hey guys welcome to another episode with me shashank udupa and in this episode we're going to talk about a very very interesting industry. now before i begin let me give you some interesting trivia about this industry.
do you know which is the most widely used material that is there right now..?
you know that it is also the second most consumed physical resource on the planet earth after water, and yes i'm pretty sure most of you smart guys would have read the title so you know what it is. it is a cement industry
now why is cement industry or white cement so important..?
we will look at in this episode we will talk about the cement industry the characteristics the drawbacks of the cement industry uh and we'll talk about a few stocks that are currently in the cement industry as well.
now the cement industry is one of the most strategic and vital importance for any growing economy if a company. if a country has to grow the economy has to grow then obviously cement industry is the most important at that point, because any type of growth in the industry or any type of growth for the economy needs to happen with a lot of construction, renovation, building, houses, homes, building big skyscrapers bridges, infrastructure and everything whatever be the infrastructure you need cement to do that.
so technically speaking cement is that substance that is used for construction which sets hard ears and adheres to other materials that binds them together cement can be classified basically in two types.
1) Hydraulic Cement
2)Non-Hydraulic Cement
the first type is a hydraulic and non-hydraulic based cement based on whether water is required to let it get set or not now hydraulic cement okay make up.
majority of the cement produced by the industry today so this is important for you to understand what is happening in the industry.
now let's look at some of the key cost drivers for the cement industry and if you look at this pie chart you will see that the key cost driver for most of it is manufacturing and miscellaneous expenses which make up for almost 30 percent of the cost of cement production.
the next you would see is freight freight is basically logistics so transportation of this simon from one place to another cement is also very expensive so that is something that adds to the cost of cement manufacturing.
then we have power and fuel and fourth we'll have the raw material which is the lowest so all these things make up for the cost of a cement uh production right now those are the cost drivers.
next let's look at the demand drivers of the industry now demand for cement is primarily divided into three sectors.
1)the first sector is the real estate
2)development second sector is infrastructure development
3)and third sector is the commercial and the industrial development
now the cement consumption per capita for india is just 210 kgs by the way that is the lowest among any developing nations the world average.
currently is at 580 kgs which shows that the demand for the cement has still not reached its true potential in india and there is a lot of room for growth long-term demand for growth rate for cement is estimated to be around 1.2 times the entire gdp growth rate.
just think about that for one second right now that is why i'm saying that if there is an economic boom or if there is an economic growth.
the cement and this industry can be expected to be on the rise when the indian economy rises. and that is something that is happening right now as well now let's look at some of the key risks that are associated with the cement industry and mainly they are as you would have seen in the top.
that are cost drivers but so the cost drivers if they become expensive it does become a risk but let's look at some of the key risks that are associated with the cement industry the first one is oil and fuel price.
imagine if the oil and fuel price goes up then obviously your cost of cement will increase as well now these were the most important things when you look at when it comes to the cement industry which was the cost drivers the demand drivers and the risk because we have to be an educated investor so now we know exactly how the cement industry works now okay.
now let's look at some of the key characteristics of the cement industry and i want to do this because we want to understand what happens in the cement industry and what are the different parameters that affect the cement industry now cement prices are not fixed but basically are determined based on the supply and demand okay so the price of cement is not fixed it is only based on the demand supply.
forces that are there thus it follows a dynamic pricing mechanism where the top players have very less pricing power okay that is number one now second cement makers with higher sales uh in the retail segment percentage would have comparably higher margins as compared to the cement makers with lower retail sales and greater infrastructure sales.
because it is the reason why this is there is because in retail sales you can charge more slightly more because in infrastructure sales you will take bulk pricing and you might reduce your margins as well so any any player that has high retail sales is considered good right that is what it considers in the cement industry now don't forget that cement as a as a commodity is a very highly taxed commodity because there is a lot of taxes like exercise duty lot of indirect taxes that limits the end margins earned by each manufacturer right.
this is slightly sad but it limits the end money that is owned by each manufacturer now because of this the pricing power in the industry is also quite low because most players engage with something known as discount and incentive schemes to boost their sales right now.
