations. The detailed analysis of the M&A transaction process reveals some results which might appear at first glance to be quite intuitive. Private companies in the US are significantly discounted by 19.7% (EV/EBITDA), 16.8% (EV/EBIT) and 30.1% (P/E).

The negative impact of the subprime mortgage crisis on firm values was not as pronounced for Mittelstand companies as for other private and public companies. Mittelstand valuation based on multiples decreased by an average of 5%, whereas other private companies faced a 17% slump, and public companies faced a 15% drop in the German market Mittelstand discounts in Germany vary across multiples. It was found statistically significant discounts of 26.1% (EV/EBITDA), 17.8% (EV/EBIT) and 27.8% (P/E) compared to public companies in Germany.

RASMUS STAUMANN JENSEN and LARS PFEIFFER PETERSON (Copenhagen Business School 2012) did valuation study titled Valuation of SAS. The aim of the thesis was to determine the fair value of the SAS stock through a strategic and financial analysis of the Scandinavian airline. The thesis was divided in five intertwined parts where the core findings of each part was extracted and built upon in the subsequent analyses to ensure consistency and accuracy in the final estimation of the share price.

It was concluded that the most important historic events of the Scandinavian airline are the focus on business travellers and the cost saving strategies, in particular Core SAS, which are reactions to the poor financial results of SAS in the recent years. The strategy is supported by MSEK11.000 in 2009 and 2010 raised by primarily the majority owners the governments of Denmark, Sweden and Norway. The WACC was determined at 6, 28% using the Danish 10-year treasury bill of 3,59% as the risk free rate, a cost of debt of 6% approximated from the interest expenses stated in the annual reports, the relevant corporate tax of 28%, a target capital structure of 63% equity and 37% debt expressed by SAS, and a required return on equity of 9,64% calculated from a beta of 1,21 and a market risk premium of 5%. The resulting estimate of the fair value of SAS was calculated to be SEK30.66 representing 8.74% premium above the actual share price.


LUCAS PETE MARCUSON through rigorous research and conducting a case study on Sterling Financial Corporation titled Public Bank Valuation (Sterling Financial Corporation) on April 2012 inferred that one of the most effective valuation techniques in analyzing a publicly traded bank were as follows:

1) Relative valuation

2) Discounted Cash Flow (DCF) valuation.

Due to the nature of a bank’s business model, using a Price to Book Value or Price to Tangible Book Value ratio with respect to the firm’s peer group median or comparable banks is an effective means of determining whether the institution is valued at a discount or a premium. Using a DCF valuation methodology is only plausible if one constructs a Dividend Discount Model (DDM) because the stream of dividend payments made by the firm represents the firm’s cash flow to be discounted. If the publicly traded bank does not issue a dividend, as in the case of Sterling Financial Corporation, a DDM is not plausible.

Marlon Gerard Silos & Andreas Gull in their research study titled Valuation and analysis of the company Telisonera in the year 2005 came to a value of TeliaSonera that was much higher than what the market was valuing it. There can be different reasons why the market values TeliaSonera as it did in those two time periods(2000 and 2002).

Chapter – 3

Research Methodology

3.1 Objective

To perform valuation of Ultratech Cement Ltd. and determine the share price of the company.

3.2 Research Design

A financial model has been prepared which has been done to forecat the future cash flows to find out the stock price. Depreciation schedule, debt schedule, assumption sheet plays the pivotal role in the research.

3.3 Data

In order to perform the valuation right data is needed. For the valuation of Ultratech secondary data has been used. The best way of conducting such a research is making use of primary data, but usually such data will not be available for the general public due to its sensitivity. Investors and to some degree other companies use secondary information to get a picture of the company of interest. The disadvantage of the use of secondary information is that the information can be manipulated, in the sense that it shows the company in question in the best limelight.

The data from 2006 to 2012 has been used for the valuation purpose. Data available from the website of Ultratech (Annual reports which includes P&L, Balance sheets , Cash flow statements etc). Secondary data has also been used from Capitaline.com.

