N. L.

DALMIA INSTITUTE OF MANAGEMENT STUDIES & RESEARCH

“EQUITY RESEARCH ANALYSIS ON CEMENT SECTOR”

Summer Internship Report

Submitted in Partial Fulfilment of The Requirements

For

2 Years Full Time PGDM Course

Batch 2019-2021

SUBMITTED BY

NAME: TANVI SHRIKANT PAWAR

PGDM ROLL NO. PF1921-D47

BATCH 2019-2021

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 ACKNOWLEGEMENTS

The success and final outcome of this project required a lot of guidance and assistance
from many people and I am extremely privileged to have got this all along the completion
of my project. All that I have done is only due to such supervision and assistance and I
would not forget to thank them.

It gives me immense pleasure to express my deepest sense of gratitude and sincere thanks
to my guide, Mr Ketan Bhatia (Regional Manager, IIFL Securities) for his guidance,
suggestions and support for this work. His valuable feedbacks and encouragements have
helped me enhancing my knowledge about project as well as the areas outside the purview
of my project.

I extent my sincere gratefulness towards Mr Kaustubh Chakravarti (Referral Associate

leader,IIFL Securities), for sharing his insights about the industry and helping me
structuring my project as per the industry needs.

I owe my deep gratitude towards my internal guide, Prof. Dr Jyoti Nair, who helped me
on critical parts of project and suggested some valuable approach for valuation. She has
always made sure to keep a follow-up on the projects & suggest changes if needed.

I consider myself fortunate enough to get an opportunity to work with IIFL Securities
Ltd. which is India’s leading financial services company. This has given me great
exposure on financial markets and investment opportunities in India.

(Tanvi Srikant Pawar)

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 CERTIFICATE

This is to certify that the Summer Internship Project Report is submitted in partial
fulfilment for the award of PGDM of N. L. Dalmia Institute of Management Studies and
Research. It is a result of the bonafide research work carried out by Ms. Tanvi Shrikant
Pawar under my supervision and guidance during Summer Internship of 8 weeks from
15th April 2020 till 15th June 2020.

No part of this report has been submitted for award of any other Degree, Diploma,
Fellowship or other similar titles or prizes. The work has also not been published in any
Journals/Magazines.

Date: Place:

Industry guide
Signature of the Industry Guide:
_____________________________
Company:
________________________________________

Name of Industry Guide:

________________________________
Designation:
_______________________________________

Internal Faculty guide

Signature of Internal Faculty Guide:
___________________________
Name of the Internal Faculty Guide:
__________________________
Faculty <Dept
Name>__________________________________

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 EXECUTIVE SUMMARY

The Project report exhibits the analysis of Indian cement sector and assessment of
financial performance of two listed companies in ceramic cement sector. This report
outlines the details and information from all sector related macro parameters to
company’s core performance and also comment on valuation and future outlook of
company.
Chapter 2 gives brief understanding of the cement product, its characteristics,
manufacturing process and the global and Indian scenario of cement industry. With
knowledge of all these industry related parameters one can understand the cement
industry in better way.
Chapter 3 & 4 states that why cement industry looks an attractive option for investment
and what all factor drives the growth of this industry, key growth drivers such as growing
real estate market, govt. policies, building of 100 smart cities/townships across India,. On
the other hand, volatility in fuel prices is the major constraint of industry. Chapter 5 talks
about the impact of Covid-19 on this industry. Chapter 6 states the Porter’s 5 force
analysis to understand the industry attractiveness by studying the barriers to entry,
bargaining power of buyers and suppliers, threat of substitutes and inter firm rivalry .
Chapter 7 analyses the past 5 years of the Indian cement industry in terms of growth in
production, consumption, exports and imports.
Chapter 8 & 9 is about the main essence of this report, where financial analysis of
Heidelberg Cement India Ltd and Star Cement and valuation are done. In financial
analysis companies are analysed on the basis of their past performance while Ratio
analysis compares both the companies. Relative valuation on the basis of industry average
P/E is conducted and accordingly a recommendation of buy, sell or hold is given.

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 TABLE OF CONTENTS

Sr.No Chapter Pg No

1 Introduction to IIFL Securities 6

2 Understanding the Cement Industry 7

3 Key Growth factors and Constraints 12
4 SWOT Analysis 17

5 Impact of Covid-19 on Cement Industry 18

6 Porter’s 5 Force Analysis 20

7 Analysis of past 5 years of Indian Cement Industry 22

8 Fundamental Analysis 25

a. Heidelberg Cement India Ltd 26

b. Star Cement 36

c. Ratio analysis 49

9 Valuation 55
10 References and Bibliography 58

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 1.INTRODUCTION TO IIFL SECURITIES

IIFL Holdings Limited (formerly India Infoline Limited) and India Infoline,] is an
Indian diversified financial services company headquartered in Mumbai. The
organisation was founded by Nirmal Jain in 1995. IIFL is ranked among the top seven
financial conglomerates in India and as the top independent financial services firm in
India in terms of market capitalisation Nirmal Jain is the Chairman of the group, while
R Venkataraman is the Group Managing Director and Co-Promoter. IIFL’s product
offerings include home loans, gold loans, business loans including loans against
property and medium and small enterprise financing, micro finance, developer
and construction finance and capital market finance; catering to both retail and
corporate clients.

The company's geographical presence spans the length and breadth of the country
with 2,372 branches across 500+ cities. IIFL Securities is a key player in both
retail and institutional segments with 4% share of daily cash turnover. Its
strength has been to continuously innovate and reinvent with strong digital
footprint. The company is a leading player in the broking industry with more than
a million accounts being opened since inception. The company provides
execution, advisory and research service across products like equity, F&O,
Commodity& Currency and Mutual Funds.

Awards and recognitions:

➢ 2019: Awarded Great place to work

➢ 2018: Best Financial advisory services, Best digital media team,
➢ 2017: NSE market achievers award

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 2.UNDERSTANDING THE CEMENT INDUSTRY

What is cement?
Cement is a binding agent that sets and hardens to adhere to building units such as stones,
bricks, tiles, etc. Cement generally refers to a very fine powdery substance made of
limestone sand or clay, bauxite and iron ore, and may include shells, chalk, marl, shale,
clay, blast furnace slag, slate. The raw ingredients are processed in cement
manufacturing plants and heated to form a rock-hard substance, which is then ground into
a fine powder to be sold. Cement when mixed with water causes a chemical reaction and
forms a paste that sets and hardens to bind individual structures of building materials.
Cement is an integral part of the urban infrastructure. It is used to make concrete as well
as mortar, and to secure the infrastructure by binding the building blocks.

Types of cements:
With the development of technology, the quality and types of cement have also
developed. There are different types of cement for different construction works. Cement
is mainly classified into two categories depending on the hardening and setting
mechanism. These are:
➢ Hydraulic cement: It not only hardens by reacting with water but also forms a
water-resistant product.
➢ Non-hydraulic cement: It does not require water to harden instead it uses air to
harden.

Along with these main types, depending on the composition and characteristics there are
other types of cements such as:
➢ Ordinary Portland Cement (OPC): It is usually used for construction works and
for masonry purposes.
➢ Portland Pozzolana Cement (PPC): PPC is generally used for hydraulic structures,
marine structures, construction near seashore, dams, etc. Since it gives a smooth
surface finish, it is used for decorative and art purposes. It is also used in the
manufacture of precast of sewage pipes
➢ Rapid hardening cement: This type of cement is used where rapid construction is
needed like constructing pavements. It also gives high strength.

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 ➢ Quick setting cement: This type of cement takes less time to set i.e. around 5 to
30 minutes. It is used for underwater construction or construction in cold or rainy
weather conditions.
➢ White cement: White cement is quite similar to OPC except for the colour and it
is expensive than OPC so not so economical for ordinary work. It is generally
used for decorative purposes and can be used for traffic barriers, tile grouts,
swimming pool and roof tile patching material.

Manufacturing process of cement:

Raw material Grinding,

Pre heating
extraction/ proportioning
raw material
Quarry and blending

Packing and Cooling and

Kiln phase
shipping final grinding

First, the raw cement ingredients needed for cement production that includes limestone,
sand and clay, shale, fly ash, mill scale and bauxite are quarried, crushed and prepared
for pyro processing. The crushed raw ingredients are then made ready for the cement
making process in the kiln by combining them with additives and grinding them to
ensure a fine homogenous mixture. The composition of cement is proportioned here
depending on the desired properties of the cement. The raw materials are then passed
through the pre heating chambers and turned into oxides to be burned in the kiln.
The kiln phase is the principal stage of the cement production process. Here, clinker is
produced from the raw mix through a series of chemical reactions between calcium and
silicon dioxide compounds. After exiting the kiln, the clinker is rapidly cooled down

8
from 2000°C to 100°C-200°C by passing air over it. At this stage, different additives are
combined with the clinker in order to produce the final product, cement. The last stage
of making cement is the final grinding process. In the cement plant, there are rotating
drums fitted with steel balls. Clinker, after being cooled, is transferred to these rotating
drums and ground into such a fine powder that each pound of it contains 150 billion
grains. This powder is the final product, cement.
Cement is transferred from grinding mills to silos (large storage tanks) where it is
packed in 20-40 kg bags. Most of the product is shipped in bulk quantities by trucks,
trains or ships, and only a small amount is packed for customers who need small
quantities.

