cement industry analysis oct 15 2013[1]

8/13/2019 Cement Industry Analysis Oct 15 2013[1]

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INDUSTRY ANALYSIS REPORT

On

Indian Cement Industry

By

Samarth V Kudalkar

15 th October, 2013



Macro-economic situation in IndiaAfter a decade on phenomenal growth, the Indian economy is in the middle of a mini-crisis with GDPgrowing at 4.4%, the lowest since 2002. The roots of this trend reversal in growth are hard to find.

Many point the finger at the Government for its policy paralysis and populist measures without taking

the finances into consideration while others point to the negativity in the West.

In recent times, inflation has been a key issue for economy and has become the main indicator onwhich the Reserve Bank of India decides its monetary policies. This period has seen the Rupeedepreciate significantly, touching close to the 70 mark before cooling off. The tepid demand growth,

high inflation and the fluctuating currency have made this environment very challenging for firms tooperate in.

The early monsoon this year is expected to give the economy a much needed boost. The crude oilimport bill has increased due to the weak rupee. But on the other hand, measures to restrict gold

imports have helped to considerable reduce the current account deficit in the near term. This should

in turn strengthen the rupee and push the import costs in the favourable direction.

The major event in the next 12 months will be the upcoming State and General Elections. The ensuingperiod is expected to bring with it a lot of uncertainty and result in a lot of work being “ in-progress ” .Depending on what the nature of the new Government will be, the economy can take various

trajectories.

But even with all these negativities and uncertainties, the long term outlook for the economy remainspositive owing to the large demographic advantages resulting in stable domestic consumption andincrease in the money available for spending. Although it might take some time before we reach the

heights of the last decade, the expectation is that things will only improve from now on.

Figure 1: India GDP Annual Growth Rate (Source: Tradingeconomics.com)



Cement Sector Introduction

Cement is one of the integral industries facilitating infrastructure growth in India. India is the second

largest producer of cement in the world, after China, and accounts for about 6% of the world’s

production. The per capital consumption of cement in India lies at 40% of the world average reflectingthe poor infrastructure spending in India and at the same time the potential for expansion. Before 1982,

the industry went through tough times with sluggish capacity expansions and low margins as the priceswere fixed by the Government. Between 1982 and 1989, the pricing transitioned from partial decontrolto being completely decontrolled. Since then cement producers have aggressive expanded productionand capacity. As a matter of fact, it took eight decades to set up the first 100 MT (Metric Tons) whereas

the next 100 MT was added over the period 2001-10. Indian cement industry has been using the mostadvanced manufacturing processes and technology. Although the sector was once considered as one

of the biggest polluters, it has vastly reduced its environmental impact due to use of advancedprocesses. The industry is currently suffering from rising fuel, power, transport costs and high

Government taxes and levies compared to countries in the Asia Pacific region. The insufficientavailability of domestic coal has led them to pursue alternate fuels at considerably higher costs. Thedomestic demand is fully catered by production in the country. Currently, the cement producers exportcement to more than 30 countries. However, due to Government banning exports over quite a fewperiods to control supply and demand, the exports have been fluctuating on an annual basis.

Industry Current State and TrendThe industry has been growing at a moderate rate (~8%) in the past few years. The current demandfor cement in India is 265 million tonnes and is expected to grow up to 465 million tonnes by

the year 2020. There was a dip in demand in 2011 due to the prolonged monsoons. Nevertheless, thedemand is expected to pick up with increase in infrastructure spending over the next 5 years. Rising

demand for housing in semi-urban and rural areas as well as the development of the infrastructurecorridors will boost the demand growth for cement. Analysts believe that 10%+ growth would be a

very optimistic figure for this sector. Weak demand has the possibility to lead to sharp price correction.

Figure 2: Cement Demand Growth – past and projections (Source: ARC Research)



The cement producers have been aggressively adding capacity over the last 5 years assuming high

growth in demand. The long gestation period resulted in building new capacity ahead of demand. Butthe moderate growth in demand as well as over-capacity have resulted in under-utilization of thecurrent plants. Also, there has been a lack of pick-up in demand due to Government spending.

Nevertheless, the modern plants are more efficient and result is lesser energy consumption. The netmargins have been on the decline over the past few years. Current Overcapacity is greater than 100 MTand companies have incremental capacity additions in the pipeline. There is a possibility that the

demand growth might not rise above the growth of capacity additions, giving the cement companieslesser ability to have price control.

Figure 3: Production Capacity and Capacity Utilization (Source: ARC Research)

Table 1: Industry Profitability Ratios across the last 6 years (Source: Dion Global)

Particulars Dec-12 Dec-11 Dec-10 Dec-09 Dec-08 Dec-07

Operating Margin (%) 18.62 18.62 25.45 27.85 29.02 30.65Gross Profit Margin (%) 11.91 11.91 19.12 22.35 24.07 25.32Net Profit Margin (%) 8.43 8.43 12.73 15.22 16.73 17.09Reported Return on Networth (%) 12.02 12.02 19.12 23.11 30.13 39.07Return on Capital Employeed (%) 12.39 12.4 19.55 23.83 28.54 32.32Return On Assets (%) 6.55 6.55 10.58 12.62 15.26 19.58Long Term Debt/Equity (X) 0.15 0.16 0.2 0.18 0.19 0.26

Total Debt/Equity (X) 0.5 0.5 0.51 0.49 0.52 0.61Asset Turnover Ratio (%) 0.8 0.8 0.89 0.95 1.06 1.02

PROFITABILITY RATIOS



Industry CharacteristicsThe industry under consideration for the purpose of our analysis are all the cement producers operating

in India.