this is what they're doing so if you look at the all the players in the industry right now they're all competing with discount and incentive schemes to boost no single person has the sole control of keeping you know sole monopoly of manipulating the cement prices so that is what is happening currently in the cement industry now cement is also a bulky product means it is difficult for cement companies to compete in all regions for market share.
now if you look at any cement company it's very difficult for him to compete and be number one in every single region now sales and distribution networks have become so important in the cement industry and they actually determine the reach and potential of whether the cement manufacturer will go up or not see if you look at production right.
if you look at manufacturing that can be solved why because you can increase your manufacturing plant and get it right but the more important thing is how do i go into a new region and if you look at the cement industry right now each region has a very stronghold player right and we will go through that in the segment so each region has a stronghold player so it is very difficult to be number one in all regions and that is why cement sector is like highly diversified across the country as well now now cement making which you look at if you remember the raw material key risk.
right now cement making is very dependent on mineral resources like limestone and companies have to make huge bids for mining this limestone now in most cases the bids that they do are reflected in the balance sheet as intangible assets okay very similar to goodwill and amortized later accordingly right so that is something that you guys need to be aware of when you're looking at the balance sheet of a cement company.
now another key characteristics of a cement company is that it is cyclical now what do i mean by cyclical as we just mentioned in the previous segment that the cement industry will boom and grow when the economy grows and same way when the economy is not growing it is not that great right but there's another factor that affects the cement industry and the other factor is also climate cycles.
why do i say climate cycles imagine apparently in the cement industry the lowest selling months are the monsoon season because you can't do much in the monsoon season with cement right so in the in the lowest months of the cement industries in the monsoon season which is from june to september so that quarter might look bad right and then after that will be which is march to june okay are mostly the highest selling months.
so that quarter is something that you need to see be aware of q1 which is a march to june quarter should be in q1 that should be a good quarter but expect the next quarter which is due to september might be bad because of the cyclical nature of the climate as well so we need to understand as a smart investor how to look at everything always tomorrow you look at a quarterly statement of a cement industry and you don't know that it's a cyclical industry and you might be.
like you know what it's going down i think i should just sell it and walk away don't think like that you need to understand the industry in and out now another key element here is that the cement industry is a very fixed asset heavy business that means a lot of money a lot of cash flow from your bank account has to go into making this business a successful business with raw materials with manufacturing plants with logistics with frayed with power and fuel too much upfront capital is required to make a lot of cement.
right now it is very important to understand that a lot of people in this industry sometimes take debt or sometimes take loan so it is interesting to look at if the cash flow is good enough how much money is coming into the bank account at the end of the day it is important to see how much cash flow they're making and is it enough right to pay off their existing loans or is it okay.
to take a new loan and then pay it off or can they make become a bigger company by doing expansion now this is something very important you need to look at when it comes to a cement industry now there are a few key different metrics or ratios to look at when it comes to the cement industry.
now cement industry basically as we all know is driven by volume more volume demand is there you will make more money now the best indicator to look at from a cement industry perspective right should be basically the sales realization per ton or a bit per ton right this is something that you need to look at why because if i know i'm making hundred rupees per ton then i know for a fact if it's thousand tons then i will make so much rupee at the end of the day so it is always looked at from a volume perspective.
because obviously if i have more bags of cement or more kgs or more tons of cement then i will make more revenue in the future so it is always looked at how much am i making per ton so there's something that is very important to understand now if you do this it will help you understand whether the cement in your industry or the cement that you have selected cement company that you have selected you can compare it with the other big players in the industry and see the comparison that.
okay what is ebitda return from and this uh player versus the ebitda from another player and you can compare it that way okay that gives you a better indication now another thing that is there in the cement industry because volumes are so that is something known as capacity utilization okay now what is capacity utilization one is just you have to make volumes right.
i have to manufacture a lot of cement okay the second thing is now demand is also there assume there is a very high demand and how this companies products use this existing supply that they have and fulfill that demands and depending on that how their performance goes up right and how are they using their existing capacity to maximize the utilization so that they can give out more tons from the same resource that is something that is very very very important.
