Ultratech Cement Stock Analysis – Is It a Good Long-Term Investment?

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Cement Industry

The need of mankind for a better binding material resulted in the development of cement as we know today. This has resulted in the development of plain concrete cement (PCC) and subsequently reinforced concrete cement (RCC). Because of this, it is now possible to construct basic infrastructure to high-rise buildings, skyscrapers, large dams, and even more.

Overview

The Indian cement industry is the 2nd largest in the world after China, having an installed capacity of approximately 545 million tonnes. It accounts for 8% of the total global cement installed capacity.

The southern region of India comprises 35%, followed by the Northern region which is 20%, Eastern (18%), Western (14%), and Central (13%) of the total installed capacity. Of the total installed capacity, 98% lies with the private sector and the rest with the public sector.

The industry employs 20,000 people downstream for every million tonnes of cement it produces.

Therefore, it forms a vital part of the economy. India has a lot of potential for the development of infrastructure and construction work with initiatives from the government like the National Infrastructure Pipeline (NIP), which aims at providing world-class infrastructure to its citizens and a better quality of life.

The NIP aims to invest INR 111 lakh crore by 2025 in a range of projects across sectors like energy, social and commercial, water and sanitation, and logistics. Such projects will indirectly boost the cement industry.

On the front of adopting green practices, the industry has reduced CO2 emission levels by 36% from 1.12 t/t of cement produced in 1996 to 0.719 t/t in 2017. Also, the majority of Indian cement plants produce their products with dry-process technology and are part of the zero-waste water industry.

The industry is one of the revenue sources of government, contributing the US $1.3b per annum in freight revenue during FY17-18. The government has also offered some schemes to make railways as an attractive transportation option.

According to DPIIT, the cement and gypsum products attracted FDI worth $5.28b between April 2000 and March 2020. Also with the easing government policies, several foreign players like Lafarge-Holcim, Heidelberg Cement, and Vicat have invested in the past.

Market size

Sales of cement in India stood at INR 63,771 crore (US$ 9.05 billion) in FY20. Considering FY16-FY20, the exports grew at CAGR 1.68%, which stood at $1.98b in FY20. The exports of cement, clinker, and asbestos increased at a CAGR of 6.44% between FY16-FY19. In FY20 (till January 2020), it reached US$ 1.66 billion. 

Some major players operating in the industry are UltraTech Cement Ltd, Shree Cement Ltd, Ambuja Cements Ltd, and many more. The manufacturing plants are spread across India with the top 20 companies accounting for around 70% of total cement production in India.

According to the latest data, domestic cement consumption is around 235 kg per Capita against the global average of 520 kg per capita, which shows significant potential for the growth of the industry.

In the cement industry, we would further analyze UltraTech Cement Ltd, which is the largest manufacturer of grey cement, RMC, and white cement in India. The company is also the largest in terms of net sales in FY20.

UltraTech Cement

UltraTech Cement Ltd is the largest manufacturer of grey cement, ready mix concrete (RMC), and white cement in India. It is also one of the leading cement producers globally, and the only cement company (outside of China) to have more than 100 MTPA of manufacturing capacity in a single country. The company was ranked among the top 10 in the Dow Jones Sustainability Index (DJSI) in the construction segment globally.

Source: World Cement Association

Over the years, the company has evolved from just being a cement manufacturer to building solution providers. The company has a reach in four countries UAE, Bahrain, Sri Lanka, and India with a presence in 30,000+ towns.

Milestones

The first plant was set up for Grasim (Vikram Cement) and Indian Rayon (Rajashree Cement) in the 1980s since then the company focused on creating new capacities through both organic and inorganic growth.

In 1998, the cement businesses of Indian Rayon and Grasim Cement were merged leading to a total capacity of 8.5 MTPA. UltraTech Cement Ltd was incorporated on August 24 2000 as a public limited company with the name L&T Cement Ltd as a 100% subsidiary of Larsen & Toubro Ltd.

In May 2004, L&T’s Cement business was acquired and later in July, Grasim Industries Ltd acquired the management control of the company and the name of the company was changed from UltraTech ChemCo Ltd to UltraTech Cement Ltd in October.