Data for calculation of Beta has been used from NSE,BSE,Reuters, Moneycontrol and other free sources of data.

3.4 Research Tools and Methodology

Excel – DCF valuation

Balance Sheet Based Methods

The methods for company valuation, which uses the information in the Balance Sheet as a base are called the Balance Sheet Based Methods, The idea is to estimate the company’s value by looking at the company’s assets. These methods are considered to be a bit out of date since they say that the company’s value lies solely in its Balance Sheet. These methods don’t take into account possible future changes or innovations. They also disregard the time value of money and other important factors such as current industry situation and organizational problems, since information about such things cannot be found in the accounting statements. One popular Balance Sheet Based valuation method is the book value; a brief explanation of the book value follows bellow:

Book value

The very basic way of looking at a company’s value is by looking at the book value of the firm, which is simply the total asset minus the total liabilities9. This method will give you a value of the company. The Book value can be seen as the total value of the company’s assets which shareholders would get if the company were liquidated, but since it only looks on values from the past and totally ignores future growth, its not interesting or relevant for investors when making their decision whether to invest or not. If one compare the Book value with the market value of the company it can be used to see whether the share is under or overvalued. The things which speaks against the use of the Book value for valuation purpose is that this method ignores the intangible assets of the firm as well as the future, and it also ignores the risk of the market in general.

Income Statement based Methods

These methods are based on the income statement of the company; the idea is to valuate the company based on their earnings, sales etc. The income statement based valuation methods are often based on the PER, which is the Per Earnings Ratio. For example if you want to find the equity value of a firm, you have to multiply the PER with the earnings. In some branches it’s common to make a fast valuation by multiplying the annual production capacity by a certain multiple, a short description of such a multiple:

Profit/Sales multiple method

This method is usually used for small and medium sized companies10, when using it you multiply the net profits or sales with a certain type of number which is predetermined as appropriate for that kind of industry or business. This method is criticized since it is assumed that what have happened in the past and what happens at the present will also continue in the future.

Market Value Method

Another commonly used way of valuating a company is by finding their market value11, this way of valuating is more correct than the Book value since it reflects the price that the market is prepared to pay for the company’s share at a certain time. This kind of valuation only works for quoted companies, which means that they are listed on an official stock exchange market. You find the market value of the company by multiplying the quoted share price for the company’s share by the total number of shares issued. This method gives you a value that is influenced but the existing conditions on the overall stock market but with this method you will have a value which can be used by false expectations, and doesn’t really count for the company’s assets and future growth.

Goodwill based Valuation Methods

The Goodwill based Valuation Methods tries to determine the value of the company by estimating the combined value of the company’s assets plus a capital gain, which results from the company’s, expected future earnings. Goodwill is the value that a company has which is above their book value, the Goodwill based Valuation also tries to evaluate the intangible assets of the firm, which usually is disregarded in other methods such as Book value or other Balance Sheet Based Methods. The process of a classic Goodwill based Valuation Method looks like this:

V= A + (n x B) or V= A (z x F)


A = Net asset Value (Book value)

n = Coefficient between 1,5 and 3

B = Net income

F = Turnover

Which of the two formulas to use depends on in which branch the firm operates, the first is mainly for industrial companies while the second works better for retail companies. The problems with using Goodwill based Valuation is that, this method takes into consideration intangible assets, such as patents, trademarks etc, but these assets are very difficult to valuate hence it is also difficult to get an correct value of the company.

Research Tool Used: DCF (Discounted Cash Flow)

Why DCF?

As discussed, the goal of a company is to generate wealth for its owners (i.e. Shareholders) and not Profit Maximization. The method is based on the belief that ultimately what can be distributed to Shareholders is Cash and hence the phrase ‘Cash is King’.