now remember we spoke about all the key risks that were there and the cost drivers now obviously if you look at so many cost drivers which was logistics there was power and fuel there was raw materials some things can be controlled here and what can be controlled it is something like power and fuel manufacturing expenses because you get a better manufacturing plant automated innovate over there.
you can reduce it fuel logistics can be reduced as well by making manufacturing plants closer to the ports a lot of things can be done at that point so if a company is working on cost optimization in the cement industry that will lead to more profit generation for the cement companies understood so there are some things like raw materials maybe its demand supply you can't control the prices so much right.
but if you look at fuel power logistics manufacturing all this is in the control of each individual company and if they are focused on reducing this automatically what will happen their margins will go up and if their margin goes up the net profit will go up if the net profit goes up the eps goes up and if the earnings per share goes up then everyone makes money at that point right.
awesome so these were the very different characteristics of the cement industry i hope i could tell it to you in a very simple easy simplified format right and i hope you guys understood that because it's so important to understand how the cement industry works.
now what i'm gonna do is i'm going to look at the top five companies based on market cap in the cement industry to show you who are the big players and how are they spread across.
now the top five Company's are
1)Ultra tech Cement
2)Shree Cement
3)Ambuja Cement
4)Acc and
5)Dalmia
so we're going to look at these five players one by one.
1)Ultra Tech Cement
now the first company that we will look at is ultra tech cement ultra tech cement is the cement flagship company of aditya birla group now this is a 5.9 billion usd dollar building solutions powered house okay.
basically i'll tell you what ultra tech cement is the largest manufacturer of gray cement rmc which is also known as ready mix concrete and the third one which is known as white cement now it is the only cement manufacturer globally outside china to have more than 100 plus million tons production capacity per annum of cement.
and it is all being manufactured by in one single country by the way another good fun fact about ultra tech cement it is the third largest cement manufacturer and producer in the world excluding china because china has a lot of players there right now the company's business operations is not only in india but it is also in srilanka, uae and bahrain.
so they have actually gone and expanded themselves outside now just to give you more understanding about how big they are and how their capacity works ultratech cement basically has a total capacity consolidated capacity of 116 million tons per annum. they have 23 integrated plants one clinkerization plant 26 grinding units seven bulk terminals one white cement plant two wall cat putty plants and more than 100 ready mix concrete rmc plants spanning across india.
uae, bahrain and sri lanka massive scale on ultra december now ultra tech cement why is it so good is because it provides a different range of products that cater to various aspects from construction to foundation to finish so basically they have products for each right.
you want to construct you want to lay foundation you want to finish the entire process ultra tech cement has a product over there now cement under ultratech product is sold under different brands.
so for example ultra ultra tech is one brand then there is something known as ultra tech premium that is something known as birla super right now white cement manufacture is manufactured under the brand name known as billa white okay.
this is not ultra tech but it's called villa white ready mix rmc concrete that is that is manufactured under something known as ultra tech cement and ultra tech concrete and new age building products under the name of extra light fixo block seal and dry and ready plast.
so they have a lot of different variations when it comes to that so when it comes to building solutions especially in the retail format ultra tech caters to all the consumers and they provide an end-to-end solution under one roof that is what ultratech cement does now i'm just going to show you two images of how their product looks just so that you have an idea of how it works there's something known as ultra deck cement weather plus and there's another thing called ultra tech cement super just to give you an idea of how it works right.
next i'm going to show you some of their revenue okay if you look at this chart cy basically means current year l by basically means last year now if you look at the india operations on the right okay so last year they were making 39 900 crores okay and current year they're making 42 578 crores these are net of taxes if you look at the total income it is 43 000 crores 43.8 000 crores in this year compared to 41 000 crores in the lashes.
so there is a slight growth that is happening in the industry as well now if you look at their look at the expenses now this is very important because we looked at expenses you know the key cost drivers look at the key cost driver here right if you look at the logistics cost which is the second last it is 9977 crores which is the highest among all the expenses that.
they currently have the next is power and fuel against 7900 crores little reduced from last year from 8100 crores and then if you look at the final one which is the raw material consumed which is again at 5200 crores so what i can assume from ultra tech and this is how i read financial statements that logistics costs power and fuel and raw material consumed are one of the biggest cost drivers for this company okay.
