Last Updated – December 2020
In this article, we will cover,
– Overview of the cement industry in India
– A comprehensive and well-researched list of the best cement stocks to buy now in India
– How to identify a good cement company
– Portfolio companies
– Key risks posing the cement industry
– A model portfolio in order to gain relevant exposure to the best Indian cement stocks
– A detailed table consisting of the various parameters measured and compared while collating the list of best cement stocks to buy in India
Overview of the cement industry in India
The Indian cement industry is the world’s second-largest producer after China and is the third-largest consumer. Housing & Real estate consists of 65% share of cement demand followed by Public infrastructure, Industrial Development which is 25% and 10% respectively. At the start of the pandemic almost every industry was facing downturn due to COVID-19 led shutdowns in the country but slowly as the lockdown is being lifted in many states, the cement industry has been seeing demand improvement mostly in the rural and semi-urban areas.
The cement sector has delivered robust performance in the September quarter (Q2FY21). The sector’s consolidated volume growth for top 15 listed companies, which has 75% volume market share, witnessed a 5% YoY demand increase in Q2FY21. As prices across all the regions remain largely stable some pick-up in infrastructure and allied-activities may keep the prices stable for the coming quarters. In terms of management commentaries many top cement companies have reinstated their Capex plans, which were put on hold due to the pandemic, and this shows that the confidence among large cement players is coming back and tough times are largely over. It is expected that companies may shift their focus on growth in the coming quarters.
Summary Table of the Best Cement Stocks to buy now in India
|Sr.No||Company Name||BSE Scrip Code||NSE Scrip code||CMP (as of 4th Dec)||Rating||Industry|
|1||Ultra Tech Cement||532538||ULTRACEMCO||5,091.4||1||Cement|
|12||JK Lakshmi Cement||500380||JKLAKSHMI||62.6||0.5||Cement|
How to identify a good Cement company?
- Cement industry is a highly capital-intensive industry. A green field project for 1 MT requires capital expenditure to the tune of Rs.3 bn (2 MT is an ideal size for a company to have some kind of economies of scale).
- This sector operates with a high level of fixed cost (maintenance cost is around US$ 5 per tonne annually) and therefore volume growth is critical. Access to raw materials (limestone and coal) and consumer markets are equally important in the long term. Therefore, any material change in raw material prices or contracts with suppliers can hamper production to a huge extent.
- The Indian cement industry has to be viewed on a regional basis viz, North/South/West/East. Demand may be favourable/unfavourable in some areas. It is also highly fragmented with top six companies already accounting for 60% of industry capacity, the rest 40% is distributed among 40 small players. So conservative Investors should pick top companies at least since the current scenario is challenging.
- Cost factor plays a huge role in cement companies as more the savings in cost more will be their margins. So, a company who can control its freight, power and other fixed costs can score against its peers as the competition level is also very high amongst players in this sector.
- Since cement is a regional play on account of its high freight costs, the company should not have all its plants concentrated in one region. It should have a geographical spread so that adverse market conditions in one region can be mitigated by high growth in the other region.
- Important ratios to look for are EBIDTA per tonne, Net Debt/EBITDA, Top & Bottom line growth, ROE etc. Also, capacity utilisation levels are equally important to look at while analysing a cement company as it shows how efficiently the company is utilising its capacities.
Shree Cements which started operations at its first greenfield cement plant in Beawar, Rajasthan, in 1979, is the second largest cement group in India with operational capacity of 40.4 million tonnes per annum (mtpa) as on March 31, 2020. From 100% of its capacity being in northern India until 2014, the company has diversified across Rajasthan, Uttarakhand, Bihar, Chhattisgarh, Haryana, Uttar Pradesh, and Karnataka. Its cement production has grown at a CAGR of 12.91% from 12 mtpa in 2009-10 to 40 mtpa in 2019-20. Moreover its capacity has grown at a CAGR of 12.45% from 210 Mega Watt (MW) in 2009-10 to 742 MW.