Considered more scientific

Shareholder wealth will be maximized as a result of cash inflow through cash/stock dividends and capital appreciation. However, paying dividends implies that the company has lesser internal cash to reinvest as a result it will need to borrow/raise more, causing the Share price to come down by that much. On the other hand Capital appreciation, in the long run is related to company fundamentals. This also explains why growing companies pay less or no dividends as compared to stable/mature ones.

Why not discount dividends?

Firstly, not all companies pay dividends. Secondly, dividends reduce internal cash resulting in a reduction in its Share price (Although for mature companies, as a result of lesser reinvestment needs Dividends are ‘believed’ to increase Shareholder wealth).

Will DCF give an accurate value per share?

Value per share as arrived at using DCF is just as good as the quality of Forecasts. Although there are several approaches to scientifically forecast the performance one must remember that a forecast, by virtue is based on certain assumptions, which are specific to every company/analyst. Although companies often aim to standardize such assumptions, they remain just that.

Fair Value

As mentioned earlier, there is no ‘best’ method. Share Prices, in the long run will (and must) revert to fundamental performance of the company in question. However, prices are also driven by sentiments which are not captured in DCF. This is where Comparables come to the rescue, it not only captures sentiments but is also better suited between quarterly results. Hence DCF and comparables are said to be complimentary. The process of triangulation is hence recommended.

Forecasting cash flows

Cash Flows are the most important component within the DCF equation and hence the quality of forecasts will ultimately decide the reliability of the Intrinsic Value thus arrived at.

• Although Academicians suggest that cash flows must be directly forecasted, such a practice will yield unreliable results in real world situations.

• The lifeblood of a company is Sales and hence it is a very critical item while forecasting cash flows Secondly a detailed COGS & Capex build up cannot be ignored. Put Simply, Free Cash flows are an outcome of a detailed Financial-cum-business model. Directly forecasting them will result in little credibility to the final output.

What is Discounting? And why must it be used?

Discounting flows from the concept of ‘Time Value of Money’. Put simply, it means the value of money deteriorates with time as a result of risk/uncertainty. To determine ‘Present Value’ of a future cash flow we must discount it by the cost of funds raised to generate the cash flows.

Discount rate

The Estimation (not calculation) of the discount rate firstly depends on the type of DCF method used, following which, one must estimate the opportunity cost of the capital contributors (i.e. depending on the type of DCF method used the discount rate will vary). Following the principle of consistency one must identify all contributors to the specific cash flow model.

Methods within DCF

Contrary to popular belief, all 4 methods within DCF must result in the absolutely same Value per Share. However, capital structure and beta prevent this from happening.

Therefore, it is futile to compare/use two different DCF approaches simultaneously.

1. Enterprise DCF – The method aims to forecast operating cash flows for firm (i.e. available to all capital contributors), subtract the Present Value of all Non-Equity items and add back all non-operating excess cash/cash equivalent items. The discount rate hence must be the WACC.

2. Equity DCF – Theoretically the easiest of all, but practically the method poses several challenges and hence loses out to the Enterprise method in popularity. As the name suggests, Cash Flows to Equity holders are calculated and hence discount factor is the ‘Cost of Equity’.

3. Adjusted Present Value – Recommended for use in Special situations like LBOs

4. Economic Profit Method – Uses EVA to ‘validate’ the Enterprise DCF approach

Theoretical background behind parts of this method and techniques for analysis.

The basic outlay of the theory section is:

• Net Operating Profits Less Adjusted Taxes (NOPLAT)

• Return On Invested Capital (ROIC)

• Free Cash Flows (FCF)

• Weighted Average Cost of Capital (WACC)

• Economic Profit

Net Operating Profits Less Adjusted Taxes (NOPLAT)

An important component when trying to evaluate a company is the Net Operating Profits Less Adjusted Taxes or NOPLAT. NOPLAT gives an indication of how much profit the company has earned on the basis of its operations. When calculating NOPLAT read through the Income statement of the company and the notes related to the Income statement and see what is to be operating related and what not. Companies are likely to produce a result

that works in their favour.