In 2006, Narmada Cement Company Ltd was amalgamated with the company. Then in 2010, the company acquired Start Cement in the middle east and also undergone greenfield expansion with cement capacity reaching 52 MTPA.

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On 24 July 2012, UltraTech Cement announced that it has signed an agreement with the shareholders of Gotan Lime Stone Khanij Udyog Private Limited (GKUPL) Rajasthan to acquire 100% equity shares of GKUPL.

With this acquisition, GKUPL became a wholly-owned subsidiary of the company. In the same year, UltraTech Cement announced brownfield expansion in Chhattisgarh and Karnataka and commissioned a grinding unit of 1.6 MTPA at Hotgi Solapur, Maharashtra.

In 2013, the company commissioned a new grinding unit of capacity 1.6 MTPA at Jharsuguda, Orrisa, and also acquired units in Sewagram and GU in Wanakbori, Gujarat of capacity 4.8 MT cement capacity.

In the same year in October, the board of directors of UltraTech Cement approved the acquisition of the cement unit of Jaypee Cement Corporation Ltd (JCCL), which is the wholly-owned subsidiary of Jaiprakash Associates Ltd (JAL).

In 2016, UltraTech Cement Ltd became the largest single cement company in India with an installed capacity of 66.3 MTA. In 2018, the company commissioned an integrated unit in Dhar (3.5 MTPA) and acquired the cement business of Binani cement (6.25 MTPA) resulting in a total capacity of 102.75 MTPA.

And the latest acquisition was in 2019 when the cement business of Century Textiles and Industries Ltd merged with UltraTech Cement. With this, UltraTech cement became the first cement company to have more than 100 MTPA capacity in a single country outside of China. This has further strengthened UltraTech’s leadership position in the Central, East, and South India markets.

Board of Directors

The board comprises of 9 members:

Kumar Mangalam Birla

Chairman

Mrs. Rajashree Birla

Non-Executive Director

Arun Adhikari

Independent Directors

Mrs. Alka Bharucha

Mrs. Sukanya Kripalu

S. B. Mathur

K. K. Maheshwari

Vice-Chairman Non- Executive

K. C. Jhanwar

Managing Director

Atul Daga

Whole-time Director & Chief Financial Officer

The Board of Directors of the company met seven times during the year on various matters. There are also six Board-level Committees which have been established in compliance with the requirements of the business and according to the law and statutes.

  • Audit Committee
  • Nomination, Remuneration and Compensation Committee
  • Stakeholders Relationship Committee
  • Corporate Social Responsibility Committee
  • Risk Management and Sustainability Committee
  • Finance Committee

No director is related to any other director, except for Kumar Mangalam Birla and Mrs. Rajashree Birla, who are son and mother respectively and also, none of the directors hold membership in more than 10 public limited companies and is a member of more than ten committees or chairperson of more than five committees across all the public companies in which he/she is a director.

Shareholding Pattern

Ultratech Cement Shareholding Pattern

Source: Company AR 2019-20

The above data is extracted from the company’s Annual Report of 2019-20. The major promotor’s holding i.e. of Grasim Industries Ltd saw a slight decrease throughout the year to 57.28% from 60.20%.

In the public shareholding category, the Mutual Funds shareholding drastically increased from 3.01% at the beginning of the year 2019-20 to 10.51% at the end of the Fiscal Year. FIIs have reduced their shareholding by approx. 3.5 percentage points to 16.48%.

The company also holds shares in various other companies that are brought through M&A. subsidiaries in which the company holds 100% shares are Dakshin Cements Ltd, Harish Cement Ltd, Gotan Lime Stone Khanij Udyog Pvt Ltd, Bhagwati Limestone Company Pvt Ltd, UltraTech Nathdwara Cement Ltd, and UltraTech Cement Middle East Investments Ltd.

The footprint of UltraTech Cement

Country/Region

Cement Manufacturing Capacity (MTPA)

India

 

West India

27.7

North India

23.8

Central India

23.3

East India

16.1

South India

20.5

Bahrain

1.0

Sri Lanka

1.5

UAE

2.4

The manufacturing plants of UltraTech Cement are spread across India and countries like Bahrain, Sri Lanka and UAE. Along with this, it has a robust domestic distribution network of 29,795 dealers, 64,204 retailers, 2,145 outlets and a truck fleet of 37,600 which serve 30,500 destinations across India.