The company reported EBITDA per tonne of Rs.1,446 in FY20 which is highest in the industry. Its biggest advantage over its peers is that it is a Net debt free company, its debt to equity ratio stands at 0.2x in 19-20 (lowest in the industry).
The company is among the efficient players in the cement industry. Its operating efficiency arises from a sharp focus on operations, low power consumption, and mainly sale of blended cement resulting in reduced consumption of energy and raw material per tonne of cement. Flexibility (to switch to grid or to shut down the plant based on merchant tariff) and ability to operate with multiple fuels (imported coal or petcoke) helps keep generation cost competitive. The operating profit per tonne of cement remains one of the highest in the industry.
Shree Cements continues to enjoy its leadership position in northern markets despite improved presence of UltraTech Cement through recent inorganic means. And since the northern markets witnessed good demand in July and August, Shree Cements saw a good second quarter as 65% of its total volumes come from the north. Going ahead, the company has announced addition of a 3rd clinker unit (capacity of 12,000 TPD in Chattisgarh which is expected to get commissioned in the next 2 years. It has also reiterated its vision of doubling its current capacity of 40 MTPA to 80 MTPA in the next 6-7 years.
UltraTech is among the largest global cement manufacturers and the largest manufacturer of grey cement, ready mix concrete (RMC) and white cement in India. It has a capacity market share of 24% – and has a consolidated capacity of 114.8 mtpa including UNCL and the cement business of Century. It has 23 integrated plants, 1 clinkerisation plant, 27 grinding units and 7 bulk terminals. Its operations are across India, UAE, Bahrain, Bangladesh and Sri Lanka. With 100+ RMC plants in 35 cities, UltraTech is the largest manufacturer of concrete in India. It also has a slew of speciality concretes that meet specific needs of discerning customers. Moreover, the company has a network of 80,000+ partners/dealers across the country with a market reach of more than 80% Indian cities and towns. UltraTech’s takeover of Century’s cement business has improved its position in the high-growth eastern market. Additionally, a pan-India presence helps the company from downtrends in any single region.
The company has been mainly focusing on reducing its leverage and till now it has reduced its Net debt from Rs.16,860 in March,2020 to Rs.12,132 cr in Q2FY21 (Net Debt/EBITDA-1.22 now vs 1.7 times during Q4FY20). The management remains keenly focused on reducing its debt and it targets to become net debt free by FY23. Moreover, the company has reignited their Capex plans and has announced a fresh 12.8 MT capacity addition across central and eastern regions. This involves a capex of Rs. 5477 crore for which funding will be entirely done via internal accruals . UltraTech’s total capacity is expected to reach 131 MT (current capacity at 114.8 MTPA) by FY23 with a long term plan to be at 160 MT. The new capacity expansion plans will boost UltraTech’s capacity in the central and east regions.
ACC Limited is a leading player in the Indian building materials space, with a pan-India operational and marketing presence. Initially called Gujarat Ambuja Cements Ltd, the Company later became Ambuja Cements Ltd. In 2006, global cement major Holcim, acquired management control of the Company. Today, Holcim holds a little over 50% equity in ACL. ACL has grown manifold over the past decade. Its current cement capacity is 31.8 million tonnes. The Company has 5 integrated cement manufacturing plants and 8 cement grinding units across the country. ACC enjoys a reputation of being one of the most efficient cement manufacturers in the world. Its environment protection measures are considered to be at par with the finest in the country.
ACC Ltd has been operating at the highest capacity of 90% as of June due to high demand in rural and semi-urban areas. The company operates PAN India and has strong operational linkages in their plants and grinding units which helps them obtain better cost efficiency. The company’s Net Debt/EBITDA stands at -1.9 times. It’s PAT has grown at a 5 year CAGR of 5.6%.
Ambuja Cements is a part of global conglomerate Lafarge Holcim which acquired over 50% stake in the company. Ambuja has a total capacity of 29.6 MT and has 5 integrated cement manufacturing plants and 8 cement grinding units across the country. Ambuja was the first Indian cement manufacturer to build a captive port with three terminals along with the country’s western coastline and it enjoys a reputation of being one of the most efficient cement manufacturers in the world. The company also has its own fleet of ships for effective transportation of cement.