The basic NOPLAT-formula looks like:

NOPLAT = EBITA - adjusted taxes

Earnings before interest and taxes and amortization (EBITA)

In order to get NOPLAT one must first calculate the Earnings before interest and taxes and amortization (EBITA). EBITA consists out of the operating revenue less the related costs and depreciations and the amortization of goodwill. EBITA is used to evaluate the profit trends of the company. It allows you to identify the recurring profits.

Adjusted taxes

Once one has calculated EBITA, then in order to get to NOPLAT itself one must also deduct the taxes that are related to EBITA. By deducting and adding from the total tax paid on income, the non operating related taxes one gets the taxes that only relates to EBITA. Normally the going tax rate on income is the corporate tax that applies to the company in question. Hereby taking into account the taxes that applies to any foreign subsidiary that the company has. To see if the value of NOPLAT is correct, one can recalculate NOPLAT by calculating a so called "Reconciliation to Net income". This is a way to check if one has the right NOPLAT value.

Hereby one works backwards from the Income statement taking out non-operating costs and revenues to get NOPLAT. There are cases that one must adjusted the NOPLAT calculations. To mention one: when there are deferred taxes, in such a case one needs to adjust EBITA for the deferred taxes. The deferred taxes are a debt/receivable which is controlled by some future act or occurrence that will result in taxes being owed/being received for income/expenses so to get a more correct picture of NOPLAT one takes into account the deferred taxes on operations. The changes in the net deferred tax are added back into NOPLAT. We do this because the deferred taxes arise because of the degree to which income statements overstate the actual cash taxes paid/received and in order to undo this distortion added them back into NOPLAT.

Return on Invested Capital (ROIC)

The return on Invested Capital is a tool that can be used when performing an analysis. Return on Invested Capital, measures how effective a company uses the money invested in its operations, or in other words it’s the return on capital that a company has invested. A good aspect of the ROIC is that it gives a comparative number, which can be used when comparing your efficiency with other companies in the same branch.

The main use is to see how a company has performed in the past and can help managers to set targets for the future. The ROIC is also used to compare different alternative investment opportunities with each other. High ROIC levels are seen as proof for an efficient company and/or a solid management team. Low ROIC levels can be seen as proof for an inefficient company or that the company might ignore growth possibilities due to poor management. ROIC depends on the skill, resourcefulness and motivation of the management of a company. The ROIC has an impact on a company’s ability to attract financing, repay creditors and reward shareholders.

If a company’s ROIC is lower than their cost of capital, they destroy value. A way a company can get a ROIC that is higher than the WACC, thereby creating value, is by removing excess invested capital or by working more efficient. A general formula for finding the ROIC looks like this:

ROIC = Net Operating Profits Less Adjusted Taxes (NOPLAT) / Invested Capital

Invested Capital

Invested capital shows how much capital is invested by the shareholders and debt holders. It shows how much of this capital has been invested in operating and other non operating activities. In our case we only look at the capital invested in operating activities, because NOPLAT is based on the operating activities.

Invested capital = operating working capital + net property, plant & equipment + other operating assets net of other non-interest bearing liabilities.

The operating working capital shows the amount of liquid assets a company has, to build its business. Companies with a lot of working capital have a good basis for growth; they can expand and improve their operations.

The operating working capital consists of the operating current assets minus the current non-interest bearing liabilities. The operating current assets are the assets necessary for operations. One can think of receivables and inventories to name a few as components of the operating current assets. The current non-interest bearing liabilities are the liabilities taken in order to perform operations. One can think of accounts payable and accrued expenses as components of the current non-interest bearing liabilities. Net property, plant & equipment are the book value of the fixed assets. Other operating assets net of other non-interest bearing liabilities are the other assets less the other liabilities that were used to come to the operating profits. The other assets could be for example intangible fixed assets. They are assets that where used for operations like software developed internally to assist with the production or administrative tasks. The other liabilities are the other non-interest bearing current liabilities. Examples of other non-interest bearing current liabilities are prepaid lease agreements and license fees. There are different ways of expressing this ROIC formula one can express it in terms of beginning of year, average or end of year. By this it is means depending on how the invested capital is expressed (beginning of year, average or end of year) the ROIC will be expressed in the same terms.

