Analysis of Cement Industry

Analysis of Cement IndustryBy: Eton Pinto

Table of ContentsIntroductionRegional-wise industry Life CyclePorters 5 Force analysisCompetitive StrategyAccounting PoliciesUltratech Cement

INTRODUCTIONThe history of the cement industry in India dates back to the 1889. In 1914, India Cement Company Ltd was established in Porbandar .The cement industry in India saw the price and distribution control system in the year 1956.In 1977, government authorized new manufacturing units (as well as existing units going for capacity enhancement) to put a higher price tag for their products.

CURRENT SCENARIOThe Indian cement industry had a total capacity of over 360 m tonnes (MT) as of financial year ended 2013-14. The Indian cement industry registered a compounded growth of about 8%. The industry is divided into five main regions viz. north, south, west, east and the central region. MARKET SIZEThe cement market in India is expected to grow at a compound annual growth rate (CAGR) of 8.96 % during the period 2014-19Cement companies are expected to add 56 million tonnes (MT) capacity over the next three years. The cement capacity in India may register a growth of eight per cent by next year end to 395 MT from the current level of 366 MT. 188 large plants accounts for 97% of total installed capacity. 365 small plants for the rest.Cement consumption and growthGrowth per annumMAJOR DEMAND DRIVERSCapacity, Production And Capacity Utilization

There is currently excess capacity appearing in the system with capacity utilization falling as a result. Players will be forced to reduce capex till demand picks up.State-Wise location of Cement Plants

3041102134933122131174320211249Andhra Pradesh has the highest number of cement plants. Followed by Rajasthan and Tamil Nadu.Regional Cement PatternsCAGR8.8%13.5%12%5.6%8.7%The East and Central has the highest cement consumption but the lowest capacity so there is a lot of scope for growth in these regions.Revival is most likely going to come in the North region. Region Wise Cement Consumption

Life CycleThe Indian cement industry has a cyclical nature. There have been successive instances of growth phases followed by a slowdown.The growth phases are linked to increased demand primarily from housing sector. This is followed by capacity additions to deal with the increased demand. However, the added capacity eats into margins if capacity utilization is not optimum and slowly results in a slowdown, until demand meets the capacity.This causes violent ups and downs in company performance (like profit and return on capital) and thus stock prices.While growth in the past has been good overall, margins for the industry as a whole have been coming down owing to rising cost of raw materials, transportation, and other operating costs.Porters 5 Force ModelEntry BarriersEntering the industry is expensive, given the capital cost of around Rs. 7200 per tonne.Limited raw material sources(limestone, gypsum) and tough government clearancesWide distribution and marketing channels are difficult to replicate by new players thus restricting entry.Rising costs mean lower IRR for new greenfield capacities.

Substitution ThreatLow, since cement doesnt have any substitute

Bargaining power of SuppliersMost companies have captive limestone reserves, no supplier power.Coal linkages have reduced so companies depend more on alternative fuel sources, suppliers can dictate prices.Manufacturers have argued that price hikes are due to increases in both the cost of raw materials and transportation. Thus suppliers are powerful enough to impose new prices on the industry.Bargaining power of BuyersAround 65% of cement in India is consumed by the housing sector, with retail consumers accounting for the bulk of the customer base. But retail buyers do not have much leverage in dictating the pricing.Lack of substitutes also causes no buyer power.Local markets are dominated by small number of cement firms.Demand is relatively inelastic exists at all price points.Competitive RivalryLarge players enjoy economies of scale.Competition is regional in nature, as cement cannot be transported over large distances.Given over capacity, slowdown in demand weakens prices so no real pricing power.

Analysis of Porters 5 ForcesCompetitive rivalry in the industry is moderate;Effect of substitutes is weak;Buyer power is minimal;Supplier power is high; andEntry/exit barriers are high.In essence, the horizontal supply chain has pricing power over final consumers, whereas the vertical dimension of competition (threat of new entry and threat of substitution) is lacking due to lack of the possibility of differentiated advantages in production.

