The Investment Research Society

Cement Industry Report

Naman Bhargava Shekhar Suman Ashim Nanda

Disclaimer: Aurum is solely an initiative of the current students and alumni of IIFT Delhi and bears no legal association with the college
 The Indian Cement Industry
India is the world’s second-largest EXPORT & DOMESTIC DEMAND SPLIT A HIGHLY FRAGMENTED INDUSTRY
cement producer, accounting for 8% of
the global installed capacity. 11%
27% 25% 23% 21%
Ultratech Cement
73% 75% 77% 79% 89% 23% Shree Cement
India’s cement demand is expected to
reach 600 MT by 2025 from 328 MT in ACC limited
FY20 at a CAGR of 13% 2016 2017 2018 2019 2020 42% Ambuja Cement
Domestic Demand Export Dalmia Bharat
8%
Ramco Cement
Key government initiatives like NIP, AVERAGE 10-YEAR REGIONAL DEMAND
Housing for All, Smart City Mission to aid 6% Birla Corporation
cement demand 6% India Cements
16% South East 3%
26% 3% 4% 5% Others
19% North West
In FY21, the industry also exhibited its
capability to manage fixed costs and 20% Central Top five players in the industry enjoy a market share of
have a leaner working capital 19% 48% ; led by consolidation and higher inorganic growth

RISING CEMENT PRODUCTION CAPACITY IN INDIA PER CAPITA CEMENT CONSUMPTION REMAINS LOW

69% 1,675
560

63% 70% Low per capita

65%
540

68% cement consumption

520

1,150
66%
500
64%
825 implies a significant
62% 64% 725
upside potential, as
480

460

62% 525
440

60%
325 225 India’s growth story
460 484 498 518 548
unfolds
420

400

58%
FY17 FY18 FY19 FY20 FY21 China Korea DPR Vietnam Turkey USA India
Capacity ( MILLION MT ) Utilization (%) Per capita consumption (kgs) World Average

Sources : CRISIL research, Industry research

The cyclical nature and an impending upcycle

THE CEMENT CYCLE A LOOK AT THE PAST… AND THE FUTURE

92% 90%
88%
100 100 %

Operational Capacity 83% 85%

78%
90 90%

profitability additions 80

70% 69% 70% 68% 67% 70% 80%

64% 62% 65% 66%

70

62 70%

60 60%

Lower
50 50%

Utilization
capacity NEW
uptick/demand 30
40 40%

29 26
additions 23 22 25 24 22 22 UPCYCLE
uptick 30

17 19
30%

20 14 20%

10
8 6 8 10%

Cyclicity in
0 0%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21
Decline in High returns
profitability
the cement or Better
Industry profitability Ind. Capacity addition Utilization

Previous Super Down cycle & Consolidation An impending

Low Cycle fragmentation amidst disruption upcycle
utilizations or Ramp up
struggle for in capacity FY04-08 FY09-14 FY15-21 FY21-26E
market share additions
Demand
9% 7% 4% 8%
CAGR
76% (Lowest 70% (Broadly Gradual
Capacity cost Demand trend Capacity 93% (Peak: 98%
utilization of 67% stable utilization improvement
utilization in FY07)
in FY14) rate) forecasted
ROIC 46% -9.5% -2.5% -
• Cyclicity in the industry is mainly due to demand/utilisation and capacity addition lag 13% (Bulk
• Rising utilization in parallel with improving profitability (ROIC) indicates upcycle 7% (Bulk addition 4 % (Capacity 5% (Capacity
Capacity additions in south,
which follows capacity addition with 2-4 years of lead time, initiating cyclicity in North and consolidation led addition by top 5
CAGR new players
south regions) by leaders ) players)
• Subdued demand leads to fall in utilization and profitability entered)

Sources : Bloomberg, Industry research

 Factors triggering the upcycle
GDP GROWTH TO AID CEMENT DEMAND HOUSING CONTINUES TO TOP CEMENT DEMAND
1.4x 1.4x
1.1x The Housing loan rate
1.2x 10%
1.2x is at a 20-year low at
0.9x 7.5% in FY21
13%

29.5mn houses under

55% PMAY-G and 10mn
houses under PMAY-U
22%
FY01-05 FY05-10 FY10-15 FY15-20 FY20-25E by FY22E
Cement demand/ GDP growth rate Average
Under AMRUT, INR
Cement demand has grown at an average of 1.2x GDP growth over the last 20 years 13,750 Cr allocated for
Housing Infrastructure
and is expected to do the same in FY20-25 according to CMIE developing 100 smart
Low cost housing Industrial and Commercial cities

SPEND ON CORE INFRASTRUCTURE (INR tn) ROAD CONSTRUCTION : A HIGHWAY TO GROWTH

8.0 25%
20% 6.8 36.5
6.0 20% 26.9 29.7 28.0 29.8
6.0 5.0 5.2
4.5 1,176
4.1 15% 1,014
4.0 11% 16% 736 776
14% 10% 608
2.0 10% 4%
5%

0.0 0%
FY17 FY18 FY19 FY20 FY21 FY22E FY18 FY19 FY20 FY21 FY22E
Spend in INR TRN Y-O-Y Growth rate MoRTH allocation (INR bn) Construction speed (Km/day)

GOI plans to spend INR 133 tn on modern infrastructure during FY21-25. Center’s Increase in budgetary allocation for MoRTH (in INR bn) and the construction speed
spend on core infrastructure in FY22E is budgeted to rise 14% Y-O-Y (km/day) of national highways in FY22E

