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Indian Cement Industry

A presentation By Zain Shaikh – LOTUS

GLOBAL EQUITIES
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Outline

n Economic Analysis

n Industry Analysis

n Company Analysis

n Recommendation
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Economic Analysis - India

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Economic Analysis-Economy-
GDP
n According to Ministry of Finance, India to grow 8% this
Financial year (‘10) – vs. 6.7% in 2008

n According to Indian Prime Minister, Manmohan Singh,

India could see growth between 9 – 10% this year –
causing Investors to reconsider their positions

n Economic Growth is fueled by investment in

Infrastructure, which primarily comprises of
Cement and Steel.

n
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Economic Analysis – Cement
Price
n However, the price of Cement have been fluctuating
over the past year, moreover since price of Cement is
not Uniform, different prices are charged per bag
around the Country (India).

n Increased Risk

n
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Cement Price Trends:
ag in the start FY ’07, the Cement Industry has picked up with prices stabilizing

Source:
CMI
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Markets: Nifty-upward trend: Jan ’08 – Oct
’09
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Economic Analysis – Strength of
Rupee

n The rupee is said to strengthen against the green back;

n Current rate: $1 = Rs. 47.4

n Expected rate in near future: $1 = Rs. 45.0

n
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Key points:

Ø India to grow around 8 – 10%

Ø Growth mainly fueled by investment in Infrastructure

Ø Infrastructure highly dependent on Cement and Steel

sectors

Ø Cement Sector Analysis

Ø
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Industry Analysis – Cement

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Industry Analysis - General

n India is the second largest producer of Cement in

the world with an estimated amount of 242 million
tons (MT) of Cement this FY, of which 5 MT is
exported.

n However, despite the demand, recent news of bulking

production by many Cement firms, is a worrying
sign, as it may signify a growing amount of surplus,
as supply outstrips demand.
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Industry Analysis-Market
Capacity
Total
Installed
Capacity
(MT)

Source:
CMA

Companies
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Industry Analysis - Growth

n Cement Industry has grown at an average of 10% in

the last 3 years.
 - This years growth estimated to be around 9 –
10%.

n The strong growth in the sector is good news for

investors, who may want to go long, with Cement
stock.
 - stabilizing prices
 - double digit growth in the Industry
 - growing economy

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Industry Analysis - Competition

n The Industry is filled with around 108 firms*, the top 8

of which account for more than 50% market share
[according to ‘Capitaline Software’]

n 132 Large plants – owned by top 15 firms

n 365 Small plants – owned by small firms

n Market Structure seems to be Oligopolistic Competition

n
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Industry Analysis - Regulation

n Imported cement has no import duty levied on it – 0%

n Essential components of Cement [such as limestone and
coal] have a 5% import duty
n Cement remains one of the highest taxed essential
goods, even more regulated than its counterpart
Steel.
n Government levies and taxes, taken together, constitute
over 60 per cent or more of the ex-factory price.
n Excise duty on Cement (50kg bag) of:
 - RSP > Rs.190  8% of RSP
 - RSP < Rs.190  Rs. 230/ tonne

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Industry Analysis – Capacity
expansion - Regional
  Current             Expected           FY  Expected                  FY 
FY 09-10 10-11 11-12

North 9.9 6.2 0

Central 0.3 0 3

East 7.9 2 2.1

West 3.6 5.5 6

No drastic changes in Capacity expansion in the Central region, mainly due to th
South 18.1 10.8 5.3

Total 39.8 24.5 16.4

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Industry Analysis – Demand/
Supply- Scenario
Supply - Demand Current Expected Expected
Scenario FY 09-10 FY 10-11 FY 11-12