Competitive StrategyCompetition in the cement industry initially occurs at the local level due to high transportation costs. Competition cannot be based on price,as price cuts are easily spotted because of the nature of the product, which is undifferentiated. Competition is hence based on head-to-head market confrontation focused on price rebates and sales volume, in order to expand market share. Any substantial price cut by a competitor results in a price war. Rivalry also occurs when firms want to enhance their respective competitive advantages on the basis of improved product quality or reduced production costs.High transportation costs make location an important factor in a cement companys pricing policy.The best location combines three advantages a) the plant is set up in a quarry with large quantities of high-quality and easily-workable limestone; b) the plant is close to large urban areas; and c) the plant is near a railway line or a road network allowing cement to be delivered to faraway places. A cement plant located inland rarely sells outside a 300 km radius and would normally sell the bulk of its production within 150-300 km.

Future of the IndustryWith increased investment in infrastructure by Government, demand is expected to revive.Consolidation phase will pick up in the industry.Improvements in efficiency.

DepreciationParticularsUltratechIndia CementRamco CementDepreciation MethodStraight line over useful life.Straight Line method, over its estimated useful life.

Straight line over useful life.

Useful LifeSchedule with useful life for different assets.Eg Thermal Plant-25 yearsOffice Equipment- 4 years5 Years5 yearsDepreciable AmountCost of an asset less its estimated residual value.As prescribed under Schedule XIV to the Companies Act, 1956.InventoriesParticularsUltratechIndia CementRamco CementRaw Material, Fuel, Stores and Spare partsLower of Cost and net realizable valueRealizable at cost if finished product they are used in is sold at or above cost.Cost based on weighted averageValuation of inventories of raw materials, packing materials, stores, spares, fuels is at weighted average cost.Valued at cost, computed on a moving weighted average basis including transportation cost or NRV whichever is lower.

Work in progress, Finished Goods, stock in trade and trial run inventoriesLower of Cost and NRVCosts include conversion and transportationCost or net realizable value whichever is lower, does not include interestand other administrative overheads.

Process Stock is valued at weighted average cost, including conversion. Finished goods are valued at lower of Cost and NRV. Includes conversion and transportation.WasteValued at NRVValued at NRVValued at NRVUT-Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and theestimated costs necessary to make the sale.17RevenueParticularsUltratechRecognition of SalesTransfer of risks and rewards to the buyerOn percentage of completionmethodTransfer of risks and rewards to the buyerComponentsNet of Sales tax, VAT, trade discounts, returns and rebates. Includes excise duty.Excludes self-consumption of finished goods.Include excise duty, revenue from trade related activities and sales tax deferred, discounts and incentives.

Excise duty, Education Cess, Secondary and Higher education cess, VAT / CST, trade discounts, rebates and returnsRecognition of ServicesAs they are renderedAs they are rendered

As they are renderedDividend IncomeWhen right to receive income is establishedWhen right to receive income is establishedInterest incomeRecognized on time proportion basis.Recognized on time proportion basis.18UltraTech CementIndias largest cement brandNumber 1 RMC player with around 100 plantsPan India presence with 12 Plants,1 clinkerization unit, 16 grinding units, 1 cement plant and 101 RMC plants. 50000 plus dealers, retailers and institutional customers Working to becoming the most efficient cement player.