Sources : CRISIL research, Industry research

 Election cycle to further bolster demand
REGIONS WITH UPCOMING ELECTIONS - 10 plants - 5 plants - 3 plants

- 7 plants - 23 plants - 17 plants

• Election is a major driver for infrastructure growth in a

state which in turn affects cement market significantly
• 7 elections lined up in 2022 with the most important
one being in UP
• Madhya Pradesh, Karnataka, Telangana, Rajasthan,
Chhattisgarh have elections in 2023

Election Strong market Cement

regions presence plants

Sources : oneindia.com, Company reports

Capacity addition to ramp up supply

PLAYER WISE CAPACITY (TOTAL: 548 mn MT) SPLIT CAPACITY ADDITION ACROSS REGIONS IN NEXT 3-4 YEARS (MT)

Ultratech Cement Central

21% Shree Cement 4.8
ACC limited
Ambuja Cement 3.1
44%
8% Dalmia Bharat
Ramco Cement 1.2
6% Birla Corporation North East
6% India Cements 1.0
5% Others 4.6
3% 3%4% 2.5
4.8

CAPACITY UTILIZATION ACROSS REGIONS IN FY20 2.5 2.7

2.2
75% 73% 72% 70% 100
0.6
55% MTPA 1.5

West South
Central North West East South
3.9 2.0
3.2
2.8
3.0
1.0
1.2
2.0 0.5

Sources : CRISIL research, Industry research

Input cost pressure to remain intact

INDIAN LIMESTONE RESERVES & CEMENT PLANTS COAL PRICE TO REMAIN SIDEWAYS (INR/TONNE)

16,200 15,525
13,275
9,300 9975
>20% 10-20% 5-10% 0-5% <3% 8,700

7,950
6,600 5,850
4,875 4,575 5100

2016 2017 2018 2019 2020 2021F

Non-coking coal Coking coal

• Global Coking coal prices declined by approximately 30% due to weak industrial
activity. In 2021, it is expected to recover on the back of a gradual economic revival
• Non-coking coal prices are expected to recover owing to a pick-up in coal-based
generation with a gradual economic recovery

LOGISTICS COST (% of revenue): A REASON TO WORRY?

25% 23%
20% 20% 21%
19% 19%

• Companies acquire limestone reserve rights ACC cement JK cement JK Laxmi Ultratech Dalmia cement Birla Ramco cement
strategically to reduce inbound logistics cost cement cement corporation
• UltraTech and ACC have huge markets in
Rajasthan, MP, UP ,and Tamil Nadu • Logistics cost constitute 28-30% of the total operating cost for cement industry
• This contributes to regional presence assuming • 60% of the logistics are carried through road. Increasing fuel prices continue to put
more importance downward pressure on margins

Sources : ibm.nic.in, Annual reports, CRISIL research, Ministry of mines

Performance snapshot of major players

EBITDA
MARGIN(%)
25.5 30.5 20.8 11.8 19.3 29.3 29.4

ROA(%)

6.6 11 5.9 12.1 7.8 8.2 7.3

ROE(%)

13.1 19.3 10.1 8.3 21.4 17.1 14.6

ROCE(%)

10.3 15.1 10.7 11.2 17.3 12.5 10.2

1,340 1,485 1,280 1,520

1,250 1,040 959
1,6 00 35. 0x

EBITDA/Ton
1,4 00

1,2 00
30. 0x

25. 0x

1,0 00

20. 0x

800

15. 0x

600

EV/EBITDA400
10. 0x

200
17.7x 24.7x 13.4x 13.8x 7.7x 7.8x 17.6x 5.0 x

0 0.0 x
Ultratech Cemen t Shree Cement Ambuja Ceme nt ACC Cement JK Laxmi Sagar Cement Ramco Ce men t

A rich valuation is driven by higher profitability, a key requirement for which is scale, the quest for which is spurring M&A activity

Source : Bloomberg
Recent transactions with more consolidation expected
DEAL SIZE
YEAR ACQUIRER TARGET STAKE (%) CAPACITY (MT) EV/TON (INR/MT)
(INR MN)

2016 50 12,000 623 9,930

2016 100 16,500 750 4,748

2016 98 54,000 855 7,560

2017 51 1,875 645 13,710

15,758
2018 100 78,750 1,343

8,505
2018 100 56,250 833

7,365
2019 15 24,000 1,680

1,478 7,913
2020 100 55,125

Sources : Company reports, News articles, Press releases

 Sustainability efforts and risks in the industry
CO2 EMISSIONS KG/TON OF CEMENT MAJOR RISKS IN THE INDUSTRY
690
550 525 500 493 515
450 450
400 390

Final product requires

RAW MATERIAL RISK
high quality inputs

Ultratech Cement Shree Cement Ambuja Cement ACC Cement Dalmia Bharat
Disruptions at the
Current FY30 Target SUPPLY CHAIN RISK vendor level
The Indian cement industry is amongst the most efficient globally, in electricity and thermal
energy consumption rate and the largest players are stepping up in their ambition to
further cut greenhouse gas (GHG) emissions
Fluctuations in market
COST INFLATION RISK driven costs
WHRS ADDITIONS (MW)
210
190
Mining rights are
125
LEGAL RISK subject to compliance
90
70
55

FY18 FY19 FY20 FY21 FY22E FY23E MOST SEVERE LEAST SEVERE

WHRS adoptions by the incumbents of the industry will continue to grow to achieve more
operational efficiency

Sources : Company reports, Industry research

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**Disclaimer: Aurum is solely an initiative of the current students and alumni of IIFT Delhi, and
bears no legal association with the college.**
The Investment Research Society

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