Global cement industry:

The demand of cement depends upon the industrial activity, real estate and construction
activity. Since activities are taking place in all these sectors, demand too is increasing
globally. As of 2019, China is the highest consumer of cement followed by India and the
US. China is also the global leader in terms of cement production. It produced 2200
million metric tons of cement in 2018 whereas; India produced 300 million metric tons
of cement. Vietnam produced 90.2 million metric tons, US produced 87 million metric
tons and Indonesia produced 75.2 million metric tons. The cement industry is expected
to soon witness an annual increase in demand, which could exceed supply, due to the
decline in capacity addition, specially in countries such as India. This may also lead to
price appreciation in the future. However, even a small revival in the cement industry
would lead to growth in the sales volume. Major usage of cement is done by concrete
and mortar industry. Any escalation in the global construction or infrastructure building
activities will spur the market largely. Other factors that could lead to the rise in the
worldwide market include increase in number of nuclear families, rising need for
accommodation, development in technology, and excessive disposable income. In terms
of consumption, Asia Pacific (APAC) outpaces other regions in the global cement market.
With a considerable increase in the number of business and residential installations,
APAC’s emerging nations have remarkably added to the demand for cement in the region.

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Cement industry in India:
FY19 turned out to be a mixed bag for the Indian economy. It witnessed sharp rise in
crude oil prices followed by a dramatic fall, INR depreciation, resolution of large NPAs
under Indian Bankruptcy Code, liquidity problems surrounding NBFCs, subdued
inflation led by lower food prices and farm loan waivers announced by few state
governments etc. The provisional estimates show that GDP growth for FY19 slumped to
a five year low of 6.8%. Index of Industrial Production grew by 3.6% in FY19 compared
to 4.4% in FY18. Overall, the macro-economic indicators are stable. After eight years,
cement production once again registered a double digit growth of ~13% as against ~6%
in FY18 leading to an average capacity utilization of ~70 percent, an improvement of ~5
percent over last year.
India ranks second in the world after China in terms of cement production. As a result,
the cement industry plays a major role in the upliftment of Indian economy was providing

10
employment to a large number of people in the country. Cement is used to bind material
together and is categorized as either non-hydraulic or hydraulic. Hydraulic cements are
composed of silicates and oxides that can set and harden even when exposed to water.
Cement today is mostly used as stucco for buildings in wet climates, as mortar for
applications near sea water, and as part of developments for strong concretes.
The Indian cement industry has flourished with the help of investments made by indian
as well as foreign investors ever since it was deregulated in the year 1982. India being a
developing nation has a huge scope of improving its infrastructure thus being beneficial
to the cement industry. Some initiatives have been taken in this direction such as the
development of 98 smart cities. Ahead of such projects and supportive government
policies, mnay foreign companies such as Lafarge-Holcim, Heidelberg Cement, and Vicat
have invested in this sector.
India’s cement manufacturing capacity was about 483 million tonnes as at March 2019,
an increase of about 18 million tonnes over last year. This represents ~4 percent capacity
expansion over last year, which is a multi-year low, paving way for improvement in
capacity utilization rate. During FY19, cement production registered a double digit
growth, first time since FY10, of ~13 percent (as against ~6 percent last year). This led
to ramp up in capacity utilization for the Industry, which operated at an average capacity
utilization of ~70 percent, an improvement of ~5 percent over last year. Demand growth
has primarily been driven by infrastructure segment, scale up in execution of
government’s housing projects and boost from pre-election spending (States as well as
Centre). Over the next two years, ~45 million tonnes additional capacity is expected to
get commissioned (i.e. an average growth of ~5 percent per annum).This can comfortably
be absorbed with an expectation of ~6-8 percent demand growth going forward, implying
further improvement in industry’s capacity utilization levels.

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 3.KEY GROWTH FACTORS AND CONSTRAINTS

Key growth factors:

Growing real estate: The real estate industry is in the cusp of transformation and the past
decade has played a crucial role in shaping the sector. The realty sector and its ancillary
industries witnessed a series of structural reforms with advent of RERA, policy change,
industry consolidation, fast proptech growth, and so on, which has helped increase
transparency and trust between builders and buyers. Furthermore, the clarion of ‘Housing
for All’ has brought the mid-income housing and affordable housing sector to the
foreground.
The real estate industry has certainly evolved from brick and mortar to a service-driven
product offering and the growth of the sector will be largely driven by ever-evolving
customer requirements, technological transformations, and a favourable policy
environment allowing it to flourish in the coming years. As reported by the Indian Brand
Equity Foundation, the real estate sector in India is expected to reach a market size of
US$1 trillion by 2030 and contribute 13 per cent of the country’s GDP by 2025.
➢ Housing: Currently the housing sector is the biggest demand booster for cement
industry as 67% of the total demand for cement is attributed to this sector. With
rapid urbanization and increasing income levels, the demand and requirements of
a home is continuously increasing. Rising purchasing power, continuously rising
population, increasing investments in socio-economic infrastructures, rapid
urbanization and migration of people from rural to urban areas are the main
reasons boosting the housing sector, and it is anticipated to register a strong
growth in the coming years. Housing sales in 2019 saw an annual growth of 4-5%
with over 2.58 lakh homes sold during the year and new housing launches in 2019
saw an 18-20% annual growth with over 2.3 lakh units.

➢ Public infrastructure: Consumption of cement for public infrastructure

accounted for 13% of the total demand. The government is strongly focused to
develop the infrastructure and boost the economic growth by developing 100
smart cities across the country to make them citizen friendly and sustainable. The
deadline for this mission is 2023. Infrastructure projects such as the Dedicated
Freight Corridors as well as the new and upgraded airports and ports are expected

12
 to expedite the construction activity thereby increasing the demand for cement.
Also, the mega rural road building project where the government plans to
construct 1,25,000 kms of road to connect the vegetable markets to the nearby
villages would also help to increase the demand for cement.

➢ Commercial construction: The commercial sector accounts for 11% of the

demand for cement. The commercial construction sector includes office spaces,
retail, hotels, and other civil structures—hospitals, multiplexes, and schools. Sectors
such as IT and ITeS, retail, consulting and e-commerce have also registered high
demand for office space in recent times. The gross office absorption in top
Indian cities has also increased by nearly 25 percent year-on-year to 36.4 million
square feet in 2018. The growth of co-working spaces has also been increasing
rapidly in the country, with the segment accounting for around 13 percent of the
total office transactions in 2019 from 5 percent in 2017. Small start-ups as well
as large IT players are finding this an attractive model. Going by the acceptance
of this model, demand for shared spaces is also likely to gather further
momentum in the upcoming years.

➢ Industrialisation and Urbanisation: Industrial and urban development

construction accounts for the remaining 9% of demand for cement. The new urban
development mission will focus on developing 500 cities having population of
more than 1lakh and some cities of pilgrim and tourist importance. The metro rail
projects in Mumbai, Bangalore and Hyderabad and the expansion phase in Delhi
drives cement demand. Airports modernisation across major cities will also
increase demand for cement industry. The latest development in the Ahmedabad
Metro Rail Project has also driven the cement demand largely.

Government initiatives: The following initiatives taken by the government would help
to foster the growth of the cement industry.
➢ UDAN scheme: UDAN (which stands for ‘Ude Desh Ka Aam Nagrik’) is a
Regional Connectivity Scheme launched by the government that aims to make
unserved/underserved airports in small cities operational with regular flights, and

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 offer subsidized airfares to encourage more people to fly. 1.7 lakh crore INR have
been allocated by the government for transportation under this scheme.

➢ Pradhan Mantri Awas Yojana: It is an initiative by Government of India in

which affordable housing will be provided to the urban poor with a target of
building 20 million affordable houses by 31 March 2022. It is estimated that in
Urban India there is housing shortage of around 10million units, this issue is being
addressed through Housing for all initiative. Under this initiative more than 6.85
million houses have been sanctioned up to December 2018. This talks about the
volume of business that is available for cement industry in coming years. It is
estimated that there would be a total demand of 10 million metric tonnes to suffice
the construction of affordable houses under this scheme.

➢ Pradhan Mantri Gram Sadak Yojana: During the Union budget 2019, Finance
Minister Nirmala Sitharaman announced 1,25,000 km of road will be constructed
under the phase 3 of PMGSY and 80,250 crore INR have been allocated for this
purpose. In the Interim Budget, the government had increased the budget for the
Ministry of Road Transport and Highways by 5.58%.By 2022, the ministry has
plans to construct 200,000 km of national highways in the country thus
encouraging the demand for cement.

Low per capita consumption of cement in India as compared to other countries:

Union Minister of Commerce & Industry and Civil Aviation, Suresh Prabhu said that
cement consumption in India is still around 235 kg per capita against global average of
520 kg per capita, which shows significant potential for the growth of industry. The
Commerce Minister highlighted that Government's focus on various initiatives such as
Housing for all by 2022, Make in India, Creation of 100 Smart cities, etc will bring
required boost in infrastructure and housing sectors thus creating demand for the cement
sector. The below graph shows the per capita consumption of cement by Asian
countries as compared to India.

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Key Constraints:
Transportation cost: In the cement sector, the manufacturing facilities and end-user
markets are considerable distances from each other. Cement plants are located near
limestone reserves. As a result, cement needs to be transported for long distances to reach
the end-users. Since cement is a low-value, high-volume commodity, transporting it to
the end-user accounts for a significant portion of the cost for cement manufacturers—it
constitutes more than 10% of the cost of sale. Cement has the highest logistics cost as a
percentage of sales. All freight cost is highly dependent on the cost of transportation which
relates directly to fuel prices. In India, transportation cost of cement is around Rs. 1.03 or
Rs. 1.04 per ton Kilometre. The cost rises high when the material is unloaded and carried on
road for further distance and if the material is brought from or taken to hinterlands,
transportation cost by road increases. The cement companies use three various modes i.e.
rail, road and ocean freight to transport cement. Road and rail contribute more than 90%
of the transportation. The transportation cost by truck transport over a period of last 10 years
has increased by nearly 50%.