Free Cash Flows (FCF)

When a company has paid all their expenses, and made the investments they consider necessary for the future, the money that is left is the FCF. The FCF is the real cash that a company has generated for the shareholders. As an investor you are interested how much real cash a company has generated during a year. The FCF will help you as an investor to determine that. FCF takes away the accounting assumptions that are in the earnings. This makes it possible to assess a company’s financial health. A formula when finding a company’s FCF looks like this:

FCF = NOPLAT – Net investments

Free CashFlow to the Firm (FCFF)

Free cash flow to the firm is the cash available to all investors, both equity and debt holders. It can be calculated using Net Income or Cash Flow from Operations (CFO).

The calculation of FCFF using CFO is similar to the calculation of FCF. Because FCFF is the cash flow allocated to all investors including debt holders, the interest expense which is cash available to debt holders must be added back. The amount of interest expense that is available is the after-tax portion, which is shown as the interest expense multiplied by 1-tax rate [Int x (1-tax rate)].

This makes the calculation of FCFF using CFO equal to:

FCFF = CFO + [Int x (1-tax rate)] – FCInv


CFO = Cash Flow from Operations

Int = Interest Expense

FCInv = Fixed Capital Investment (total capital expenditures)

This formula is different for firm’s that follow IFRS. Firm’s that follow IFRS would not add back interest since it is recorded as part of financing activities. However, since IFRS allows dividends paid to be part of CFO, the dividends paid would have to be added back.

The calculation using Net Income is similar to the one using CFO except that it includes the items that differentiate Net Income from CFO. To arrive at the right FCFF, working capital investments must be subtracted and non-cash charges must be added back to produce the following formula:

FCFF = NI + NCC + [Int x (1-tax rate)] – FCInv – WCInv


NI = Net Income

NCC = Non-cash Charges (depreciation and amortization)

Int = Interest Expense

FCInv = Fixed Capital Investment (total capital expenditures)


Free Cash Flow to Equity (FCFE), the cash available to stockholders can be derived from FCFF. FCFE equals FCFF minus the after-tax interest plus any cash from taking on debt

FCFE = FCFF - [Int x (1-tax rate)] + Net Borrowing

Change in working capital

The change in working capital shows the amount working capital that a company has invested during a year. It shows the receipt (increase/decrease in receivables etc.) and expenditure (increase/decrease in accounts payables etc.) that a company has during a period.

Capital expenditures

The capital expenditures are the expenditures that a company has done in its fixed assets. The buying and selling of property, plant and equipment are seen as capital expenditures.

A way the capital expenditure can be calculated is by the use of the formula:

Book value of assets at year end = Book value of assetsat beginning of year + CAPEX – Depreciation

Other assets net of other liabilities

As the change in working capital, the change in other assets net of other liabilities shows the expenditure that the company has made during a year in the to other operating related assets and liabilities. An alternative to find the FCF is by taking the Gross Cash Flow (NOPLAT + Depreciation) – The Gross Investments (Net Investments + Depreciation). The result will be the same as calculated under the previous mentioned formula.

FCF is a useful tool when looking at the financial health of a company, since a company can have very high earnings but until it has been looked whether they FCF is generated or not, it is not known if cash is really generated or not. For shareholders and investors the FCF is very important, since what they really are interested in is getting dividends or returns on their invested money. Unless there is FCF in the company they will not be able to get any cash back. We have to remember that a negative FCF doesn’t necessarily mean that the company is bad. It can for example be a young company who needs to put a lot of their money into investments, new machines, buildings etc, which will result in more positive FCF in the future.

