ANALYSIS OF CEMENT

INDUSTRY
By: Eton Pinto
Table of Contents
 Introduction
 Regional-wise industry
 Life Cycle
 Porter’s 5 Force analysis
 Competitive Strategy
 Accounting Policies
 Ultratech Cement
INTRODUCTION
 The 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 SCENARIO
 The 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 SIZE
 The cement market in India is expected to grow at a compound
annual growth rate (CAGR) of 8.96 % during the period 2014-19
 Cement 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 growth

Cement Consumption Growth

Growth per annum
350 14.00%

12.9%
300 293 12.00%
269
10.6% 254
250 10.1% 243 10.00%
9.7% 9.6% 230
9.1% 213 8.9%
8.5% 201
200 7.9% 8.0% 8.00%
178
164
149
150 136 6.0% 5.9% 6.00%
5.6% 5.7%
123
108 114
99 4.5%
100 4.00%

50 2.00%

0 0.00%
FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 010 FY 011 FY 012 FY 013 FY 014 FY 015 FY 016
MAJOR DEMAND DRIVERS

Industrial; 6%
Commercial and Institutional; 13%

Infrastructure; 17%
Housing Sector; 64%
Capacity, 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

Andhra Pradesh has 9

the highest number of 3
4
3

cement plants. 20
2
12 4
Followed by Rajasthan 1 7

and Tamil Nadu. 13

13
4
9
10
4
11

30
12

21
2
 Regional Cement Patterns
Region Wise Cement Consumption
12
CAGR Region Wise Capacity (mtpa)
10

13.5% North
8 43.5; 14% 66.4; 21%
West
12% 37.3; 12% South
6 Centra
44.1; 14%
5.6% l
4 East
8.8% 126.9; 40%

2
8.7%
0

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.
 Life Cycle
 The 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.
Porter’s 5 Force Model
Bargaining power of
Entry Barriers
Suppliers
1. Entering the industry is
1. Most companies have
expensive, given the capital Substitution Threat
captive limestone reserves,
cost of around Rs. 7200 per Low, since cement doesn’t
no supplier power.
tonne. have any substitute
2. Coal linkages have reduced
2. Limited raw material
so companies depend more Bargaining power of Buyers
sources(limestone, gypsum)
on alternative fuel sources, 1. Around 65% of cement in
and tough government
suppliers can dictate prices. India is consumed by the
clearances
3. Manufacturers have argued housing sector, with retail
3. Wide distribution and
that price hikes are due to consumers accounting for
marketing channels are
increases in both the cost of the bulk of the customer
difficult to replicate by new
raw materials and base. But retail buyers do
players thus restricting entry.
transportation. Thus not have much leverage in
4. Rising costs mean lower IRR
suppliers are powerful dictating the pricing.
for new greenfield
enough to impose new 2. Lack of substitutes also
capacities.
prices on the industry. causes no buyer power.
Competitive Rivalry 3. Local markets are
1. Large players enjoy economies of scale. dominated by small
2. Competition is regional in nature, as cement cannot be number of cement firms.
transported over large distances. 4. Demand is relatively
3. Given over capacity, slowdown in demand weakens prices so no inelastic – exists at all
real pricing power. price points.
Analysis of Porter’s 5 Forces
 Competitive rivalry in the industry is moderate;
 Effect of substitutes is weak;
 Buyer power is minimal;
 Supplier power is high; and
 Entry/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 Strategy
 Competition 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

company’s 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 Industry
 With increased investment in
infrastructure by Government, demand
is expected to revive.
 Consolidation phase will pick up in the
industry.
 Improvements in efficiency.
Depreciation
Particulars Ultratech India Cement Ramco
Cement
Depreciatio Straight line over Straight Line Straight line
n Method useful life. method, over its over useful
estimated useful life.
life.

Useful Life Schedule with useful 5 Years 5 years

life for different
assets.
Eg Thermal Plant-25
years
Office Equipment- 4
years
Depreciable Cost of an asset less As prescribed
Amount its estimated residual under
value. Schedule XIV
to the
 Inventories
Particulars Ultratech India Cement Ramco Cement
Raw Material, Lower of Cost and net Valuation of Valued at cost,
Fuel, Stores and realizable value inventories of raw computed on a
Spare parts Realizable at cost if materials, packing moving weighted
finished product they materials, stores, average basis
are used in is sold at spares, fuels is at including
or above cost. weighted average transportation cost or
Cost based on cost. NRV whichever is
weighted average lower.