Regional NatureThe cement industry has a lot of regional focus due to varying input costs according to different regions.These costs are a function of raw material availability and the costs of distribution of the end product.

Most of the raw materials are found in reserves that are concentrated regionally. Since freight chargesoccupies 28% of costs, it’s economical to have regional plants and a wide distribution network ofwholesalers, resellers and retailers to achieve an efficient distribution system. This has led to differentialpricing across regions and has given rise to small regional players. These regional discrepancies have

led to overcapacity in the South and supply shortages in the East.

Figure 4: Region-wise capacity distribution (Source: ARC Research)

CommoditizationThe product has low differentiation across competitors and is quite standard. This causessubstitutability across competitors resulting in low switching costs. Since the customer does not expect

or will not be willing to pay higher for an incrementally better product, there is little scope for R&D inproduct development.

Costs – Set Up and OperatingSetting up a plant is requires large capital and capacity addition generally happens in large increments.A new one MT plant requires close to INR 500 Crores for setting it up. Operating costs too are quite

significant and require significant economies of scale to be financially viable.

The high exit barriers due to the capital intensive nature of the industry result in very few firms shutting

down their plants. They would rather operate at low margins rather than quit producing cement.

71

122

39 42 41

0

20

40

60

80

100

120

140

North South East West Central

Geographical Segmentation of Industry

Capacity (Metric TonsPer Annum)



Figure 5: Industry Cost Structure (Source: ARC Research)

Apart from limestone which is the basic raw material, Coal, power, Transportation and Taxes take upmajor portions of the total cost. The bargaining power of suppliers is very high in this industry becauseof its monopolistic control on the external cost element. This is so because scarcity in supply of rawmaterials can cause the whole plant to stand still for production and can lead to incurring huge losses.Therefore, it is pretty much evident that suppliers exert a great amount of influence on the productionof cement.

Since 2011, Coal India Ltd. has raised coal prices by 35-50% for different grades of coal. The rise inrailway freight rates by more than 25% in the last 2 years and the partial decontrol of diesel have addedto the upward pressure on costs. The rise in costs have led the producers to continuously increaseprices to maintain profitability. The rise in railway freight cost and diesel price hike has impacted thecosts significantly and these do not look as if they would ease in the near term. In cases where the coalhas to be imported, the fluctuating currency has made life difficult for the firms.

Figure 6: Price trend of Cement (past and projected) (Source: ARC Research)



Cyclicality and SeasonalityThe demand for cement is significantly correlated with the growth in the economy and spending on

infrastructure. This interdependence makes the industry highly sensitive to business cycles and only themajor players will be able to withstand times of stress. During the calendar year, the demand for cement

peaks before the monsoons and is subdued during the rainy season as the construction work stallsduring this period.

Influence of GovernmentThe sector has a lot of influence from the Government, directly and indirectly.

Government has the authority to ban exports in order to alter supply to control rising prices. The largest transport distribution channel for the cement industry – railways is under direct

control of the Government, hence having control over significant portion of freight costs. Cement Industry is the second largest excise duty payer in India only after tobacco industry, his

is because the manufacturing of cement is inherently very polluting.

Allegations of collusion between major players

On 20th June 2012, the Competition Commission of India (CCI) passed an order imposing penaltiesmore than INR 6300 Cr against 11 cement manufacturers of the country for being involved in cementcartel for alleged price fixing. In the outset of a dim economy where demand is low, cement

manufacturers had been increasing prices simultaneously. The CCI claimed that the manufacturers didnot utilize their available capacity to keep the supply low. The CCI commission observed that the cementmanufacturers had met up at the CMA, which then collected both retail and wholesale prices and

circulated details of capacity utilization and production among its members. The commissionconsidered this a coordinated act on the part of the cement companies to restrict production andsupply in the market. COMPAT has granted a stay on penalties imposed but it has asked the companies

to deposit 10% of the penalty amount while the hearings continue.Table 2: Firm-wise penalty imposed by CCI (Source: CCI)



Analysis of Cement Market The cement industry has a large number of players, but 7 major players take up almost 60% of the

market share - giving them high power to dictate price. The nature of the industry has helped it toobserve supply discipline on the face of rising overcapacity. The analysis of the n firm concentration

ratio and the market share of the 10 largest producers reinstate the presence of major players.

Table 3: Analysis of market concentration

Number of Firms Concentration Ratio

4 firm 47%

5 firm 52%

7 firm 60%

The consolidation is expected to decrease in the coming years with new firms entering the picture. At

the same time, foreign ownership is currently at multi year highs.