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Capital-intensive sector: The investment cost in cement industry is soaring up while the
profits of the industry are declining. It has been estimated that the investment cost per
tonne of installed capacity of a million tonne per annum cement plant is Rs. 3500, which
translatesmeans into an investment of Rs. 3500 million for a 1 million tonne per annum
plant. It is difficult to raise such a big sum in India considering the condition of the capital
market and the profitability of the industry. Also, the cement factories in India have
generally worked below capacity due to drastic power cut in various states, shortage of
coal, non-availability of wagons and limited supplies of furnace oil.

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 4.SWOT ANALYSIS

STRENGTHS
- Existence of large market.
- Yield high return on investment.
- Capital intensive industry.
WEAKNESSES
- High cost of transportation.
- Major packaging problem.
- Acute shortage of raw material and
power.

SWOT
OPPORTUNITIES THREATS
- Good prospect for growth through - Takeover hitting the performance of
Element Export Promotion Council small units.
(EEPC).
- Impact of GST.
- Replacing cement for tar in road
construction in near future.

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 5.IMPACT OF COVID-19 ON CEMENT INDUSTRY

The COVID-19 pandemic has taken an unprecedented toll on the Indian real estate
sector and the construction industry. The nationwide lockdown had not only put brakes
on the ongoing real estate and infrastructure projects, but the allied cement industry also
suffered a setback. Since cement is a primary construction material, it experienced a
considerable dip in the holistic demand ever since the announcement of the shutdown.
The industry had witnessed an overall 1.3 percent growth in sales revenue in fiscal 2020
which was a steep de-growth over 24.4 percent of 2018-19. Production had fallen by 0.8
percent in fiscal 2020 against a 13.3 percent growth in fiscal 2019. The following factors
may affect the demand for cement in the upcoming quarters:

➢ Workforce disruption and upcoming monsoons: According to Prasad S Shetty,

Sector Lead, Business Research and Advisory, Aranca Pvt Ltd, “The building
sentiment may remain the same or pick up only gradually, that too, around the last
quarter of 2020. This is primarily because the majority of the construction
labourers have returned to their homes and might be reluctant to join work even
after the impact of the virus subsides. This is in line with the usual trend around
this time of the year when labourers return to their villages since April and May
is the harvesting period.” The upcoming monsoon period may also impede the
flow of construction activities. Overall, the labour force disruptions coupled with
the upcoming monsoons may take a hit on the housing sector, and the cement
acquisition may continue to be on the backburner.

➢ Hike in prices: The construction sector that is already in doldrums may suffer a
blow further due to the hike in cement prices from May 1, 2020. While the
premium brands have surged the cement values by Rs 60 per bag, regular brands
have increased it by Rs 100 per bag. The move has come as a shock for the
industry as in the current times of crisis, not only the small developers but big
builders are also struggling to stay afloat and complete their pending projects.
Hence, the hike is likely to have a negative impact on both the sectors - real estate
and construction. It would not only slow down the building activities but would

18
 also impair the demand for cement. Authorities have reportedly sought
Government’s intervention to prevent the cartelisation of cement.

➢ Lack of funds: The heightened financial challenges in the realty market may also
act as a deterrent for the cement industry. For instance, many developers expecting
high sales on Gudi Padwa and Akshay Tritiya scheduled their new project
launches around these festivals to keep their businesses afloat in the ensuing
quarters. However, the COVID-19 induced self-isolation impaired the home
buying sentiment and posed severe financial implications, especially for
developers with weak balance sheets. Many builders even deferred their new
project launches until the situation improves. The postponement of new
developments also indicates the lower cement consumption in the quarters to
come.

➢ Uncertainties in the job market: The abysmal home buying trend may remain
so with the deaccelerated business operations and job-related uncertainties of
potential homebuyers. The pandemic has caused a massive slowdown and
economies around the world are reeling under pressure, including India. As a
result, many companies are either sacking their employees or exercising pay cuts
to tide over the financial crisis. In the backdrop of the existential predicament, the
prime focus of potential homebuyers is on saving for the future than undertaking
hefty financial liabilities. Therefore, the residential sector may take a hit, directly
influencing the cement industry. Barring affordable housing projects, demand in
mid-segment and premium housing projects may continue to tread slowly. The
cement industry is expected to stay low-key until June 2020. While Jul-Sep 2020
might see single-digit growth, the robust revival is likely to happen only in Q3
2020-21. However, this majorly depends on India’s ability to contain the virus at
the earliest.

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 6.PORTER’S 5 FORCE ANALYSIS

It is very important to understand Porter’s 5 forces to analyse any industry. All these
forces shape competition in market. We will try to understand and analyse ceramic sector
based on all these forces mentioned below.
➢ Threat of New Entrant: Various factors act as a barrier to new entrants in the
cement sector. A major portion of the total manufacturing cost is spent on outward
freight. Almost 20% of the entire manufacturing cost is spent on outward freight
and every tonne of cement output requires 1.7 tonne of raw material. Therefore,
the location of the cement plant is of utmost importance. When deciding on the
location of the plant, one has to diligently balance between the proximity to the
market and proximity to the limestone, coal and raw material resources. Access
to limestone reserves also acts as a barrier to entry. Lastly, setting a new business
or manufacturing plant in cement sector is capital intensive. Huge amount of
initial capital is required. Therefore, we can conclude that threat to new entrants
in this sector is high.
➢ Bargaining Power of Buyers: This refers to the influence that customers have in
a particular industry. In this industry, there is low bargaining power of buyers
since they purchase in large quantities. They are bulk buyers like construction
companies or corporates. Pure bargaining power of buyers exists when there is
just one buyer in the market. Buyers bargaining power is said to be powerful if
they are highly concentrated. Given the cement industry, the buyers are highly
fragmented and therefore their bargaining power is limited.
➢ Bargaining Power of Suppliers: The suppliers exercise high bargaining power.
Reason being the raw materials such as coal and limestone form an important part
of the manufacturing process and any shortfall in the supply of raw materials will
disturb the entire plant and can lead to large losses. Also, the transportation of
cement is mainly dependent on rail and road transporters. However, since the raw
materials are natural resources they are heavily influenced by government control
and companies need to buy rights from them. Therefore, we can say that supplier’s
bargaining power is moderate in this industry.
➢ Threat of Substitutes: Due to lack of substitutes and other products, this industry
does not face any credible threat of substitutes. Few of the substitutes like bitumen

20
 and plastic engineering can also be replaced by cement since it is widely used as
an important ingredient for construction work and easily available to the end
users.
➢ Inter firm rivalry: Cement industry is one of the exceptionally competitive
industries in India. Various firms in the business have enormous amount of capital
invested in setting up the plant. Such companies invest heavily in marketing and
promoting their product by providing discounts to their customers. Since there
isn’t much differentiation in types of cement, the customers do not hesitate to
switch brands. Therefore, firms compete strongly to pick up their piece of pie.
Thus, there is high level of inter firm rivalry.

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 7.ANALYSIS OF PAST 5 YEARS OF INDIAN CEMENT INDUSTRY

In the FY 2019, India’s cement consumption was 328 million tonnes which observed a
6.83% CAGR since FY2016. The production of cement in FY 2020 was 334.48 million
toones and is expected to be 401 million tonnes in 2021. Sale of cement in India stood at
Rs 58,407 crore (US$ 8.29 billion) until December 2019.

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There was an increase of CAGR of 6.44 % in the exports of cement, asbestos and
clinker in India from FY16 to FY19. In FY20 (till January 2020), it reached US$ 1.66
billion. The country’s top export destinations for cement, clinker and asbestos in FY19
were Nepal, Sri Lanka, USA, Maldives and UK. The country’s top five import sources
for cement, clinker and asbestos in FY19 were Pakistan, Bangladesh, Japan, Vietnam
and Thailand.
Installed Capacity and key markets in each geographic location:

23
Major Companies in the industry

(As on 30/07/2020)

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 8.FUNDAMENTAL ANALYSIS

Fundamental Analysis (FA) is a holistic approach to study a business. When an investor

wishes to invest in a business for the long term (say 3 – 5 years) it becomes extremely
essential to understand the business from various perspective. These characteristics can
be classified under two heads namely the ‘Qualitative aspect’ and the ‘Quantitative
aspects’. The process of evaluating a fundamentally strong company includes a study of
both these aspects. The Qualitative aspect mainly involves understanding the non-
numeric aspects of the business. This includes many factors such as:

1. Management’s background – Who are they, their background, experience,

education, do they have the merit to run the business, any criminal cases against
the promoters, etc.
2. Business ethics – is the management involved in frauds, bribery, unfair business
practices.
3. Corporate governance – Appointment of directors, organization structure,
transparency, etc.
4. Shareholders – Who are the significant shareholders in the firm, who are the
people with above 1% of the outstanding shares of the company.

