## Quantitative Analysis of Cement Sector in India

### Introduction

India is second largest producer of cement after China with an installed capacity of ~509 MTPA. Indian cement sector is highly fragmented and has intense competition. Currently, real estate sector accounts for 65% of the total cement demand, followed by public infrastructure (20%) and Industrial development respectively. However due to the pandemic, resulting in lower income, majority of demand is expected from government infrastructure and housing projects. In this blog, we will do a quantitative analysis of Indian cement sector.

**Please note** that we have done this analysis with the only purpose of screening good companies. Analysis done is completely on quantitative basis. No suggestions are being made to directly go and invest in the top scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top scoring companies in this analysis and take investment decision based on risk profile.

### Cement Sector Quantitative Analysis

##### Companies selected for analysis

We have selected the following five companies for our quantitative analysis.

#### Procedure of Analysis and its Interpretation

- These 5 companies are analysed on following parameters and ranked and scored accordingly. For example, if a company has higher PE ratio, it has a lower rank , hence has scored lesser points. Similarly, if a company has higher RoE, it has higher rank and has scored higher points.
- Here , 1 means that the company has scored lowest points and 5 means the company has scored highest points.
- At the end, we have added all the points together and companies are ranked accordingly.

##### 1. PE

- PE is basically how much an investor pays for each rupee of profit earned.
- Ambuja Cement has lowest PE and hence has first rank, followed by UltraTech Cement and others.

##### 2. EV/EBITDA

- EV/EBITDA is another valuation metric to value companies, based on the operating profit generated as compared to their Enterprise Value.
- Enterprise value is basically the value of total company. Here, market value of debt is also considered in addition to the market valuation of equity.
- Thus, Enterprise Value basically gives the valuation of total assets of the company in market. Hence, lower the EV/EBITDA, better its valuation.
- Analogous to PE valuations, Ambuja Cement has lowest EV/EBITDA and hence has first rank, followed by ACC, UltraTech and others.

##### 3. Return on Capital Employed (RoCE)

- Return on Capital Employed (RoCE )is one of the return ratios commonly used in fundamental analysis. RoCE is
**Earnings before Interest and Taxes (EBIT)/ Total Capital Employed (Debt+Equity)** - It gives us a perspective of how the company is earning profits by allocating its overall capital. So higher the RoCE ,the better.
- Cement sector is a very capital intensive sector and hence it is normal for companies to have debt on their balance sheet.
- Here, ACC has highest RoCE and hence has first rank whereas UltraTech has lowest RoCE and is at last position.

##### 4. Return on Equity (ROE)

- Another return ratio that is used widely in fundamental analysis is Return on Equity (RoE) which is
**Net Income/ Total Shareholder’s equity (Equity share capital + Reserves/Surplus).** - Here, Ultratech cement has higher RoE and hence has first rank. On the other hand, Ambuja cements despite having highest RoCE has lowest RoE and hence has lowest rank.
- We will discuss this discrepancy in between RoE and RoCE in the next part.

##### 5. Debt to Equity (D/E)

- Here, Ramco cement has highest debt to equity ratio and hence comes at last position.
- UltraTech cement has considerably higher debt as compared to other players, this results in higher RoE and lower RoCE. This is because in calculating RoE, we only consider equity capital, whereas in calculating RoCE , we consider equity as well as debt capital.
- ACC and Ambuja cement on the other hand, have no debt, and hence their RoCE > RoE. This is mainly because the denominator in calculating RoE and RoCE for debt free company is same, but numerator is different (Net Profit in case of RoE and EBIT in case of RoCE). Since EBIT > Net Profit, here RoCE > RoE.

##### 6. Interest Coverage Ratio

- Interest coverage ratio is
**Earnings before Interest and Taxes (EBIT)/ Interest expense.** - This ratio gives the ability of the company to pay interest from its operating profit.
- Overall the companies have good interest coverage ratio. Usually interest coverage ratio above 2.5 x is healthy.
- Since Ambuja cement and ACC have no debt, their interest coverage ratio is highest. Hence they rank first, where as since UltraTech has comparatively higher debt, its interest coverage ratio is lowest. Hence it is at lowest rank.