Product Portfolio

UltraTech Cement has a wide range of product portfolios that cater to various aspects of construction, from foundation to finish. This Ordinary Portland Cement, Portland Blast Furnace Slag Cement, Portland Pozzolana Cement, White Cement, Ready Mix Concrete, building products, and a host of other building solutions.

The cement is sold under the brand UltraTech, UltraTech Premium, and Birla Super. White cement is manufactured under the brand Birla White, and Ready Mix Concretes under the brand UltraTch Concrete. Ordinary Portland and Portland Pozzolana Cement contributed to 86% of the turnover of the company in FY20.

Apart from these products, the company also has new age products under the name Xtralite, Fixoblock, Seal & Dry, and Readiplast. These products are developed to meet today’s demand in the construction industry which requires a replacement of conventional products and methodology. Also, UltraTech Building Solutions is a retail format that caters to the end consumer providing a wide variety of primary construction material under one roof. It was started in 2007 and has more than 2145+ stores spread across India making it the largest network of home building stores in India.

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Stock Performance

ultratech cement stock performance

Comparing the returns of the stock and benchmark indices, on a one-year term, the stock has given better returns than the indices. But on a longer term, three or five years, both the indices Sensex and Nifty have given better returns than the stock.

Financial Performance

Revenue

The company has not seen much growth in revenue in FY20 with respect to previous fiscal year. This is probably due to overall slowdown in the economy and muted demand. This trend would be observed in the current fiscal as well due to the pandemic. But in the coming years, due to the initiation of various projects in the infrastructure sector, there would be an increase in demand for cement.

EBITDA and EBITDA Margin

The company has seen more or less a constant growth in EBITDA which is a positive sign, also the EBITDA margin has seen a slight dip in FY19, but it increased in FY20 to 24%. This is because of slight decrease in operating cost where the energy cost declined 8% from INR 1,065/t to INR 985/t on accounts of drop in fuel prices. Also there was a drop in price of Pet coke.

Return on Capital Employed

Return on Capital Employed indicates the efficiency of the capital (both debt and equity) deployed by the company. Higher the value, better it is. UltraTech Cement generated an ROCE of 11.2% in FY20 better than the previous two fiscal years. Rising inflation and increase in cost of production will significantly impact the expenses especially due the rise in fuel prices. In order to maintain a steady ROCE, the company would need to reduce its expenses, it needs to optimize its fuel mix towards energy efficiency. The company is planning to increase its solar and wind capacity from 99 MW to more than 350 MW by the end of FY22, to cater to nearly 7% of the power requirement.

ultratech cement roce

EBITDA/tonne

FY20 saw an increase in the EBITDA per tonne due to slight increase in margin and a slight decrease in expenses even when the sales decreased in FY20 as compared to FY19. Overall the company is able to maintain an average EBITDA/tonne of INR 1017.

ultratech cement ebitda

Leverage Ratio

Let us look at the Debt Equity ratio (Net)

During the year FY20, the company paid off high cost, long term long term debt transferred from the Century as a part of acquisition. Apart from this, it has paid some short-term as well as long-term rupee loans which improved the ratio. Also in coming years, the company is planning to reduce its debt level.

ultratech cement net debt

Valuation Ratio – Peer Comparison

Source: Tickertape

Comparing the PE ratio and PB ratio of UtraTech Cement Ltd with its peer, it is fairly valued. Investors are prepared to pay INR 19.65 per Rupee earning of UltraTech Cement whereas in the case of Shree Cement Ltd, the stock is overvalued, where investors are willing to pay INR 49.42 for per Rupee earning. In the case of dividend Yield, the company has the lowest percentage when compared to its peers.

Tackling Environmental Challenge

The company has included sustainability in its business strategy and also looking at the environmental impact of business activities and investments. The company aims to reduce CO2 (Decarbonisation) by 25% by FY21 and increase energy productivity 2x by FY35. The company is aiming to increase the share of renewable energy in its total energy requirement. The company is also planning to upgrade technology to enhance energy efficiency. Along with renewable energy as an energy source, the company is looking at tapping waste materials like fly ash, slag, and plastics to cater to the energy needs.

