Headwinds and Tailwinds in Indian Cement Sector
In this blog, we will discuss about Indian cement sector. India ranks second in the world, followed by China, in cement production. Cement production in India accounts for 8% of the total cement production in world.
Indian Cement Sector Analysis
Indian cement sector is seen consolidating in the recent times and the top players are Ultratech Cement, Shree Cement , Ambuja and ACC. Ambuja and ACC belong to the same parent and there is a possibility of merger between the two.
Market Capitalization and PE
As seen from PE metric, Shree Cement is commanding quite premium valuations among the top 4 companies.
Indian cement industry is quite fragmented and there are many leading regional level players as well apart from these 3-4 market leaders.
One more interesting player from cement sector is in news these days which is India Cement. It is mainly because the popular investor and promoter of Dmart, Mr. RadhaKrishna Damani, increasing his stake in this company. Currently he owns 18-19% stake in India cements through his own and family accounts.
Return on Capital Employed (RoCE), Debt to Equity (DE) and Interest coverage ratio
- ACC has the highest RoCE mainly because it is a debt free company and thus, has highest interest coverage ratio.
- Shree Cement has healthy RoCE as compared to its debt levels of 0.24.
- Ultratech cement has debt to equity ratio that is almost double the debt to equity ratio of Shree cement. Hence, the Interest Coverage Ratio is also lower. However, it has healthy RoCE ratio.
- Overall all the four companies have good inflows from FIIs, DIIs along with strong promoter holding.
- None of the companies mentioned above have any shares pledged, which is a positive sign.
- Since Ultratech Cement is a market leader as well as a part of NIFTY 50 index, there is a considerable flow of passive investment. This is evident from the shareholding of DIIs and FIIs .
- Ambuja Cement’s promoter holding is highest at ~63.3% as compared to other players.
- FY 19 was a good year for cement sector in terms of sales and PAT growth. As compared to FY 19, FY 20 seems to be a year of sluggish growth mainly due to high base effect as well as impact of on-going COVID pandemic.
- Among the top 4 players, Shree cement managed to grow its sales by ~1.5% which is highest.
- In terms of profit growth, Ultratech cement and Shree Cement have recorded healthy profit growth of ~60-65%.
- Ambuja cement’s profit growth was flattish, while ACC incurred huge losses, with profit declining 33% on YoY basis.
- The sales and profit growth of Shree cement justifies its premium valuation. Similarly, it justifies the lower valuations of Ambuja Cements and ACC.
Cement sector outlook
- As seen from the 1-year sales and profit growth rates, it is evident that FY 20 was a sluggish year for cement sector.
- However, there are some signs of demand recovery seen in the recent times.
- The key drivers for demand recovery are as follows:
- Government’s focus on infrastructure spending and housing through Pradhan Mantri Awas Yojana (PMAY) will drive demand for cement.
- Good rabi season and normal monsoon to sustain demand recovery for housing in rural India.
- Q2FY21 is expected to be sluggish as most of the construction and infrastructure activities are deferred due to monsoon.
- Due to the current liquidity crunch, private sector will be on a back foot in construction and infrastructure sector. So it is expected that government will fill the gap by spending more on infrastructure activities to stimulate the construction activities in economy.
- Consolidation in market share. Indian cement sector is undergoing consolidation. In this phase, companies with weak balance sheets are suffering and hence do not have much pricing power.
- This lack of pricing power of small/regional players can augur well for the top 4 companies to increase their market share.
- If we see the market share of these top companies, they already account for 40% of the market share in industry and this might increase to 50% in coming quarters.
- Cost control measures: Most of the companies are taking cost control measures to maintain their operating profits and protect profit margins during these difficult times.
- Hence, the best part to analyse companies in coming quarters will be operating profit margins as the companies will be following cost saving measures.
- Government intervention in pricing. Although the top 4 players will increased pricing power in the coming times, however they cannot increase prices as they want.
- If the price increase goes beyond a limit, government can intervene in cement pricing.
- Second wave of COVID-19 pandemic. If this happens, government’s revenues will be hampered which will ultimately affect its spending on infrastructure. This will definitely hurt revenues of cement companies
- Challenges in NBFC sector. Housing sector also accounts for a major share (~65%) in demand for cement. If NBFCs are in trouble and have difficulty in issuing new housing loans, it will have an adverse impact on housing sector and implicitly on cement sector as well.
- Rise in freight costs. Recent hike in fuel prices can hurt cement companies as freight/transportation cost accounts for 30-35% of the total costs.
In these difficult times, it is better to stick to the top players in cement sector like UltraTech Cement, Shree Cement, etc.