Work in Lower of Cost and Cost or net realizable Process Stock is

progress, NRV value whichever is valued at weighted
Finished Goods, Costs include lower, does not average cost,
conversion and include interest including conversion.
stock in trade transportation and other Finished goods are
and trial run administrative valued at lower of
inventories overheads. Cost and NRV.
Includes conversion
and transportation.
Waste Valued at NRV Valued at NRV Valued at NRV
 Revenue
Particulars Ultratech
Recognition of Transfer of risks On percentage of Transfer of risks
Sales and rewards to the completion and rewards to the
buyer method buyer
Components Net of Sales tax, Include excise duty, Excise duty,
VAT, trade revenue from trade Education Cess,
discounts, returns related activities Secondary and
and rebates. and sales tax Higher
Includes excise deferred, discounts education cess, VAT
duty. and incentives. / CST, trade
Excludes self- discounts, rebates
consumption of and returns
finished goods.
Recognition of As they are As they are As they are
Services rendered rendered rendered

Dividend Income When right to When right to

receive income is receive income is
established established
Recognized on time Recognized on time
 UltraTech Cement
 India’s largest cement brand
 Number 1 RMC player with around 100 plants
 Pan 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.
Sales (Rs Cr)

FY11 FY12 FY13 FY14

Net Margin 10.4% 13.1% 12.96% 10.4%
 Strategies
 Self 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 plants
 Use alternative fuel to reduce power cost.
 Use of PET coke
 Acquired Jaypree group inorder to build capacity and increase presence in
Gujurat. It overtook Holcim (Owner of ACC and Ambuja).Western Region
38%,Holcim 33%,
Acquisitions
 Acquired 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 Pradesh
 In talks to acquire Jaiprakash Associate’s Bhilai plants
Assumptions
 Sales 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 0.9
 Cost 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 Loss
31/03/201 31/03/201
31/03/2014 31/03/2015
  6 7
Total Revenue (I) 20,608.84 23,307.95 25,405.67 27,692.18
         
Costs        
Raw Materials 3,327.30 3,560.08 4,010.57 4,371.52
Power and Fuel 4,135.42 4,742.89 5,133.86 5,595.90
Employee Benefit Expense 1,014.63 1,218.29 1,289.36 1,405.41
Freight and Forwarding
4,580.80 5,400.38 5,886.41 6,416.19
Expense
Other Expenses 3,403.75 3,819.50 4,179.62 4,555.79
Total Expenses 16,461.90 18,741.14 20,499.82 22,344.81
         
PBDIT 4,146.94 4,566.81 4,905.84 5,347.37
Finance Costs 319.17 547.45 699.83 804.47
Depreciation and
1,052.26 1,133.11 1,419.06 1,555.94
Amortisation Expense
PBT 2,775.51 2,886.25 2,786.95 2,986.95
Tax 631.04 871.52 836.08 896.09
Profit for the Year 2,144.47 2,014.73 1,950.86 2,090.87
 Forecasted Balance Sheet
31/03/201
Particulars 31/03/2014 31/03/2015 6 31/03/2017

Share Capital 274 274 1098 3112

Reserves and Surplus 16823 18583 20598 22549
Shareholders' FundsTotal 17098 18858 21696 25660

Long-term Borrowings 4494 4614 6351 6923

Deferred Tax Liabilities (Net) 2296 2792 11735 10583
Other Long-term Liabilities 2 1 1 2
Long-term Provisions 138 163 178 194
Total Non Current Liabilities 6930 7570 18266 17702

Short-term Borrowings 379 1898 1973 2646

Trade Payables 2424 2739 2985 3254
Other Current Liabilities 2088 3010 3303 3600
Short-term Provisions 835 1140 1217 1327
Total 5727 8787 9478 10827

TOTAL 29754 35215 39961 43362

Fixed Assets 17913 23021 25406 27692

Non-Current Investments 1662 2686 2174 2174
Long-Term Loans and Advances 1194 1596 1967 2144
Total Non Current Assets 20770 27303 29547 32010
Ratios
31/03/2014 31/03/2015 31/03/2016 31/03/2017

Profitability
ROA 11% 11% 9% 9%
ROCE 15% 15% 14% 13%
ROIC 15% 15% 13% 12%
ROE 13% 11% 9% 8%

Margins
Gross Profit 42% 41% 41% 41%
EBITDA Margin 20% 20% 19% 19%
PBT Margin 13% 12% 11% 11%
PAT Margin 10% 9% 8% 8%

Liquidity
Current Ratio 1.569 0.900 1.099 1.048
Quick Assets 1.155 0.587 NA NA
Valuation

31/03/2014 31/03/2015 31/03/2016 31/03/2017

FCFF 1,638.92 2,262.11 -1,613.92 601.71

NOPLAT 2391.0735 2396.874 2440.74493 2653.999591

Invested Capital 29,754.01 35,214.95 39,961.13 43,361.97
EVA -410.73487 -894.35542 -1299.4039 -1442.59836

No of shares 27.44
MPS 2146 2939

Market Value of Shares 58886.24 80646.16

Book Value of Shares at Rs 10 F.V 274.4 274.4

Although the FCFF and EVA of the company is bad, the
industry
Market Valueis currently going 58611.84
Addition through 80371.76
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 high
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