Quantitative aspects are matters related to financial numbers. It is a process of

identifying the financial strength and weakness of the firm by determining relationships
between the items of the balance sheet, profit and loss account and cash flow statement.
Quantitative analysis helps to assess the financial position and profitability of a concern.
Quantitative analysis includes:
1. Assessment of past performance using Horizontal analysis of Balance sheet, P&L
account and cash flow statement.
2. Ratio analysis.

I have chosen Heidelberg Cement India Ltd and Star Cement for the purpose of
fundamental analysis.

25
 HEIDELBERG CEMENT INDIA

Heidelberg Cement India Limited (HCIL / Company) is a subsidiary of Heidelberg

Cement Group, Germany. Heidelberg Cement entered India in 2006 and has consistently
pursued its strategy of growth in developing markets. The Group acquired majority stakes
in Mysore Cements and Cochin Cements, as well as the Indorama Cement joint venture,
which was converted to a full acquisition in 2008. Following the merger with Indorama
Cement, Mysore Cements was renamed Heidelberg Cement India Ltd. (HCIL) in 2009.
The existing HCIL facilities in Central India were expanded as part of a brownfield
project, increasing its capacity from 2 million tonnes per year to 5 million tonnes in 2013.
With the acquisition of Italcementi in the second half of 2016, the Group has more than
doubled its installed capacity making it one of the top 10 players in India. The enlarged
India footprint now covers 12 States served by 4 Integrated Cement plants, 4 Grinding
Units and a Terminal, having installed capacity of 12.6 Million Tonnes. Its manufacturing
locations are at Damoh (Madhya Pradesh), Yerraguntla (Andhra Pradesh), Sitapuram
(Telangana), Ammasandra (Karnataka), Jhansi (Uttar Pradesh), Solapur (Maharashtra),
Chennai (Tamil Nadu) and Cochin (Kerala).
This has enabled the Group to improve its product offerings over a wider geographic area.
The products from its manufacturing units are sold under the brand names “Mycem” and
“Zuari”.

26
Management team:

Ms. Akila Krishnakumar - Chairperson

Alumnus of the Birla Institute of Technology and Sciences
(BITS), Pilani. Until February 2013, she was President of Global
Technology and also Country Head for SunGard.

Mr. Ramakrishnan Ramamurthy - Independent Director

Post–graduate Diploma in Business Management. He has been
President of Mytrah Energy Ltd ., Managing Director of GMR
Industries Ltd. and Chief Executive of Sanmar Engineering

Mr. Kevin Gerard Gluskie - Non-executive Director

Did Executive Master of Business Administration from the
Australian Graduate School of Management in 2001. In 2009, Mr.
Gluskie was appointed as Chief Executive of Hanson Australia.

Mr. Jamshed Naval Cooper - Managing Director

Post-Graduation in management specialising in marketing from
the Institute of Management Studies, Indore. He joined
Heidelberg Cement India Limited as Head of Sales & Marketing
in December 2006.

Mr. Sushil Kumar Tiwari - Wholetime Director

Prior to joining the Company he worked with the cement division
of Raymond Limited. Mr. Tiwari became Whole-time Director of
the Company w.e.f. 29th April, 2011.

27
Shareholding Pattern:

Shareholding Pattern
Promoters (Foreign Body Corporate)
Mutual Funds
Financial Institutions & Banks
Central /State Government
Insurance Companies
Foreign Portfolio Investors
Alternative Investment Funds
NRIs and Foreign National
Bodies Corporate
Trusts
Resident Individuals
Clearing members
LLP, HUFs

Category No. of Equity % of Equity

Shares shareholding
Promoters (Foreign Body 15,72,44,693 69.39
Corporate)
Mutual Funds 85,32,482 3.77
Financial Institutions & Banks 1,30,986 0.06
Central /State Government 3,28,440 0.14
Insurance Companies 58,44,955 2.58
Foreign Portfolio Investors 2,65,66,173 11.72
Alternative Investment Funds 11,09,014 0.49
NRIs and Foreign National 10,63,300 0.47
Bodies Corporate 55,13,198 2.43
Trusts 56,627 0.02
Resident Individuals 1,92,99,036 8.52
Clearing members 3,88,631 0.17
LLP, HUFs 5,35,581 0.24
Total 22,66,13,116 100

28
Company performance overview:

During FY19, the Company produced 4.8 million tonnes of cement registering a growth
of 4.6 percent over FY18. 4.9 million tonnes of cement was sold registering an increase
of 5.2 percent in volume terms. The capacity utilization stood at ~90 percent in FY19
against the industry average of ~70 percent. The power generated by Waste Heat
Recovery Power Plant (WHRPP) substituted grid power and thus enabled the Company
to reduce its power cost. During FY19 the Company reported highest ever production,
sales and profitability. The company registered its highest ever Net Profit at Rs. 2206.6
Million, up 65.7% over previous year, highest ever EBITDA/Ton of Rs. 987, up 26.4%

29
over previous year, highest ever Sales Volume of 4.9 Million Tonnes, up by 5.2 % over
previous year and increased dividend payment by 60%.

Share price:

30
Balance Sheet

Rs in Millions
Particulars Mar-19 Mar-18 Mar-17 Mar-16 Mar-15
Assets
Non-current assets
Property, plant and equipment 17362.7 18043.8 18744.2 18975 17864.4
Capital work-in-progress 172.4 80.7 62.9 560.5 1274.2
Intangible assets 5.7 16.5 26.5 36.9 49.6
Financial assets
Security deposits 285.3 284.9 273 356.6 319.1
Derivative instruments - - - 274.6 1033.7
Other non-current assets 254.9 294.1 311 325.3 393.4
18081 18720 19417.6 20528.9 20934.4
Current assets
Inventories 1674.2 1268.9 1396.4 1782.1 1910
Financial assets
Security deposits 145.3 106.9 101.6 28.2 26.4
Derivative instruments 186.5 808.1 862.9
Trade receivables 253.2 188 125.6 257.6 191.4
Cash and bank balances 3376.7 2124.1 142 77.7 1462.6
Other financial assets 27 19.1 7.7 19.4 11
Other current assets 3397.9 2901.2 2699 2644.1 2565.4
8874.3 6608.2 4658.8 5617.2 7029.7
Total assets 26955.3 25328.2 24076.4 26146.1 27964.1

Equity and liabilities

Equity share capital 2266.2 2266.2 2266.2 2266.2 2266.2
Other equity 9445.7 8197.8 7403.3 6683.1 6403.3
11711.9 11711.9 9669.5 8949.3 8669.5
Non-current liabilities
Financial liabilities Borrowings 3918.2 4692.3 5751.9 6708.6 9248.9
Other financial liabilities 41.2 53.8 62 30.2 29.3
Provisions 197.3 196 217.1 191.6 201.8
Government grants 650 511.8 328.1 124.8 -
Deferred tax liabilities (net) 1303.3 835 530 419.4 471.1
6110 6288.9 6889.1 7474.6 9951.1
Current liabilities
Trade payables 2778.2 2266.3
Borrowings 700
Other current financial liabilities 3045.4 3121.6 2820 4609.1 5081.4

31
 Other current liabilities 822.3 896 562.8 460.3 443.8
Government grants 145.3 102.8 59.8 20.8 -
Provisions 2342.2 2188.6 2161.1 2072.4 1908.4
9133.4 8575.3 7517.8 9722.2 9343.5
Total liabilities 15243.4 14864.2 14406.9 17196.8 19294.6
Total equity and liabilities 26955.3 25328.2 24076.4 26146.1 27964.1

➢ Increase in inventory of 32% from previous year’s Rs. 12689 lacs to current year’s
Rs. 16742 lacs is due increase in inventory turn around time from 25 days to 29
days. However, it must be noted that the finished goods inventory has decreased
from Rs. 2471 lacs to Rs. 2409 lacs but the WIP and raw materials inventory has
increased by 21% each indicating inefficiency in converting raw materials and
WIP into finished goods.
➢ Other equity includes reserves and surplus and debenture redemption reserve
created to redeem the second instalment of 10.4% non-convertible debentures
issued in 2013. Accordingly, an amount of INR 1250 million will become due for
repayment on 16th December 2019 and the company has adequate balance to meet
this obligation.

Statement of Profit and Loss Account

Rs in Millions
Particulars Mar-19 Mar-18 Mar-17 Mar-16 Mar-15
Revenue from operations 21333.5 19619.6 20018.5 19159.2 20442.8
Other income 348.2 199.3 236.9 224.4 138.4
Total Income (I) 21681.7 19818.9 20255.4 19383.6 20581.2
Expenses
Cost of raw material consumed 3915.2 3566.4 3259.9 3427.8 4438.3
(Increase)/decrease in inventories of finished goods and work-
in-progress -51.8 136.1 346.6 -93.4 -277.2
Excise duty on sale of goods - 724.9 2843.9 2675.7
Employee benefits expense 1239 1201.5 1147.6 1050.2 1337.3
Depreciation and amortization expense 1017.7 1011.7 991.5 997.8 1375.4
Finance costs 747.8 744.5 897.7 1084.5 1389.3
Other expenses 11397.7 10357.1 9631.9 9787.2 11722.9
Total Expense (II) 18265.6 17742.2 19119.1 18929.8 19986
Profit before tax (I) - (II) 3416.1 2076.7 1136.3 453.8 595.2
Tax expenses
737.5
Current tax 444.3 239.5 107.5 91.3