But if the company is spending so much that their FCF is negative, they also have to show that it’s paying off. In other words: their investments have to show a rate of return that is high enough, so that it’s worth for the investors to wait with receiving some cash back. The bottom line is that the FCF is simply what’s left after the company paid its bills and financed future growth.

Weighted Average Cost of Capital (WACC)

The assets of a company can be financed in two ways, by equity that is money they already have, or by debt meaning the money they have to borrow. The WACC is the average of the cost of these two. Calculate the WACC by taking the ratio between the market value of debt and equity in the company’s capital structure, it is called weights. By taking this weighted average it can be determined how much it costs the company for every dollar borrowed and how much money the company has to generate, in other words, their required return. WACC is given as

Weighted Average Cost Of Capital (WACC)


Re = cost of equity

Rd = cost of debt

E = market value of the firm's equity

D = market value of the firm's debt

V = E + D

E/V = percentage of financing that is equity

D/V = percentage of financing that is debt

Tc = corporate tax rate

Cost of equity

The cost of equity is the return that stockholders require for a company. The cost of equity is determined with the help of the Capital Asset Pricing Model. The Capital Asset Pricing Model or CAPM is a commonly used model for valuing stocks, it relates the risk and the expected return, the idea is that if investors should be willing to accept additional risk they also demand additional return. If the investors invest their money in a risk free security they will get a certain amount back in interest. If they should invest their money somewhere else, in a stock for example which has higher risk, then they would demand to get the same amount like from the risk free security plus an additional risk premium. And if this expected return doesn’t meet the investors required return, they would not accept the additional risk and they would turn down the investment.

Capital Asset Pricing Model (CAPM)

The general idea behind CAPM is that investors need to be compensated in two ways: time value of money and risk. The time value of money is represented by the risk-free (rf) rate in the formula and compensates the investors for placing money in any investment over a period of time. The other half of the formula represents risk and calculates the amount of compensation the investor needs for taking on additional risk. This is calculated by taking a risk measure (beta) that compares the returns of the asset to the market over a period of time and to the market premium (Rm-rf).

When we look at the CAPM there are some assumptions that have to be fulfilled for the CAPM to be valid, these are the eight assumptions.

1. Investors are risk averse

2. Investors have the same expectations about the future, and the same information at the same time.

3. Asset returns are distributed by the normal distribution

4. Investors may borrow an unlimited amount at a risk free rate.

5. There is a limited amount of assets

6. All assets are priced correctly, and it’s a perfect competitive market.

7. Asset markets are frictionless and all information is free and available to everybody at the same time.

8. There are no Taxes, regulations or restrictions on short selling.

Cost of debt

The cost of debt is the total obligation cost the company has because it has borrowed money. This cost is represented by the different interest rates that the company hasto pay on the different forms of debt that it has.

The weight of the capital structure

The weight of equity in the capital structure is determined by determining the market value of equity. The market value of equity is determined by first identifying the number of shares in the capital structure, followed by determining the market price per share as of the valuation date. Multiplying these two will generate the market value of equity, hereby one must also if applicable integrate the reserves, retained earnings and net income. They are all part of the equity. The weight of debt in the capital structure is determined by determining the market value of debt. The market value of debt is determined by valuing the total debt

against its market value. By adding the market value of equity with the market value of debt one gets the total market value of invested capital. By dividing the market value of equity by the total market value of invested capital one gets the weight of equity. By dividing the market value of debt by the total market value of invested capital one gets the weight of debt.

Using these weights together with the cost of equity and debt one gets the WACC. As a note it must be mentioned because it is going to be used, the WACC, to discount the FCF, the debt part of the capital structure is corrected with the taxes. The reason for this is that the FCF is calculated by taking the taxes into consideration.