It has registered a CAGR sales growth of 23% in the last 5 years, which is the highest among the industry and at the same time, its PAT has grown at a CAGR of 22%. The company has highest capacity in North and Central regions (40%) and as the demand in these regions has not come down drastically, Ambuja cements is likely to be at an advantageous position over its peers. The company has also maintained a healthy dividend payout ratio of 25%. As far as its costs are concerned, freight cost consists of 26% of its total income which could be a concern going forward as diesel prices have risen sharply which could in turn impact its profitability in the coming quarters.
Key Risks & Conclusion:
There could be short term regional demand risks in this sector if major cement companies cut down their CAPEX due to COVID-19 related uncertainties. Additionally, the continued rise in diesel prices will affect the freight cost of a lot of cement companies which are dependent on road transport. Furthermore, major cement players are facing fresh inquiries by the Antitrust body, Competition Commission of India (CCI) over allegations on price coordination and collaborating levels of cement supply. Major cement companies like Shree cement, ACC, Ambuja and Ultratech are alleged to be involved in price cartelisation. Any negative outcome may affect their stock prices in the near term but for now their long-term fundamentals remain intact.
Watch our video on how to analyse and pick Cement stocks for investments
In order to get an exposure to the Best Indian Cement Stocks, you would need a total of Rs. 50,632.1 for the below curated portfolio as of Dec 4, 2020.
The below table covers some of the most important factors while evaluating cement stocks such as return ratios including RoE and RoCE, operating margins, sales and earnings growth and market cap among others.
|SR.No||Company Name||BSE Scrip Code||NSE Scrip code||CMP||Rating||Market Cap||EBITDA/Tonne||Debt/Equity||PE||ROE%||ROCE%||OPM%||Sales Growth(5Yrs) %||Dividend Yield (%)|
|1||Ultra Tech||532538||ULTRACEMCO||5,091.40||1||1,44,707 Cr||1,411||0.5||23.0||17.0||12.4||23.5||12.4||0.3|
|2||Shree Cements||500387||SHREECEM||24,912.90||4||85,789 Cr||1,446||0.1||50.3||13.6||15.5||29.5||17.6||0.5|
|5||Ramco Cements||500260||RAMCOCEM||888.9||2||19,932.5 Cr||955||0.4||33.3||12.7||12.2||23.9||8.1||0.3|
|7||JK Cement||532644||JKCEMENT||2,161.10||0.5||15,067 Cr||1,186||1.0||27.0||17.6||17.1||22.7||11.3||0.4|
|8||Birla Corp||500335||BIRLACORPN||763.4||0.5||5,679 Cr||984||0.9||11.2||11.0||12.2||20.0||16.6||1.0|
|10||India Cements||530005||INDIACEM||153.3||0.5||4,614 Cr||254||0.5||53.6||1.1||4.4||14.1||0.5||0.4|
|11||Star Cements||540575||STARCEMENT||95.6||0.5||3,862 Cr||1,438||0.0||14.7||16.0||18.0||21.4||5.2||1.1|
|12||JK Lakshmi Cement||500380||JKLAKSHMI||62.6||0.5||4,044 Cr||820||0.9||13.8||16.0||16.3||19.0||13.5||0.7|
|13||Orient Cement||535754||ORIENTCEM||78.4||0.5||1,611 Cr||659||0.9||16.3||8.0||11.1||18.6||9.4||1.0|
|14||Sagar Cement||502090||SAGCEM||734.6||0.5||1,684 Cr||533||0.4||21.6||3.0||8.1||22.2||15.3||0.4|
|15||Shree Digvijay||502180||SHRDIGCEM||61.5||0.5||835 Cr||1,044||0.0||18.5||22.7||29.2||19.0||2.7||2.5|
|17||Mangalam Cement||502157||MANGLMCEM||220.2||0.5||597 Cr||559||0.8||9.4||14.0||16.5||16.4||5.9||0.5|
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