32
Current tax related to earlier years 2.4 - 2 5 -91.3
Net current tax expense 739.9 444.3 241.5 112.5
Deferred tax charge 469.6 300.6 132.7 -12.6 602.6
Total tax expense 1209.5 744.9 374.2 99.9 602.6
Profit for the year (III) 2206.6 1331.8 762.1 353.9 -7.4
Other comprehensive income
Remeasurement gain/(losses) of net defined benefit plans -3.9 10 -24.3 -6.1 603.1
Income tax effect 1.3 -3.5 8.4 2.1 -201.1
-2.6 6.5 -15.9 -4 402
Net movement on cash flow hedge - 2.6 -39.7 -107.1 -
Income tax effect - -0.9 13.7 37 -
- 1.7 -26 -70.1 402
Other comprehensive income for the year, net of tax (IV) -2.6 8.2 -41.9 -74.1
Total comprehensive income for the year, net of tax (III) +
(IV) 2204 1340 720.2 279.8 595.3
Earnings per share [nominal value of share Rs 10]
Basic and diluted 9.74 5.88 3.36 1.56 2.63

➢ There has been 8.74% increase in revenue from operations as compared to

previous year. The revenue from operations till 30th June 2017 include excise duty
collected from customers. After 30th June 2017, GST was collected on behalf of
the government which is not included in the revenue from operations. Therefore,
it is not appropriate to compare these two figures. However, it must be noted that
inspite of non-inclusion indirect taxes there has been an increase in the revenue.
This is due to increase in volumes sold since the price remained flattish all over
India except the central region where prices improved. The incremental demand
was from non trade segment where the margins are low.
➢ Other income includes huge amount of interest on bank deposit due to 71%
increase in bank deposits and government loans received at below market rate of
interest that are treated as government grants.
➢ The interest expense on borrowings has reduced by 20% due to final repayment
of external commercial borrowings of 15000 lacs made for the purpose of
financing import of capital goods for setting-up Waste Heat Recovery based
Power Generation Project at Damoh. However, there has been increase of Rs 1226
lacs on interest on other financial liabilities.

33
 ➢ Other expenses that majorly include consumption of stores and spares, power and
fuel and freight and forwarding have increased as they are directly proportional to
the increase production volume.

Statement of Cash flow:

Rs in Millions
Particulars 2019 2018 2017 2016 2015
Cash flow from operating activities 3416.1 2076.7 1136.3 453.8 1198.3
Profit/(Loss) before tax from discontinued operations -0.4
Profit before tax 3416.1 2076.7 1136.3 453.8 1197.9
Non-cash adjustment to reconcile profit before tax to net cash
flows:
Depreciation and amortization expense 1017.7 1011.7 991.5 997.8 1375.4
Property, plant and equipment written off 9.1 2.7 9.1 2.6 5.4
Profit on sale of property, plant and equipment (net) -0.6 -10.4 -1.4 -6.4 -4.2
Profit on sale of discontinued operation -603.1
Unrealized foreign exchange loss/ (gain) -4 -0.3 -1.1 0.4 0.1
Sundry balances written off - 5.7 1.7 1.1 6.3
Provision for mine reclamation expenses 22.5
Provision/ liabilities no longer required written back -47.3 -60.7 -169.4 -69.6 -33.4
Government grants -116.9 -74.1
Interest expenses 720.9 722.2 880.2 1069.5 1351.4
Interest income -177.1 -51.1 -31.8 -145.1 -129
Operating profit before working capital changes 4817.9 3622.4 2815.1 2304.1 3189.3
Movements in working capital :
Increase / (decrease) in trade payables and other payables 657.6 827.8 337.4 282.6 137
Increase / (decrease) in provisions and gratuity 151 71.4 230.5 169.4 442.2
Decrease / (increase) in trade receivables -65.2 -62.4 132 -66.2 -73.2
Decrease / (increase) in inventories -405.3 127.5 385.7 127.9 -448.5
Decrease / (increase) in other current and non-current assets -514.7 -374.4 -41.5 -115.2 -765.5
Cash generated from operations 4641.3 4212.3 3859.2 2702.6 2481.3
Direct taxes paid (net of refunds) -712.6 -440.9 -245.2 -133.2 -105.8
Net cash flow from operating activities (A) 3928.7 3771.4 3614 2569.4 2375.5
Cash flows from investing activities
Purchase of property, plant and equipment including capital work -
in progress and capital advances -426.6 -232.4 -473.7 -1249 1728.2
Proceeds from sale of property, plant and equipment 6.9 48.9 27.8 32.6 7.6
Increase in other bank balances -3.7 -2.3
Interest received 160.1 48.8 43.5 136.7 122.5
Proceeds from sale of discontinued operation 1660
Net cash flow used in investing activities (B) -263.3 -137 -402.4 -1079.7 61.9
Cash flows from financing activities
Proceeds from borrowings and government grants 672.8 680 610.7 1029.1
Repayments of borrowings -1500 -1094.5 -2825.3 -2752.6 -642

34
 Dividend Paid (including Dividend Distribution Tax) -950.1 -543.2
-
Interest paid -639.2 -696.9 -932.7 -1151.1 1474.2
-
Net cash flow used in financing activities (C) -2416.5 -1654.6 -3147.3 -2874.6 2116.2
Net increase/ (decrease) in cash and cash equivalents (A + B + C) 1248.9 1979.8 64.3 -1384.9 321.2
Cash and cash equivalents at the beginning of the year 2121.8 142 77.7 1462.6 1141.4
Cash and cash equivalents at the end of the year 3370.7 2121.8 142 77.7 1462.6

Horizontal Analysis:
Year 2015 2106 2107 2018 2019
Revenue from operations 20442.8 19159.2 20018.5 19619.6 21333.5
YoY growth % -6.279 4.48505 -1.9927 8.73565

Operating Profit 14667.2 12005.5 12767.1 14126.8 16179.3

YoY growth % -18.147 6.34376 10.65 14.5291

Net Profit -7.4 353.9 762.1 1331.8 2206.6

YoY growth % 4882.4 115.343 74.754 65.6855

➢ As mentioned earlier, this year had been the year of many firsts and therefore we
can see that all the factors i.e. revenue from operations, operating profit and net
profit have been highest in FY2019 as compared to the last 5 years. This is
mainly due to increase in capacity utilisation of machinery coupled with cost
reduction of power with the help of power generated by Waste Heat Recovery
Power Plant.

35
 STAR CEMENT

Start Cement Incorporated as Cements Manufacturing Company Limited as Public

Limited Company on November 2, 2001, under the Companies Act, 1956, with the
Registrar of Companies, Assam, Tripura, Manipur, Nagaland, Meghalaya, Arunachal
Pradesh and Mizoram. Later the company name changed to Cement Manufacturing
Company Limited by issuing a fresh Certificate of Incorporation dated November 10,
2004, issued by the Registrar of Companies, Assam, Tripura, Manipur, Nagaland,
Meghalaya, Arunachal Pradesh and Mizoram. Thereafter, the name of the Company was
again changed from Cement Manufacturing Company Limited to Star Cement Limited
and the Registrar of Companies, Assam, Tripura, Manipur, Nagaland, Meghalaya,
Arunachal Pradesh and Mizoram issued a fresh Certificate of Incorporation dated June
21, 2016. Maximum production of cement in the entire northeastern region of India is
done by Star Cements. The Company commenced the marketing of cement in North-East
India. It subsequently extended its presence to Bihar and West Bengal. The Company is
now a prominent player in North-East India with a growing presence across East India.
The Company comprises seven manufacturing units – four in Meghalaya, one in Assam
and two outsourced units in West Bengal. The Lumshnong plant is spread across 174.5
hectares in a strategic Meghalaya location that facilitates access to high-grade limestone
and coal. The Company is engaged in commissioning a grinding unit in Siliguri (capacity
2 MTPA). It’s 1.0 MTPA cement plant located at Lumshnong in Meghalaya is closest to
the most important raw material reserves of limestone, coal and shale. The company
additionally included a cement unit in Meghalaya, Sonapur (Guwahati) and 2 grinding
units in West Bengal aggregating an installed capacity of 4.3 MTPA. Star Cement’s
produces and sells Ordinary Portland Cement, Portland Pozzolana Cement (PPC),
Portland Slag Cement (PSC) and Anti Rust Cement (ARC) in accordance with the clients
changing needs. Larsen & Tourbo, National Hydro Power Corporation, Public Works
Department, Indian Railways and Ministry of Defence are some of its high-end clients.

36
37
MANAGEMENT TEAM:

Shri Sajjan Bhajanka (Chairman and Managing Director)

Commerce Graduate from Dibrugarh University, Assam. He is
the Managing Director of Century Plyboards (I) Limited,
Chairman of Shyam Century Ferrous Ltd and a promoter
Director and also the Chairman of Star Cement Limited.

Shri Sanjay Agarwal (Managing Director)

Commerce Graduate from Calcutta University. He is the
Managing Director of Century Plyboards (India) Limited and
a promoter Director of Star Cement Limited.

Mr. Prem Kumar Bhajanka (Director)

He is the Managing Director of M/s Century Plyboards (India)
Ltd and also the promoter director of M/s Namchic Tea Estate
Pvt. Ltd. and M/s. Lal Pahar Tea Estate Pvt. Ltd.

Mr. Rajendra Chamaria-Vice Chairman and Managing

Director
He is a partner in Nefa Udyog, Banderdewa, and Arunachal
Pradesh. Mr. Chamaria is also a Director in M/s Donypolo
Udyog Ltd

Mr. Pankaj Kejriwal (Director)

He was an Executive Director in M/s Avanti Ampoules Pvt.
Ltd., and in 2002, he joined M/s Star Cement Limited as an
Executive Director.