if you look at that ebitda which is earnings before interest tax depreciation and amortization you will see that there in the current year it's at 12 000 crores and in the last year it was 9 700 crores if you look at their keger growth right if you look at how they're growing if you look at the sales cake or in the last 10 years sales gigger growth.
how is their sales growing year on year they're currently growing at a 13 growth rate which is very healthy for a company if you look at the profit growth right it is at 15 kg which is again very nice and attractive if you look at the cash flow from operations keger growth right.
because as i told you right cash flow is very important because this is a high fixed asset business it is a 20 growth rate over the last 10 years now if you look at their p e ratio their current pe ratio is at around 35.4 when i'm doing this video and the industry p is also around the same rate so it is add part with the industry pe ratio as well if you look at that stock price kager growth.
in the last 10 years it is going up by 21 i would say that is very nice another very important element we spoke about while reading the characteristics that if you want to look at a cement industry you need to look at something known as ebitda per ton obviously because if i make more time and i make more better i'll make more revenue now let's look at whether the ebitda per ton is growing or not for this company right ultra tech cement.
so if you look at this in fy 17 they had 990 ebitda per ton okay and if you look at fy 21 they're making 1424 ebitda per ton that means they've obviously grown right that means they have taken a lot of measures to reduce costs they've taken a lot of measure to increase their ebitda margin.
so that they can make more per same ton this is basically a company that is doing good cost optimization that keger growth for ebitda is going up by 7.5 that means if you take that metric you can predict the future growth as well if you look at some other metrics if you look at the net margins in the march 2021 the net margin is 10.
if you look at that asset turnover ratio it's consistent at 0.52 if you look at the financial leverage the financial average is basically the amount of loan that they have is around 2.07 which is reducing from 2.8 and 2.35 from the last two years and if you look at the return on equity has slightly gone down from 16 to 11 percent that is something that you might need to look at.
but that average roe is at 14 that means only in 2021 the return on equity has gone down but all the other years at an average of 14 so this was basically ultra tech cement india's largest cement manufacturer by market cap listed company.
2) Sri Cement
now the next company that we will look at is something known as sri cement. now sri cement again comes in india's top three cement manufacturers and producers among the fastest growing as well and they currently have an installed capacity of 40 m million tons per annum or mtpa.
if you see it right in india and they have 44 totally consolidated including their overseas market now one advantage that sri cement has is that also it has an installed power generation capacity of 742 megawatts right which includes waste the heat recovery power solar wind power wind energy and all others as well.
so what happens with this that means that cost manufacturing for power and fuel will be slightly lower because they have their own uh power generation capacity as well now they basically operate in three business verticals when the cement industry the first one is called as opc opc is basically ordinary portland cement then there is something called ppc which is portland puzzle owner cement.
and there is a third one okay known as psc which is portland slag cement now these are important because i will show you in a few images what different products they have now.
because sri cement also operates in the power sector they have an installed capacity of 300 megawatts with captive and green power capacity of 442 watts the company also produces something known as aac which is autoclaved aerated concrete blocks a lightweight precast building material which has high insulating capacities as well and this plant is in uttar pradesh.
now i want to show you some of their plant locations look at this image if you look at where cement is basically uh has a predominant hold if you look at it most of their plants are in north of india right if you look at the image that is there most of it is in north india they have four plants towards the east one plant in maharashtra one plant in hyderabad but nothing towards the south of india correct.
now i will show you some of their brands and why i'm telling you i'm gonna show you some of their brands because i told you they have three business verticals that they're working on uh opc ppc and psc so you will look at different type of products that are there in that kind of industry as well.
so if you look at the sri cement uh they have the concrete master they are building the nation for decades they have desh kobanai rock strong i mean these are all different type of brands that catering to the audience in the north right most of it is in the north.
now if you look at the most key important parameter here which is how are they growing the manufacturing capacity because cement is all about tons and volumes right so if you look at how they've grown the cement production capacity in 2010 they had 12 million tons per annum and now they've grown in the next last 10 years they've grown to 40 million tons per annum almost four times from 12.