Business Risks to the company

Risk is an integral and unavoidable component of a business given the challenging and dynamic conditions in which the company operates. Risk cannot be completely avoided but a proper risk management plan can ensure that risks are reduced, avoided, retained, or shared. Some of the risks identified by the company

Economic Environment and Market Demand

The industry is affected by the overall economic growth of the country. The slowdown in the Indian economy has resulted in a slowdown in the construction projects as well, which has affected cement consumption. To this, the ongoing pandemic has added more challenges which have resulted in a complete halt on construction activity.

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Even when the situation is improving, problems such as social distancing, unavailability of migrant workers, local lockdowns, and supply chain disruption will reduce the pace of construction activity, reduce the production capacity, and also the cement consumption. This has also brought cyber and fraud risk and health and safety issues.

There are many government initiatives in the housing and public infrastructure segment which will definitely boost the industry and the cement sales.

The cement company is an aggregation of large and small industries. The risk possessed by the company would be in terms of market share due to an increase in competition from existing players and emerging players in the industry. The company continues to enhance the brand equity through different marketing strategies and also increasing the product portfolio and value-added services.

Inflation and Cost of Production

The company faces the risk of inflation and changes in the market-driven cost of coal, pet coke, power, and other fuel. Due to the large energy requirements of the industry, the changes in fuel prices significantly impact the production cost. There are many strategies adopted by the company and also, it is looking for alternative fuel as a source of energy. Also, the risk of an increase in the cost of raw material (Limestone: primary raw material) has been significantly mitigated by the company through policies that are implemented.

Legal and Compliance

Due to the ever-evolving regulatory framework, the risk of non-compliance and penalty is a constant risk to the company which can also lead to reputational risk. The company has a policy to mitigate this risk.

Financial and Accounting Risks

This includes the risk of exposure to interest rates, foreign exchange rates, and commodity price fluctuations. The risk management strategy involves identifying risk exposure, measuring and evaluating the financial impact, deciding on the steps to mitigate the risk and regularly monitoring and reporting

Environment and Sustainability

The risk of environmental pollution due to the discharge of waste, which results in environmental damage is a legal offense. The company has taken various steps like building sewage treatment plants, recycling of industrial wastewater, bag filters, and also extensive plantation and creation of green belt to protect the environment.

Opportunities

During the pandemic, the company has reduced its total fixed- cost by 21% in Q1FY21 as compared to the previous year, lowering the impact on P&L due to lower capacity utilization. Also, the company is constantly making attempts to reduce its debt even during the pandemic.

In long run, infrastructure being the backbone of the Indian economy, various projects have been initiated by the government to boost infrastructure spending like the National Infrastructure Pipeline under which the government has identified 6,835 projects and aims to invest INR 111 lakh crore by 2025.

The investments are made in a variety of sectors like energy, social and commercial infrastructure, communication, and water& sanitation. There are other projects like ‘Housing for All’ by 2022 and various projects at the state level which will definitely boost the cement industry and also the overall economy.

Conclusion

UltraTech Cement Ltd is the number 1 cement company in India and also among the top 10 in the world. The company focuses on creating new capacities through organic and inorganic growth. Due to the slowdown in the Indian Economy and then the pandemic, it has affected the company and the cement industry overall.

But due to the measures taken by the company of reducing the fixed-cost, it has reduced the impact on P&L of low capacity utilization.

The company is continuously aiming to reduce its debt level. On the sustainability front, the company plans to increase the percentage of renewable energy in the total energy requirement and continuously adding value-added products like UltraTech Super, UltraTech Weather Plus to its portfolio.

The company is also adopting holistic world-class safety practices to achieve the goal of Zero-harm, Zero Injuries, and Zero Excuses to strengthen its human capital along with adequate training hours.

It has also contributed to society through CSR initiates and also helps people during the pandemic. The various initiates taken by the government in the infrastructure sector to achieve the target of $5 trillion economies, will definitely boost UltraTech Cement and the cement industry as a whole.

References

Business Today | Business Standard | Bloomberg Quint | Tickertape | Company Website

Researched and Written by Unmesh for FinMedium.


Cover Image: Indiamart

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