38
Shareholding Pattern:

39
Company Performance:

The company commissioned a railway siding, helping the Company moderate costs of
delivered fly-ash (earlier unloaded at another railway siding 3 kilometers away). It
marketed 72% cement in North East and 28% outside North East and achieved desired
freight costs related to delivery in the markets of West Bengal and Bihar Production and
sales. The Company produced 20.37 lac tonnes of clinker as against 20.57 lac tonnes in

40
the previous year (on account of equipment downtime). Own Cement production was
24.58 lac tonnes in FY2018-19 as against 21.70 lac tonnes in the previous year, an
increase of 13.27%. The Company’s North East cement sales were 20.44 lac tonnes as
against 17.52 lac tonnes in the previous year, a growth of ~17%. Sales outside North East
were 6.61 lac tonnes as against 6.53 lac tonnes in FY2017-18. The Company marketed
approximately 18% of OPC, 2% of PSC and 80% of PPC cement grades, an attractive
and profitable mix. Revenue was Rs.1831 crores as against Rs.1629 crores in FY2017-
18, a growth of 12.40%. EBITDA was Rs.455 crores against Rs.526 crores and PAT (after
minority interest) was Rs.299 crores compared to Rs.330 crores. EBITDA per tonne
declined to Rs.1591 in 2018-19 from Rs.2018 per ton in FY2017-18 mostly on account
of the expiry of freight subsidy support to the Company. Trade sales accounted for 82%
and non-trade 18% (79% and 21% respectively in FY2017-18) due to increased consumer
demand.

Share Price:

BSE Sensex Star Cement

120.00
RELATIVE VALUES TO 100

100.00

80.00

60.00

40.00

20.00

0.00

41
 Balance Sheet:
(Rs. in Lacs)
Particulars March March March March March
2019 2018 2017 2016 2015
ASSETS
Non-current assets
(a) Property, plant and 25,608.29 27,350.78 28,538.56 26,332.34 30,845.29
equipment
(b) Capital work-in-progress 6,051.60 2,639.69 4,624.16 4,071.93 2,151.88
(c) Intangible assets 18.39 18.91 12.49 12.28 12.84
(d) Investment in 23,744.65 23,744.65
subsidiaries
(e) Financial assets
(i) Investments 150.38 139.29 23,911.39 23,878.43 23,878.43
(ii) Loans 178.31 142.81 20,569.83 19,338.34 16,919.12
(f ) Deferred tax assets (net) 16,296.26 13,557.18 85.90
(g) Non current tax assets 62.94 62.05
(net)
(h) Other non-current assets 5,187.69 2,830.73 - 48.20 5.99
Total non-current assets 77,298.51 70,486.09 77,656.43 73,767.42 73,813.55
Current assets
(a) Inventories 8,004.79 12,226.59 6,203.17 8,506.31 5,246.48
(b) Financial assets
(i) Trade receivables 12,794.09 12,710.24 28,769.85 34,736.91 22,720.68
(ii) Cash and cash 7,777.14 641.63 383.55 121.04 478.89
equivalents
(iii) Other Bank balances 11,639.97 114.88 875.57 685.45 718.98
(other than (ii) above)
(iv) Loans 70.83 44.07 43,342.80 31,613.67 22,697.35
(v) Other financial assets 39.01 38.50
(c) Other current assets 36,892.37 72,367.07 35 35
Total current assets 77,218.20 98,142.98 79,609.94 75,698.38 51,862.38
Total assets 1,54,516.71 1,68,629.07 1,57,266.37 1,49,465.80 1,25,675.93

42
EQUITY AND
LIABILITIES
Equity
(a) Equity share capital 4,192.29 4,192.29 4,192.14 4,192.14 4,192.14
(b) Share Capital-Pending 0.15
Allotment
(c) Other equity 1,00,936.43 79,648.64 60,416.72 53,006.55 47,376.19
Total equity 1,05,128.72 83,840.93 64,609.01 57,198.69 51,568.33
Liabilities
Non-current liabilities
(a) Financial liabilities
(i) Borrowings 15,141.35 28,143.38 35,693.50 28,573.80 23,177.14
(ii) Other financial liabilities 9,693.88 8,945.72 8,947.66 7,628.03 6,219.12
(b) Employee benefit 137.17 100.04 249.88 159.61 150.76
obligations
( c) Deferred tax liability 98.16
Total non-current liabilities 24,972.40 37,189.14 44,989.20 36,361.44 29,547.02
Current liabilities
(a) Financial liabilities
(i) Borrowings 522.65 10,111.69 20,344.14 22,805.75 15,874.60
(ii) Trade payables
-to micro enterprises and - -
small enterprises
-to creditors other than micro 9,450.30 15,842.97 7,414.28 14,747.34 10,182.00
enterprises and small
enterprises
(iii) Other financial liabilities 8,205.92 14,144.09 4,024.25
(b) Employee benefit 271.16 239.18 71.92 118.65 59.80
obligation
(c) Other current liabilities 5,176.23 6,535.40 19,837.82 18,233.93 14,419.93
(d) Current tax liabilities 789.33 725.67
(net)
Total current liabilities 24,415.59 47,599.00 47,668.16 55,905.67 44,560.58
Total liabilities 49,387.99 84,788.14 92,657.36 92,267.11 74,107.60
Total equity and liabilities 1,54,516.71 1,68,629.07 1,57,266.37 1,49,465.80 1,25,675.93

43
 ➢ Current year’s PPE amounts to 25,608.29 lacs which is 6.37% less as compared
to previous year although the company has net additions of 2465.46 lacs. This is
due to the increase in amount of depreciation as compared to last year.
➢ Increase in net deferred tax assets is attributable to mainly to MAT credit
entitlement and other current tax assets is due to advance tax paid.
➢ The 34% decrease in inventories is due to the improvement in days sales of
inventory from 31 days to 18 days.
➢ Increase in cash and cash equivalents from 641.63 lacs to 7777.14 lacs and
increase in bank balance from 114.88 lacs to 11639.97 lacs is due to the excess
cash left with the company after paying off debts with the huge amount of
subsidies received from the Government.
➢ Decrease in other current assets is due to decrease in subsidies/ incentives
receivable from Government and decrease in advances and prepaid expenses.
➢ Long term borrowings included rupee loans from banks, financial institutions and
director and foreign currency loan from a bank that has been repaid using the
subsidies provided by Government. Decrease in other financial liabilities is also
attributable to repayment of current maturities of long term borrowings using
subsidies.

Profit and Loss Statement:

(Rs. in Lacs)
Particulars March March March March March
2019 2018 2017 2016 2015
INCOME
Revenue from operations 1,69,537.76 1,48,374.70 1,45,969.47 1,48,433.04 1,17,759.95
Other income 3951.16 384.55 163.34 93.56 46.64
Total income 1,73,488.92 1,48,759.25 146132.8 148526.6 117806.59
EXPENSES
Cost of materials consumed 58367.37 47832.72 41849.87 43214.48 38692.32
Purchase of traded goods 10097.5 10336.8 17549.11 15536.81 4647.96
(Increase)/decrease in inventories 1119.64 316.27 -98.26 -594.67 751.59
Excise duty - 1993.1 5906.21 6833.82 6398.07

44
Employee benefit expenses 7272 6375.15 6992.18 6224.4 5087.39
Finance costs 2087.86 4343.37 5631.68 4913.04 4452.4
Depreciation and amortisation 4648.77 5745.45 4669.26 6064.49 8645.7
expenses
Other expenses 61859.01 49032.44 55737.18 60693.16 44629.65
Total expenses 1,45,452.15 1,25,975.30 138237.2 142885.5 113305.08
Profit before tax 28036.77 22783.95 7895.58 5641.07 4501.51
Tax expenses
- Current tax 5187.74 4877.74 0 0 0
- Income Tax for Earlier year -393.87 41.59
- Deferred tax -2740.11 -3171.44 -228.61 -85.9 102.44
Total tax expenses 2447.63 1706.3 -622.48 -44.31 102.44
Profit for the year 25589.14 21077.65 7273.1 5596.76 4603.95
Other comprehensive income
Items that will not be reclassified
to profit and loss
Remeasurements of post- 2.96 -20.25
employment benefit obligations
Deferred tax on above -1.03 7.07
Other comprehensive income for 1.93 -13.18 35.36 -55 -1.31
the year (net of tax)
Total comprehensive income for 25591.07 21064.47 7308.46 5541.76 4602.64
the year
Earnings per equity share
Basic earning per share 6.1 5.03 1.74 1.34 10.98
Diluted earning per share 6.1 5.03 1.74 1.34 10.98

➢ Decrease in finance cost is due to premature repayment of debts using government

subsidies.
➢ Decrease in amount of depreciation and amortization is due to decrease in net
additions to PPE in the current year as compared to previous year.
➢ Increase in other expenses, which includes consumption of spares and stores,
power and fuel, repairs and maintenance of plant and machinery and outward
freight charges are directly proportional to the increase in production and capacity
utilisation of machinery.