Chapter 4


Common size statements

Common size statements i.e. balance sheet and income statement were prepared by taking data from historical. Common size statements were prepared to analyze varies entries with respect to sales and COGS in order to do projections for future. The common size statement prepared were as -

Assumption Sheet

Assumption sheet which also acts as control sheet for the projections is most important part of the valuation model. The assumptions for various entries were as follows-


Sales was calculated by taking CAGR from the common size ratio analysis.


COGS was take as a percentage of sales and the CAGR from common size statement.


Separate schedules for depreciation, interest income, and interest expense were prepared which is part of annexure.

Similarly marketable securities/investments fixed assets, capital WIP, loans and advances and debt (both long and short term) were determined from schedules.


Capex was taken as a percentage of sales.

Capital WIP

Capital WIP was taken as percentage of capex.

Accounts payable, provisions, other liabilities, were taken as a percentage of COGS.

Certain items were taken as constant that are evident in further projections and assumption sheet.

Assumption Sheet


The projection include the projection for the year 2013 to 2019 for income statement balance sheet and cash flow statement.


The valuation part include calculation of FCFF by top to bottom approach where first

NOPLAT is calculated by by adjusting taxes. The process and theory has been explained in the methodology. NOPLAT then leads to FCFF which is discounted by a discount factor.

Calculation of discount factor

The discount factor is calculated by the discounting formula


Where Yn is the year for which discount factor is to be found and Y is the year from which projection starts.

Mid year adjustment

It is assumed that the cash flows do not come at the end of the year but twice a year i.e. once in the mid year and then in the end of the year. Hence the formula is adjusted with the mid year factor.

WACC calculation

Calculation of cost of debt

Implied interest rate = 10.05% (from debt schedule)

Marginal tax rste = 30 %

Post tax cost of debt = 10.05*(1-30%)

= 7.04 %

Cost of equity

Risk free return =8.0907% (G-sec 10 yr)

Beta = 0.707459 ( Data from 2006-2012, NSE)

Adjuste beta = 0.707459*2/3+1*1/3

= 0.8049

Rm calculation

Year Sensex

1979 100

2013 20110 (Jan 2013)

Rm = (20110/100)^(1/(2013-1979))-1

= 16.88 %

Cost of equity = Rf+B*(Rm-Rf)



Wt. Rate

Debt 11%(debt schedule) 7.04%

Equity 89%(debt schedule) 15.17 %

WACC = 11*7.04+89*15.97

=14.28 %

CV estimation by Gordon Gowth Approach

Last Year 2019

Last FCF 8,557.89

Growth Rate 3.50%

CV 82135.25

PV of CV 34484.63

Growth rate = 3.50%

Continuing value = Last FCF*(1+3,50%)/(WACC - 3.50%)

= 8557.89*(1+3.50)/(14.28-3.50)

= 34484.63

Valuation Summary

Year FCF

2013 -444.41

2014 891.83

2015 1,511.60

2016 2,606.13

2017 4,050.24

2018 5,984.28

2019 8,557.89

2020 -

PV of Explcit FCF 23,157.56

PV of CV 34484.63204

Value of Operations 57,642.19

Add: Non-operating items

Excess Cash 212.9

Mkt. sec 3547.45

Loans & advances 2585.12

EV 63,987.66

Less: Non-Equity Claims

Debt 5546.02

Pref. Shares


Minority Int. 62.26

Contingent Liabilities

Value of Equity 58,379.38

No. Of Diluted Shares 28

Value per share = 58379.38/28

= 2084.978018

Finding and Suggestions

The stock price was calculated to 2084.978018 where as the current price of Ultratech is 1916.65 approx. ( as on 25 Jan 2013)

There is a difference in the price calculated and current market price (CMP), hence it can be concluded that the scrip is a little undervalued.

Ultratech scrip is a BUY for a long time investment as the economy seems to grow with more than 6% and real-estate and infrastructure outlook seems to be good.

Ultratech as a company has big expansion plans of around 11000 cr over the next three years and also the fact that it is currently leading the pack amongst the cement players the company seems to be good investment avenue for long-term.



Depreciation Schedule

Debt Schedule


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