10.4%13.1%12.96%10.4%Net Margin

19StrategiesSelf dependency in power, one of their major inputs"Consistent capex initiatives undertaken over the years such as setting up of captive power plants and investment in infrastructure to get closer to our customers have led to economies of scale and efficiency in operations for us. This has made us highly competitive," ( Newer plants have a better advantage than older plants since they are closer to the customer and can thus reduce transport cost)Multi fuel kilns and power plantsUse alternative fuel to reduce power cost.Use of PET cokeAcquired Jaypree group inorder to build capacity and increase presence in Gujurat. It overtook Holcim (Owner of ACC and Ambuja).Western Region 38%,Holcim 33%,

AcquisitionsAcquired Jaypree group inorder to build capacity and increase presence in Gujurat. It overtook Holcim (Owner of ACC and Ambuja).Western Region 38%,Holcim 33%,Acquired assets of Jaiprakash Associates in Madhya PradeshIn talks to acquire Jaiprakash Associates Bhilai plants

AssumptionsSales assume to grow by 10% for next two years.Purchases are taken as around ~14% of total revenue. The company made heavy acquisitions in 2015 and is looking to continue to build up capacity in the future.EFN is sourced through Debt and Equity in the Debt to Equity ratio of 0.9Cost of debt is based on 2015 interest rate since no debt repayment and increased debt expected.Out of the Debt funding EFN, Long term debt is caped at 25% with the remaining coming from short term borrowings.Tax rate is 30%

Forecasted Profit and Loss31/03/201431/03/201531/03/201631/03/2017Total Revenue (I)20,608.8423,307.9525,405.6727,692.18CostsRaw Materials3,327.303,560.084,010.574,371.52Power and Fuel4,135.424,742.895,133.865,595.90Employee Benefit Expense1,014.631,218.291,289.361,405.41Freight and Forwarding Expense4,580.805,400.385,886.416,416.19Other Expenses3,403.753,819.504,179.624,555.79Total Expenses16,461.9018,741.1420,499.8222,344.81PBDIT4,146.944,566.814,905.845,347.37Finance Costs319.17547.45699.83804.47Depreciation and Amortisation Expense1,052.261,133.111,419.061,555.94PBT2,775.512,886.252,786.952,986.95Tax631.04871.52836.08896.09Profit for the Year2,144.472,014.731,950.862,090.87Forecasted Balance SheetParticulars31/03/201431/03/201531/03/201631/03/2017Share Capital27427410983112Reserves and Surplus16823185832059822549Shareholders' FundsTotal 17098188582169625660Long-term Borrowings4494461463516923Deferred Tax Liabilities (Net)229627921173510583Other Long-term Liabilities2112Long-term Provisions138163178194Total Non Current Liabilities693075701826617702Short-term Borrowings379189819732646Trade Payables2424273929853254Other Current Liabilities2088301033033600Short-term Provisions835114012171327Total57278787947810827TOTAL29754352153996143362Fixed Assets17913230212540627692Non-Current Investments1662268621742174Long-Term Loans and Advances1194159619672144Total Non Current Assets20770273032954732010Total Current Assets898479121041411352TOTAL29754352153996143362Ratios31/03/201431/03/201531/03/201631/03/2017ProfitabilityROA11%11%9%9%ROCE15%15%14%13%ROIC15%15%13%12%ROE13%11%9%8%MarginsGross Profit42%41%41%41%EBITDA Margin20%20%19%19%PBT Margin13%12%11%11%PAT Margin10%9%8%8%LiquidityCurrent Ratio1.5690.9001.0991.048Quick Assets1.1550.587NANASolvencyDebt Equity Ratio0.7400.8670.8420.690ICR9.6966.2724.9824.713Debt Service Coverage Ratio0.7990.6470.5440.515Valuation31/03/201431/03/201531/03/201631/03/2017FCFF1,638.922,262.11-1,613.92601.71NOPLAT2391.07352396.8742440.744932653.999591Invested Capital29,754.0135,214.9539,961.1343,361.97EVA-410.73487-894.35542-1299.4039-1442.59836No of shares27.44MPS21462939Market Value of Shares58886.2480646.16Book Value of Shares at Rs 10 F.V274.4274.4Market Value Addition58611.8480371.76Although the FCFF and EVA of the company is bad, the industry is currently going through a down phase, with recovery expected in the next few years, we assume that cashflows will pick up.Market Value Addition on the other hand is quite highNote: Wacc=10%, Ke=CAPM=10.18%, Kd=8%THANK YOU