##### 7. Pledged Promoter Shares (%)

- Pledged Promoter shares are usually not so healthy sign of corporate governance. Hence, ideally there should not be any pledged promoter shares.
- Here since Ramco cement has 1.97% pledged shares, it has lowest points and others have highest points.

##### 8. Institutional Holding (FIIs+ DIIs)

- Institutional Investor’s shareholding in a company is also one of the important parameter while analyzing a company.
- Ramco cements has highest institutional stake and hence has first rank followed by UltraTech cement and others.

##### 9. Operating Profit Margin (%)

- Here, Shree cement has highest operating profit margin and hence it has first rank followed by UltraTech cement and others.

##### 10. 5 year CAGR

- Here, Shree Cement and Ambuja Cement lead the pack with highest profit and sales growth respectively.

##### 11. 3 Year CAGR

- Here, UltraTech cement has highest sales and PAT growth over 3 years and hence ranks first.

##### 12. Capacity (Metric Tonne Per Anum) and Capacity Utilization (%)

- Higher the capacity and capacity utilization , the better it is. However if the capacity utilization ~100%, it is a red flag as company should add up capacities to serve the increased demand.
- Here, UltraTech cement has highest capacity as compared to other players and hence has first rank.
- On the other hand, ACC having 33.4 MTPA capacity has highest capacity utilization of 33.4% and hence has scored highest points.

##### 13. Realization per tonne (Rs/tonne)

- Realisation per tonne is basically how much amount(in Rs) a company earns per tonne. Hence, higher the realisation, the better it is for profitability.
- Here, UltraTech has highest Realization per tonne and hence has first rank, whereas Ramco cements has lowest Realization per tonne, hence has lowest rank.

##### 14. EBITDA per tonne

- This parameter signifies the gross profit earned per tonne by the company.
- Here, Shree cement has highest EBITDA per tonne which is evident as it has highest margins.
- ACC has lowest EBITDA per tonne and hence has last rank.

##### 15. Enterprise Value per tonne (EV per tonne)

- This signifies the replacement cost for a particular company. Hence higher the EV per tonne the better as it means there are higher barriers to replace the company.
- Here , Shree Cement leads the pack with $235 /tn and ACC ranks last with $83/tn.

##### 16. Inventory Turnover Ratio

- Inventory Turnover Ratio is
**Cost of Goods Sold/ Average Inventory.**Average Inventory is (Starting Inventory + Ending Inventory)/2. - It gives us an idea about how the company is stocking up its inventory as well as how many times the company has sold its inventory in a given period.
- Here Ramco Cement has highest inventory turnover ratio and hence ranks first. On the other hand, Shree Cement comes at last position with lowest inventory turnover ratio.

##### 17. Debtor days

- Debtor days is basically how quickly the debtors/customers are paying back company. It is
**(Average Accounts Receivables/Credit Sales)*365**. - The lower the debtor days, it is better as it means that company is receiving its accounts receivables early, which aides its liquidity position.
- Here, ACC has lowest debtor days and hence has first rank. Whereas Shree Cement has highest debtor days and hence has last rank.

##### 18. Cash Conversion Cycle

- Cash conversion cycle tells us the number of days a company usually takes to convert its investment in inventories and accounts receivables to turn into cash flows.
- The formula of cash conversion cycle is
**Inventory Days + Debtor Days – Payable Days**. The lower this cycle , the better as it signifies that the company does not have significant working capital requirement. - As ACC has lowest number of debtor days, its cash conversion cycle is also shortest and hence it is at first rank.
- Similarly, since Shree Cement has lowest inventory turnover ratio and highest debtor days, its cash conversion cycle is also longest and hence it is at last position.

##### Final Score

As seen, UltraTech Cement leads the pack overall followed by Ambuja Cement, ACC, Shree Cement and The Ramco Cement.