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 Cash flow statement:
Particulars March March March March March
2019 2018 2017 2016 2015
A Cash flow from operating
activities
Net Profit/(Loss) before Tax 28,036.77 22,783.95 7,930.93 5,586.06 4,500.19
Adjustments for :
Depreciation and amortisation- 4,648.77 5,745.45 4,669.26 6,064.49 8,645.70
( refer note 33)
(Profit)/ Loss on Sale of (11.39) - (5.73) 8.22 22.92
Property, Plant and Equipment
Interest and Dividend Income (3,903.86) (144.59) (127.49) (47.26) (25.80)
(refer note 28)
Finance Costs (refer note 32) 2,087.86 4,343.37 5,631.68 4,913.04 4,452.40
Allowance for Bad and 0.29 19.89 (16.53) (35.14) 1.43
Doubtful Debts
Unrealised Foreign Exchange (40.00)
Gain /(Loss)- Net
Provision for Income Tax & 1.57
Wealth Tax
Income Tax for Earlier years (393.87) (41.59)
Operating Profit before 30,858.44 32,748.07 17,688.25 16,447.81 17,558.42
working Capital changes
Adjustments for :
(Increase)/Decrease in Trade (84.13) (1,850.89) 5,983.59 (11,981.10) (12,820.1
receivables 5)
(Increase)/Decrease in 4,221.82 (6,023.42) 2,303.14 (3,259.83) 1,821.67
Inventories
(Increase )/Decrease in Loans (62.26) 1,358.14 (14,061.52) (12,470.54) (9,973.59)
(Increase )/Decrease in Other 33,116.32 (8,391.99)
assets
Increase /(Decrease ) in trade (6,392.67) 7,799.79
and other payables
Increase /(Decrease ) in Other (7,026.22) 3,261.55 (3,891.32) 5,856.79 6,823.59
Liabilities and Provisions

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 Cash Generated from 54,631.29 28,901.25 8,022.15 (5,406.87) 3,409.93
Operations
Income Tax Paid (4,575.00) (4,250.00) 1,105.00 1,100.00 665.00
Net Cash flow from 50,056.29 24,651.25 9,127.15 (4,306.87) 4,074.93
Operating Activities
B Cash flow from Investing
Activities
(Purchase)/sale of Property, (6,306.27) (2,211.64) (7,436.72) (3,357.45) (2,322.14)
Plant and Equipment (
including CWIP)
Fixed Deposits/Margin Money (11,525.09) 262.30 (308.33) (4.74) 185.40
Given/(Repaid)
(Purchase)/ sale of Investments (11.08) - (32.96) - -
Interest Received 3,903.86 145.58 127.49 47.26 25.80
Net Cash used in Investing (13,938.58) (1,803.76) (7,650.51) (3,314.93) (2,110.94)
Activities
C Cash Flow from Financing
Activities
Payment of Dividend ( (4,303.28) - 0
including Dividend
Distribution Tax)
Interest paid (2,087.86) (4,337.38) (5,631.68) (4,913.04) (4,452.40)
Proceeds from /(Repayment of (13,002.03) (8,517.95) 6,640.74 5,249.78 (2,666.25)
) Long Term Borrowings /
Liabilities
Proceeds from /(Repayment of (9,589.03) (10,232.46) (2,461.60) 6,931.14 5,916.96
) Short Term Borrowings
Net Cash used in Financing (28,982.20) (23,087.79) (1,452.55) 7,267.89 (1,201.69)
Activities
Net Increase/(decrease) in 7,135.51 (240.30) 24.09 (353.91) 762.30
cash and cash equivalents (
A+B+C)
Cash and Cash Equivalents
(refe note 12)
Opening Balance 641.63 881.93 787.48 1,141.40 379.09

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 Add: Transferred as per 72.02
Scheme of Amalgamation
(Refer note 2.26)
Closing Balance 7,777.14 641.63 883.58 787.48 1,141.40

Horizontal analysis:
2015 2016 2017 2018 2019
Revenue from 1,17,759.95 1,48,433.04 1,45,969.47 1,48,374.70 1,69,537.76
operations
YOY Growth (%) - 26.05% -1.66% 1.65% 14.26%

Operating Profit 18,304.56 15,930.37 17,934.92 32,804.49 31,941.88

YOY Growth (%) - -12.97% 12.58% 82.91% -2.63%

Net Profit 4,603.95 5,596.76 7,273.10 21,077.65 25,589.14

YOY Growth (%) - 17.74% 23.05% 65.49% 17.63%

➢ There has been an increase in revenue from operations and net profit margin in
2019 as compared to 2018. But there has been a decrease in operating profit
margin, however all three line items have observed exponential growth in
revenue, operating profit and net profit in the past 5 years.

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 RATIO ANALYSIS
HEIDELBERG CEMENT INDIA LTD.

YEAR 2019 2018 2017 2016 2015

PROFITABILITY RATIOS
Return on Equity (%) 18.84 12.72 7.88 3.95 6.86
ROCE (%) 23.36 16.84 12.28 2.15 17.23
Return On Assets (%) 8.18 5.25 3.16 1.35 2.12
Gross Profit Margin (%) 24.28 20.28 17.61 15.38 15.76
Operating Margin (%) 19.51 14.93 11.84 9.33 16.43
Net Profit Margin (%) 10.34 7.04 4.43 2.14 2.91
LIQUIDITY RATIOS
Current Ratio (X) 0.97 0.77 0.62 0.58 0.75
Quick Ratio (X) 0.79 0.62 0.43 0.39 0.55
SOLVENCY RATIOS
Debt to Equity 0.33 0.45 0.59 0.83 1.08
Interest Coverage Ratios (%) 5.57 3.79 2.27 1.42 0.7
TURNOVER RATIOS
Asset Turnover Ratio (%) 79.14 74.59 71.33 63.04 73.1
Inventory Turnover Ratio (X) 12.74 14.89 12.3 9.25 9.01

STAR CEMENT

YEAR 2019 2018 2017 2016 2015

PROFITABILITY RATIOS
Return on Equity (%) 24.34 25.14 12.74 9.84 8.92
ROCE (%) 23.15 22.41 7.29 6.01 5.67
Return on Assets (%) 16.56 12.49 5.04 3.76 3.66
Gross Profit Margin (%) 20.51 22.45 14.21 11.73 19.86
Operating Margin (%) 17.76 18.53 11.07 7.45 15.54
Net Profit Margin (%) 15.09 14.39 6.23 3.97 4.13
LIQUIDITY RATIOS
Current Ratio (X) 3.16 2.06 1.79 1.37 1.16
Quick Ratio (X) 2.83 1.81 1.66 1.22 1.05
SOLVENCY RATIOS
Debt to Equity 0.15 0.46 0.92 0.9 0.76
Interest Coverage Ratios (%) 14.43 6.25 2.53 2.15 4.11
TURNOVER RATIOS
Asset Turnover Ratio (%) 109.7 86.8 80.9 94.73 88.61
Inventory Turnover Ratio (X) 21.18 11.97 20.7 16.65 21.23

➢ Liquidity ratios measure a company's ability to pay debt obligations and its
margin of safety through the calculation of metrics including the current
ratio, quick ratio, and operating cash flow ratio. The current ratio measures a
company's ability to meet its current liabilities with its current assets such as cash,
accounts receivable and inventories whereas the quick ratio eliminates inventories

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 to calculate the ability of the firm to meet its current liabilities through easily cash-
convertible current assets. The higher the ratio, the better the company's liquidity
position. Both current as well as quick ratios of both the companies have steadily
increased over the past 5 years. However, Star cements’ liquidity ratios portray a
better picture as compared to Heidelberg Cement India ltd. While Star Cement
has 3.16 Rs of current asset to pay off every 1 rupee of its current liability,
Heidelberg Cement owns only 0.97 Rs of current assets to repay its 1 rupee of
current liability. The industry average for current ratio is 1.4 which states that Star
cement is better than the industry peers whereas Heidelberg has a scope for
improvement.

➢ Solvency Ratios indicates whether a company’s cash flow is sufficient to meet its
short-and long-term liabilities. The lower a company's solvency ratio, the greater
the probability that it will default on its debt obligations. The debt to equity ratio
measure of the degree to which a company is financing its operations through debt
versus wholly-owned funds. More specifically, it reflects the ability of
shareholder equity to cover all outstanding debts in the event of a business
downturn. A high debt/equity ratio often indicates high risk; because it means the
company has been aggressively financing its growth with huge amount of debt.

If a lot of debt is used to finance growth, a company could potentially generate

more earnings than it would have without that financing. If leverage increases
earnings by a greater amount than the debt’s cost (interest), then shareholders
should expect to benefit. However, if the cost of debt financing outweighs the
increased income generated, share values may decline. Here we can observe that
the debt to equity ratio of both the companies has reduced over the period of 5
years. Heidelberg Cement’s weighted average cost of capital is around 9.8%
whereas the increase in EBIT is 14.53%. However, Star cement’s weighted
average cost of capital is 8.81% whereas increase in EBIT is around 8.14% which
is almost close to the cost of capital but does not surpass it. The benefit of this
increase in earnings over and above the interest is observed through higher return
on equity. Both the companies are doing good in terms of debt to equity ratio as
the industry average is 0.58.

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 Interest coverage ratio tells us how many times the EBIT of the company can
cover the amount of current interest expense. A result of 1.5 is generally
considered to be a bare minimum acceptable ratio for a company and the tipping
point below which lenders will likely refuse to lend the company more money, as
the company’s risk for default may be perceived as too high. While Star cement
has an interest coverage ratio of 14.43% and always maintained the ratio above
2% in the past 5 years, Heidelberg Cement’s interest coverage ratio has steadily
improved over the years and is satisfactory at the moment. Both the companies
have sufficient earnings to pay its interest expenses.