Installed Capacity 242 288 304

Increasing Surplus may cause pric

Consumption 196 215 236

Export 5 5 6

Surplus 41 68 62
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Industry Analysis – Price per
bag
State/ City Price (Rs.) /Bag Price Increase
Maharashtra – 240 (Rs.)/Bag
10
Mumbai
Hyderabad 165 10
Northern Region – 227 -
Source:
New Delhi
Ahmadabad, 195 – 200 5 CMIE
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Baroda, Baruch [called up Ultratech

prices of limestone and coal, which are the prime components in making Cement. Mo
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Price Increase caused by:
n Governments reallocation of the budget to suit the
National Highway Development Project

n Cement Demand increases post Monsoon Season

(heavy rains and floods)

n Construction activity at its peek

n Projects in Delhi such as the Delhi Metro and projects

involving Common Wealth Games

n Problems in Mumbai such as, shortage in Wagons

and Logistics problem (system problems)

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Key points:

Ø Cement Industry recording avg. growth of around 10%

[past 3 years]

Ø Production capacity said to bulk up by numerous

Industry players

Ø Prices have picked up

Ø Surplus predicted in future

Ø
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Company Analysis:
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Company Analysis – Company
Profile – Heidelberg Cement
n Heidelberg Cement India Limited is a subsidiary of
Cementrum I. B.V.
 - a Company incorporated under the laws of The
Netherlands, which is 100% controlled by Heidelberg
Cement AG
n "Heidelberg Cement Group", with its core products being
cement is one of the leading producers of building
materials worldwide.
 - employs around 46,000 people in more than 50
Countries
n AIM- Mission Statement:
 Heidelberg Cement India Limited is committed to supply
high quality products and provide best possible services to
its customers. Its emphasis is to continuously upgrade
plant efficiency by employing modern and latest
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Company Analysis – Merger
Details – heidelberg Cement
n The SK Birla group, original promoters of the company,
had sold 1.34 crore shares to Heidelberg at a price of
Rs72.5, including a non-compete premium of Rs14.5
per share in the initial period of the merger.

 - In addition, further Equity Shares were acquired

under the Open Offer giving Cementrum I B.V. 54.89%
shareholding in Heidelberg Cement India Limited.

n Talks about the Merger initiated on July 2006. The actual

merger took place during August of the same year.

n After the merger the entity was known as Mysore cement,

which on April 16th 2009, changed to Heidelberg Cement
Inda. LTD

n
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Why the proposed merger is
said to be beneficial:
n The proposed merger, which is with a view to
consolidating the cement businesses of MCL, ICL and
HIPL, achieve greater synergies and improve
managerial efficiencies, is subject to other approvals,
consents and permissions as  required to be obtained
pursuant to relevant laws.

 - MCL – Mysore Cement Limited

 - ICL – Indore Cement Limited
 - HIPL – heidelberg India Private Limited
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Other benefits:

n Earlier Consolidation in market - The German cement

maker is merging two companies, the unlisted
Indorama Cement and holding company Heidelberg
Cement India into Mysore Cements that was acquired
in 2006.
 Which will lead to:

n Market access - Indorama Cement's plant is located in

Raigad district of Maharashtra, while Mysore
Cement's plants are situated in Madhya Pradesh,
Uttar Pradesh and Karnataka, providing Heidelberg
with access to markets in central, north and south
India

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Details of Share swooping:

n The 1.3544 equity shares of Mysore Cements Limited

for each equity share of Indorama Cement Limited
i.e. 6,77,21,681  equity shares ( of face value of Rs.
10/- each) of Mysore Cements Ltd  will be issued for
5,00,00,000 equity shares (of face value of Rs.10/-
each ) held in Indorama Cement Limited.

n The 0.1469 equity shares of Mysore Cements Limited

for each equity share of Heidelberg Cement India Pvt.
Limited   i.e. 8,81,670  equity shares ( of face value of
Rs.10/- each) of Mysore Cements Ltd will be issued 
for 60,00,000 equity shares (of face value of Rs.10/-
each)  held in Heidelberg Cement India Pvt. Ltd.

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Future Expansion plans:

n According to Managing Director - ‘We are planning of

doubling our capacity in MP and UP. We have
started initiating dialog with equipment suppliers etc.,
but it is still early days.

n Approved:
 > MUMBAI: Heidelberg Cement India Ltd has
informed BSE that the board meeting on October 29,
2009, has approved the setting up of expansion
project at its plants at Damoh (Madhya Pradesh)
and at Jhansi (Uttar Pradesh) to increase cement
production capacity to 4.7 MTPA. — Our Bureau.