Table 4: MNC Presence in India

MNC Companies in IndiaHolcim ACC, Ambuja

Heidelberg Mysore CementLafarge Lafarge IndiaItalcementi Zuari Cement

Figure 7: Market Share of Top 10 competitors in 2012 (Source: Indiastat)



Table 5: Performance in the last financial year of Top 10 companies (Dion Global)

Table 6: Market Information of Top 10 companies (as on Oct. 15 th , 2013) Source: Dion Global

Liquidity premium exists for large cap players, and is visible from the above multiples. This premium isexpected to decrease on account of the increase in free float and liquidity of smaller players.

Figure 8: Price Performance of Top 3 stocks vis-a-vis NIFTY (Data Source: nseindia.com)

Company Name Year End Sales (Rs.Cr.) NP (Rs.Cr.) NPM (%)UltraTech Cement 1303 20,175 2,655 12.96

ACC 1212 11,358 1,061 9.13

Ambuja Cements Ltd. 1212 9,730 1,297 12.86Shree Cement 1306 5,590 1,004 17.37

Prism Cement Lim 1303 4,768 -59 -1.24

India Cements Lt 1303 4,597 164 3.54

The Ramco Cements 1303 3,826 404 10.43

JK Cement 1303 2,912 234 7.88

Birla Corporation Lt 1303 2,603 270 9.88

Chettinad Cement 1303 2,451 138 5.59

Company Name BSE Price (Rs.) Mkt. Cap. (Cr) P/E (X) P/BV (X)UltraTech Cement 1969.25 54,138 20.22 3.54

ACC 1130.85 21,278 20.09 2.88

Ambuja Cements Ltd. 197.85 30,619 23.68 3.47

Shree Cement 4449.9 15,624 15.56 4.03

Prism Cement Lim 27.25 1,374 0 1.26

India Cements Lt 50.2 1,541 8.19 0.38

The Ramco Cements 184.35 4,395 10.89 1.85

JK Cement 196.15 1,375 5.96 0.81

Birla Corporation Lt 211 1,621 6 0.66

Chettinad Cement 709.55 2,709 19.7 2.27



Recent Developments UltraTech announced the acquisition of 4.8MT cement plants of JP Associates in Gujarat for a

total EV of INR 38 Billion. Holcim is planning to restructure its holding in ACC and Ambuja Cements

Figure 9: Holcim restricting proposal (Source: Company Presentation)

Shareholding Pattern

Table 7: Shareholding pattern of Top 10 companies (Source : Dion Global)

Company Name Date Promoters (%) Institutional Investors Other Investors (%) General Publ ic (%)UltraTech Cement 30-06-2013 61.96 25.27 6.33 6.44

ACC 30-09-2013 50.3 32.67 3.92 13.12

Ambuja Cements Ltd. 30-06-2013 50.55 38.94 3.7 6.81

Shree Cement 30-06-2013 64.79 14.03 17.83 3.36

Prism Cement Lim 30-09-2013 74.87 3.63 10.97 10.52

India Cements Lt 30-06-2013 28.23 47.57 15.73 8.46

The Ramco Cements 30-09-2013 42.32 33.22 5.39 19.07

JK Cement 31-03-2013 66.71 20.93 3.52 8.84

Birla Corporation Lt 30-06-2013 62.9 20.79 11.07 5.25

Chettinad Cement 31-03-2013 94.48 3.24 0.12 2.16



ConclusionConsidering the aspects of the industry that have a bearing on the profitability and analysing thevarious stakeholders involved in the business, we have come to a conclusion that the overall

attractiveness of Indian Cement Industry is moderately low .

The Key Expectations for this industry are Housing demand in tier 2, tier 3 cities as well as rural areas to boost demand growth Pre-election spending would be key to pick up in demand; Infrastructure spending to

catch pace with 12 th Five Year Plan The pace of capacity addition to decelerate Pressure on margins due to rise in power, fuel and freight cost (freight rise majorly due

to partial diesel decontrol) Demand recovery post monsoons

Supply discipline necessary in order to continue price strength

The Key Risks are Prolonged monsoons Uncertainty in projects due to elections – less clarity in future spending Extended slowdown in economy; delays in infrastructure projects Transportation costs increasing on trying to expand reach Over capacity affecting profitability Sustainability of supply discipline – difficult if consolidation decreases in the future

Coal costs remaining high, increasing dependence on non-linkage sources Non-traditional players are entering the market eg. Steel and power companies. They

have access to land, power capacity and fly ash – hence incremental spend for cementproduction is much lesser.

Increase in Land acquisition costs post Land Acquisition Bill



References

CRISIL Research

Emerging Market Insights - Cement Production India – March 2013

MarketLine – Cement in Asia Pacific – June 2013

ARC Financial Services- India Cement Industry Report, April 2013

www.indiastat.com

https://insight.dionglobal.in

www.cmaindia.org

www.nseindia.com

CCI

http-//www.equitymaster.com/research-it/sector-info/cement/Cement-Sector-Analysis-Report.asp

http://www.indiastat.com/


https://insight.dionglobal.in/


http://www.cmaindia.org/


http://www.nseindia.com/






cement industry analysis oct 15 2013[1]

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