➢ Profitability ratios are metrics that assess a company's ability to generate income
relative to its revenue, operating costs, balance sheet assets, or shareholders'
equity. Profitability ratios show how efficiently a company generates profit and
value for shareholders. Profitability ratios generally fall into two categories—
margin ratios and return ratios. Margin ratios give insight, from several different
angles, on a company's ability to turn sales into a profit. Return ratios offer several
different ways to examine how well a company generates a return for its
shareholders. Some examples of profitability ratios are the profit margin, return
on assets (ROA), and return on equity (ROE).

Both Heidelberg Cement and Star Cement have seen steady growth in their margin
ratios over a period of past 5 years except that Heidelberg Cement witnessed a
decrease in these ratios in 2016 as compared to 2015. This is because in 2015 the
company shifted from Jan- Dec calendar to April- March Calendar thus including
15 months in the year 2015 (1.01.14 to 31.03.2015). Therefore, it will not be
appropriate to compare 2015 with the rest of the years. However, if we calculate
a proportionate 12-month gross profit margin it would amount to 12.61% thus
indicating a steady growth in the margin ratios over the 5-year period. Although
Star Cement’s gross profit margin and operating margin is lower than that of
Heidelberg’s, its net profit margin is higher than the latter ones. This is mainly
due to high finance cost as a percentage of revenue.

Return on assets assess how effectively the company is deploying its assets to
generate sales and profit. The more assets a company has amassed, the more sales

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 and potential profits the company may generate. As economies of scale help lower
costs and improve margins, returns may grow at a faster rate than assets,
ultimately increasing ROA. The ROA figure gives investors an idea of how
effective the company is in converting the money it invests into net income. While
Star Cement’s ROA (16.56%) is higher than that of Heidelberg Cement (8.18%),
it must be noted that Heidelberg Cement’s ROA has increased by 55% as
compared to previous year while Star Cement’s ROA has increased by only 32%.
The average industry ROA is 10.25% indicating that Star Cement is performing
well above the industry average while Heidelberg still has scope to improve.

ROE is the percentage expression of a company's net income, as it is returned as

value to shareholders. While ROE considers the net return only to equity
shareholders, ROCE considers the returns to all shareholders as well as debt
holders. When ROCE is greater than ROE it means that debt holders are benefitted
at the cost of equity holders. However, this is not true because the commitment
towards debtholders is limited and a summation of interest and principle.
Therefore, a higher ROCE only leaves greater surplus for equity shareholders.
Higher ROCE will also help the company to raise debt and equity at attractive rate
as compared to its peers. However substantially superior ROCE to ROE is not a
good sign either since it indicates that the company is borrowing debts at
exorbitantly high rates and the high cost of capital is negatively affecting the
return to shareholders. According to Warren Buffet, ideally the gap between
ROCE and ROE should not be more than 100-200 basis point in order to make
sure that shareholders and lenders are both being taken care of and nobody has
being compromised at the cost of others. In case of Heidelberg Cements, its ROCE
is greater than its ROE by 400 basis points which means there is a scope to
improve its ROE since the debtholders are being rewarded higher than the
shareholders. Nevertheless, higher ROCE also indicates that the company is
efficiently using its debt to its advantage. In case of Star Cements, its ROE is
greater than its ROCE which means its cost of borrowing is lower than its
expected rate of return to its shareholders which is a positive sign.

➢ Efficiency ratios measures a company's ability to use its assets to generate

income. An improvement in the efficiency ratios usually translates to improved

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 profitability. Both the efficiency ratios for both the companies have observed an
increasing trend over the years. Heidelberg cement’s asset turnover ratio of
79.14% indicates that every one rupee invested in the assets of Heidelberg Cement
produces net sales of 0.7914 rupee. Whereas, the asset turnover ratio of Star
Cement indicates 109% of net sales for every rupee invested in assets. Inventory
turnover ratio indicates the number of times a company has sold and replaced its
inventory during a given period. While Heidelberg cement’s inventory turnover
ratio has decreased as compared to last year, Star Cement has managed to have a
4 years highest inventory turnover ratio.

HEIDELBERG
CEMENT STAR CEMENT
2018 2019 2018 2019
Net Profit Margin (%) 0.0704 0.1034 0.1439 0.1509
Asset Turnover Ratio 1.0972
(%) 0.7459 0.7914 0.868
Equity Multiplier 2.310634 2.232067384 2.19 1.71

ROE 12.13346 18.26517704 27.35424 28.31204

➢ DuPont analysis allows an investor to determine what financial activities are

contributing the most to the changes in ROE. The three components of DuPont
analysis are net profit margin, asset turnover ratio and equity multiplier ( i.e.
average total assets/ average shareholders’ equity). The profit margin can be
improved if costs for the company were reduced or if prices were raised, which
can have a large impact on ROE. Because average assets include components
like inventory, changes in this ratio can signal that sales are slowing down or
speeding up earlier than it would show up in other financial measures. If a
company's asset turnover rises, its ROE will improve. The equity multiplier is an
indirect analysis of a company's use of debt to finance its assets.

Here we can see that Heidelberg Cement improved its ROE from 12.13% to
18.26% by improving its net profit margin and asset turnover ratio and reducing
its debt in the company. Similarly, Star Cement also increased its ROE from
27.35% to 28.31% by improving its net profit margin and asset turnover ratio

53
 while reducing its debt. However the increase in Heidelberg Cement’s ROE is
much higher than that of Star Cement.

Overall, if I have to conclude which company is doing better based on the ratios calculated
above, I’d say Star Cement appears to be in a better position since its liquidity ratios,
profitability, solvency ratios and efficiency ratios are all better as compared to Heidelberg
Cement.

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 9.VALUATION OF COMPANIES

For valuation of these companies, I have used relative valuation and not intrinsic DCF
valuation.

Why not DCF (Discounted cash flow)?

DCF or intrinsic valuation gives company’s current value based on projections of

company’s future earnings. In a simple way DCF is calculation of company’s current
and future available cash, designated as free cash flow. These future projections of cash
are then discounted using company’s weighted average cost of capital to obtain present
value. There are primarily 3 reasons why I am not using DCF for valuation of
Heidelberg Cement India Ltd and Star Cement.

1. Operating cash flow projection: DCF model generally use 5 or 10 years of

estimates. For companies like Heidelberg Cement and Star Cement, who are still
at the growth stage, this projection of cash flow in long term future becomes
very difficult. For such companies cash flow generation is very uncertain. Any
analyst can forecast the operating cash flow for current year and couple of years
ahead but more than that cannot be estimated properly considering the volatility
with such companies.

2. Capital expenditure projection: For projection of free cash flow one has to
project the capital expenditure of company. Company’s management may guide
capex for couple of years but forecasting more than that may give misleading
figure.

3. Discount rate and growth rate assumptions: Discount rate and growth rate
assumptions are very important in DCF model as small changes in these can lead
to drastic change in value of stock. Analysts generally use weighted average cost
of capital of the firm for discount rate. But these approaches are quite theoretical
and based on many assumptions. These assumptions can change the value in real
world investing application. Perpetual growth rate or terminal value assumption
is the most susceptible part of DCFF. Assuming that anything will hold in
perpetuity is highly theoretical. For mature companies like ITC or any power

55
 and infrastructure related companies, who has long term projects and continuous
constant cash generation, it is easier to assume estimated perpetual growth rate.
But for companies like Heidelberg and Star Cement, who are still at the growth
stage one cannot decide perpetual growth rate. Using multiple based valuations
will entail fewer assumptions to value the stock than under discounted cash flow
scenario. Company’s price to earnings multiple can be calculated after every
trade, hence we have lot of data on past performance. It is always better to take
fewer assumptions and go roughly right than taking more assumption and going
absolutely wrong.

Relative valuation compares the company’s value to that of its competitors, industry
average or historical performance to find the company’s financial worth. There are
various tools for relative valuation of stocks such as price-to-earnings ratio, price-to-book
value ratio and return on equity ratio. For the purpose of valuation, I have chosen price-
to-earnings ratio. We determine the average price-to earnings ratio of the industry and
multiply it with the current market price of the stock to arrive at the target price of the
stock.

Company Name TTM PE (x) Company Name TTM PE (x)

Ultra tech Cement 22.50 Ultra tech Cement 22.50
Star Cement 13.8 Heidelberg 17.5
Ambuja Cement 17.1 Ambuja Cement 17.1
ACC Cement 23.5 ACC Cement 23.5
Orient Cement 24.33 Orient Cement 24.33
Ramco Cement 11.33 Ramco Cement 11.33
JK Cement 23.1 JK Cement 23.1
JK Lakshmi Cement 13.5 JK Lakshmi Cement 13.5
Sagar Cement 33.4 Sagar Cement 33.4

Averge Industry P/E 20.28 Averge Industry P/E 20.70

EPS Heidelberg 11.83 EPS Star Cement 5.30
Target Market Price 239.96 Target Market Price 109.69
Current Market Price 184.9 Current Market Price 94.5
Decision BUY Decision BUY

56
Conclusion:

Since the P/E of both the companies , Heidelberg Cement (17.5) and Star Cement (13.8)
is below the average industry P/E, there is scope for the companies’ stock prices to rise
owing to its future prospects and strong fundamentals I would recommend to BUY the
stocks.

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 10.REFERENCES AND BIBLIOGRAPHY

• Company’s Annual Reports

Websites:

• www.ibef.com – Report on industry analysis of Cement Sector

• www.cmaindia.org/index.html - Cement industry data
• www.nseindia.com – Stock price data

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