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Investment Opportunities:
n Debt free: Heidelberg is among the few debt free cement
companies in India.
 - Company is not dependent on any external entity
 - Instead of paying off debt, money can be invested back
into the company to consolidate its position in the market,
as well as increase installed capacity.
n Buoyant Growth: Cement consumption growth was 15% in
Uttar Pradesh and Madhya Pradesh in the Apr-June 09
quarter which has nearly doubled the overall
consumption growth of cement in the country. Buoyant
demand for cement from UP and MP led to an increase in
company’s revenues. These markets contribute 60-70%
to the company revenues.
n Increasing focus on infrastructure development:
Government’s emphasis on infrastructure development
in the budget for 2009-10 will boost cement demand.
Infrastructure and housing together contribute more
than 70% of the total cement demand in India. An
upward trend in cement demand from infrastructure and
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However following should also
be considered:
n Poor monsoon and sluggish demand have caused a fall
in cement prices by Rs. 3-5 per bag in the recent
past. The company has reiterated that they have
been able to balance out the fall in prices by
increasing the prices in other geographical locations.
Seasonality and slow progress of infrastructure sector
has also led to the fall in prices. However early signs
of recovery in demand can be seen in the real estate
sector.

n
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Company Analysis – Financial
Information –as of 8/01/10
Important Financials: Heidelberg Cement

Current Price (Rs.) – 13-01-10 49.40 > Current Price: Rs. 49.4 – Increasing
Market Cap (Rs.) 1118.37
> Installed capacity to reach 4.7 M
Total Debt (Rs.) 10

Cash & Bank (Rs.) 337.81 > EV/tonne is at Rs. 2635, attr
Enterprise Value (Rs.) 790.56 > Good Operational Effi
Total Installed Capacity (MT) 3

EV/Tonne (Rs.) 2635.2

EV/share (Rs.) 50.03288

EV/EBIDTA 3.69 x
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Heidelberg Cement as of
13/01/10 - 49.40 –
[rediff.money]
Other Financials: Heidelberg Cements:

Volume: 162,145

Prev. Close: 49.00

Day’s high/low (Rs.): 50.45 – 48.90

52wk H/L (Rs.): 51.90 – 13.45

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Heidelberg Cement – Yearly outlook:

- Consistent Growth

Source: Rediff.money.com
+ Financials – by ICICI online – Nov
’09

[(Market Cap) 931

+ (Debt) 10 ]
–
(Cash) 338 = (Enterprise Val
Rs.603 Cr.

ØEV/ton:
ØEV/ Total Installed Capaci
Ø
ØRs. 6,030,000,000
--------------------------
3,000,000
=
Rs. 2010/ton
[as per November 2009]
Ø
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Heidelberg Vs. Industry
Standard
n Currently the Industry price for purchasing 1 ton of
Cement is Rs.3500/ton

n By calculating the EV/ton for Heidelberg, we attained

the following value: Rs. 2010/ton [Rs. 2635 updated]

n The Replacement cost in the Industry is set at

Rs.3500/ton Vs. Rs.2010/ton [Rs. 2635 updated]

n Thus if one has to set up a plant of certain number of

tons of Cement so, rather than setting up the plant by
purchasing cement at Rs.3500/ton, one could just
purchase Heidelberg Cements – Specific case
considered
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Recommendation:

n Good purchase for the medium/long term. 

n On the basis of my research, I feel that this is a good stock to buy at the
current market price of Rs.49.40. If everything goes well, the price is likely to
increase, despite surplus. However since the cement industry is essential for
economic growth to take place as well as other factors, such as:

n Heidelberg’s attractive investment opportunities:

 - Debt free – Buoyant growth – low replacement costs (per/tonne) – nature of

industry

- as well as the following fact:



 > Since German Cement maker – Heidelberg Cement – purchased the original
shares at a price of Rs. 72.5

However, in the long run, demand prospects which are largely affected by real


estate and housing sector remain the key, despite impetus given from wagon
shortages and short run demand requirements.