the keger growth is almost 13 percent growth that they're growing with respect to increasing the cement production capacity now if you look at the power generation capacity and why is power generation important because it helps you to increase your cost decrease your cost.
so that increase your margin so you can become more profitable now their power generation capacity was at 210 megawatt in 2010 and now grown almost three times almost four times to 742 megawatts again growing at a 13.45 kg let's look at that keger okay kegel growth in the last 10 years the sales have been growing by 14 kg their profit has been growing by a whopping 27 percent gregor which is very good uh this cash flow from operations last 10 years is growing from 14.3 kg right.
and if you look at that current p e ratio is at 44.8 and the 10-year stock price gigger now just listen to this is 33 which is that means it is growing very fast is what you can make out of it now let's look at how we categorize with ebitda by turn because this is how you measure all the industry players.
if you look at their ebitda by ton in fy 17 they had 1144 ebitda per ton in fi 17 and in fy 21 they have 1434 which you can significantly see that there is a growth from last five years with respect to ebitda that they're making per ton the kegel growth is 4.6 percent now if you look at their margins their net margins from 2019 to 2021 has grown from 8 to 16 percent.
their asset turnover ratios at 0.63 their financial leverage has actually gone down from one point six seven to one point five one and that roe as roe is actually increased from ten point eight four percent to sixteen percent.
so this is something very attractive when it comes to cement and the most important thing to look at is three cement is that power generation capacity that is good way to start your industry research.
3)Ambuja Cement
now the next company let's look at is something known as Ambuja Cement. and you guys might have heard of ambuja cement with all the amazing ads that they used to do in tv in the past.
right now ambuja cement is actually a part of this global conglomerate known as lafarge wholesim right. it is one of the leading manufacturers in india and also they're in four business segments one is cement aggregates rmc which is ready mix concrete and solution and products as well.
now they have pledged that they want to do a low carbon based emission with construction they want to do they have pledged to net zero their ambition is to lead the industry in reducing carbon emissions and shifting towards a low carbon construction as well now if you look at some of the key important stats they have approximately 29.65 million tons per annum installed cement capacity.
they have around 5000 employees that they they have currently right now if you look at the channel partners they have around 50 000 channel partners they have a power plant capacity of 291 megawatts right they have five bulk cement terminals and if you look at their knowledge centers which is mostly like an r d plant.
they have around 30 across india now if you look at their market presence where is ambuja cement they are currently there in 11 states and they cover 32 districts now if most of the other two we when we saw ultra tech and we saw sri sam and they were all catered to the north right.
now look at how they are catered to they have a lot of presence in the north they have a few plants in the north they have very few plants in the east they have a lot of plants in the west as well but they have only one plant in manga or one plant in kochi so south dominance is not that but they have north and west dominance uh
when it comes to ambuja cement now let's look at that gigger growth ambuja cements 10-year sales kegel growth is around 13 the profit growth is around seven percent their cfo which is captured from operations around 9.9 their current pe ratios are 24.1 and their stock price gigger is at 10 percent.
if you compare it to the peers it is slightly lower the cable growth is not very attractive if you look at how their ebitda per ton has grown it was at 785 in fy17 now it has gone up to 1167 in f521 which is the keger growth of 8.3 if you look at some of their margins and if you look at some of the ratios their net margins have gone up from 8.36 to 9.65 that asset turnover is at 0.62.
the financial leverage is pretty much stagnant at 1.7 and their ro is also fluctuating at the same rate which is an average roe of 9.75 now the next company that we will look at is something known as acc cement okay.
4)Acc Cement
now you might have heard of Acc Cement and it is one of the leading players in the indian building material space with a pan india operation, and they have a lot of marketing presence as well.
now if you look at acc they have around 17 manufacturing units that they have they have around 90 rmc which is ready to mix plants they have around 6000 employees that they have and they have around 50 000 retailers and dealers as well then that is quite big for a company like this okay.
now but the important thing about acc from understanding it in 2005 acc became a part of this group in switzerland known as the wholesim group okay now in 2015 wholesome and lafarge came together in a merger and formed the lafarge wholesome group the global leader in buildings and solutions as well now being a part of this large group has helped helped acc grow very fast.
and thus stays ahead in the curve when it comes to the cement industry now let's look at some of their growth rates right now if you look at their sales gigger in the last ten years it is at five percent their profit keger is at three percent very low there is cash flow from operation keger is at one point four percent very low.
if you look at the current p is at industry power 21 and the stock price has grown by only eight percent kegel growth if you look at that ebitda per ton it has grown from six one six to nine seven four in the last five years and it has grown at a category of nine 9.6 and finally if you look at some of the different ratios their net margin is at 10.37 their asset turnover at 0.76.
their financial leverage pretty much constant at 1.5 and that roe ratio is at 13.04 slightly higher than all the other peers that are there in the industry but again very important to understand how acc cement comes into the picture because they are also a part of the wholesim lafarge group.
5)Dalmia Cement
now the last company that we will look at is Dalmia Cement. now dalmia cement bharat limited also known as dcbl is the subsidiary of dalmia bharat group limited.
right now i'll tell you what is different with dalia cement now dynamic cement basically caters in this multi-spectrum it's a multi-spectrum cement player almost has double digit market share in most of the regions where it operates okay which is very interesting.
also it is the first cement company that came out globally and said that we're gonna commit to the carbon negative footprint by 2040 and currently it has the lowest co2 footprint in the cement sector which is again impressive.
now what is so impressive in dalmatia i'll tell you so dalmar bharat's main unique ability is to be a manufacturer that constantly innovates and gets our new products they also have something known as future labs which is sole purpose is to innovate so that rnd facility is always top notch that is what they've done from the past right now also dalmia bharat has been there from so long they enjoy a very good relationship with their current customers influencers and dealers.
and these some of these relationships go back by three generations so that is something that they have but again basically they're given a unique position in the market and they're leading only and they're also fast growing only because of their usb and innovation.
now let's look at how they're increasing their capacity right how they're increasing their metric tons in fi 20 they had 26 million metric tons per annum now they want to grow it from 26 to 37.3 almost a 1.3 x increase they currently have 13 plants in nine states they want to make it 17 plants in 10 states.
and if you look at that market they don't cater to the north market they cater to more of the northeast market and little bit in the south as well if you look at the chart now if you want to see how they're growing let's look at that keger growth the last five years sale cake not ten years.
but last five years sale kicker growth has gone up to three point five percent their five year profit keger is at thirty nine point five percent that cash flow from operation five year giga growth is at six point seven if you look at the current pe which is at 27.4 and the stock price in the last three and a half years has gone up by 45 percent okay.
now let's look at how the ebitda per tonne is working as well in fy17 the rabbit top return was at one two three nine and now it is at one three four four a giga growth of a very small cable growth of one point six percent but maybe with the new plant additions it might go up.
if you look at some of their margins their net margins have gone up drastically in 2021 from two percent to eleven percent that is something that we will have to check whether it's an anomaly or is it something that they have done their financial leverage has gone down from 2.87 to 1.88 which is very good that roe has gone up from 4.31 to 10.52.
so this year something has they've done really well and this is something that we we need to look at as well for from dalmya bada's perspective.
so guys my god this was insane amount of information when it came to the cement industry i saw a lot of people in the comment section saying please do a review on the cement industry and i think we have done that again.
i hope you understood firstly let's recap quickly let's do a quick summary i hope you understood what the cement industry means like how important it is for any growing economy, what are the different risk factors in the cement industry, what are the cost drivers in the cement industry and then we looked at different characteristics of how it's cyclical at some points how climate affects the cement industry and then finally we did a proper deep down analysis of the top five companies in the cement industry with respect to market cap.
and now after reading this article i hope i have explained it to you in a very simple way and you guys can understand how the cement industry works. again if you liked the article and you liked what you learned and keep educating yourself.
**Disclaimer
hey guys just a disclaimer any stocks or fund that have been mentioned in this article is only for educational purposes we do not recommend a buy or sell in anything investments in securities market are subject to market risks read all the related documents carefully before investing please read the risk disclosure documents carefully before investing in equity shares derivatives mutual fund and or other instruments traded on the stock exchanges
Comments
Post a Comment