Industry Comment Cement

ICRA Management Consulting Services Limited

IMaCS Research & Analytics

CEMENT

FEBRUARY 2019

Industry Research

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Industry Comment Cement

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Industry Comment Cement

T ABLE OF CONTE NT S
SUMMARY OUTLOOK ..........................................................................................................................4
OUTLOOK ............................................................................................................................................................................. 4
RECENT DEVELOPMENTS ....................................................................................................................5
RECENT FINANCIAL PERFORMANCE ................................................................................................7
KEY RATIOS (FY2018)........................................................................................................................................................ 9

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Industry Comment Cement

S U M M A RY O U T LO O K
Outlook
The real estate and housing sector consumes around 60-65% of the domestic production of
cement. Domestic cement production increased 13.9% during 9MFY2019 to 245.8 mt, compared
with growth of 6.3% in FY2018 (to 298 mt). The high growth is partly attributable to base effect as
production had declined 1.4% in H1FY2018. Since growth was high at 14.6% in H2FY2018,
production growth could be marginally lower at 12-13% in H2FY2019 but still remain higher than
during FY2013-17. Compared with a decline from Q3FY2017, production and demand growth has
improved from Q2FY2018, with production growth improving from 0.6% in Q2FY2018 to 18.5% in
Q4FY2018. Production increased at a high rate of 12.9% to 83.3 mt in Q3FY2019. Growth in real
gross value added in construction has improved from 1.8% in Q1FY2018 to 7.8% in Q2FY2019, and
annual growth recovered from 1.3% in FY2017 to 5.7% in FY2018. Cement demand growth could
improve to 8-9% in FY2019. Cement companies could see some recovery in demand because of
recent focus on infrastructure and housing in the Union Budget 2018-19. Credit allocation for the
rural, agriculture and allied sector has been increased to Rs. 1.1 trillion. In addition, allocation to
infrastructure sector has been increased 21% to Rs. 5.97 trillion. Budgetary allocation for the roads
sector (including PMGSY) has been raised by 7% to Rs. 895 billion. Economic growth is projected to
recover in FY2019. Private investment in construction and machinery could recover gradually as
excess capacity diminishes, and the Goods and Services Tax (GST) and other measures to improve
the ease of doing business are being implemented. However, large non-performing loans and high
leverage of some companies are holding back investment.

Domestic cement prices declined 0.1% in 9MFY2019 and prices have been declining since early-
February 2018 because of oversupply and lower than expected demand in Southern states. Prices
could stabilise during the short-term because of seasonal increase in demand in H2FY2019,
increase in power costs and higher freight rates.

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Industry Comment Cement

R E C E N T D E V E LO P M E N T S
 The real estate and housing sector consumes around 60-65% of the domestic production of
cement. Domestic cement production increased 13.9% during 9MFY2019 to 245.8 mt,
compared with growth of 6.3% in FY2018 (to 298 mt). The high growth is partly attributable to
base effect as production had declined 1.4% in H1FY2018. Since growth was high at 14.6% in
H2FY2018, production growth could be marginally lower at 12-13% in H2FY2019 but still
remain higher than during FY2013-17. Compared with a decline from Q3FY2017, production
and demand growth has improved from Q2FY2018, with production growth improving from
0.6% in Q2FY2018 to 18.5% in Q4FY2018. Production increased at a high rate of 12.9% to 83.3
mt in Q3FY2019. Growth in real gross value added in construction has improved from 1.8% in
Q1FY2018 to 7.8% in Q2FY2019, and annual growth recovered from 1.3% in FY2017 to 5.7% in
FY2018. Cement demand growth could improve to 8-9% in FY2019. Cement companies could
see some recovery in demand because of recent focus on infrastructure and housing in the
Union Budget 2018-19. Credit allocation for the rural, agriculture and allied sector has been
increased to Rs. 1.1 trillion. In addition, allocation to infrastructure sector has been increased
21% to Rs. 5.97 trillion. Budgetary allocation for the roads sector (including PMGSY) has been
raised by 7% to Rs. 895 billion. Economic growth is projected to recover in FY2019. Private
investment in construction and machinery could recover gradually as excess capacity
diminishes, and the Goods and Services Tax (GST) and other measures to improve the ease of
doing business are being implemented. However, large non-performing loans and high
leverage of some companies are holding back investment.

In di a’s Ce me n t Pro d u cti o n a n d G ro w th

400 16%
Production-mt (LS)
Growth-RS 14%

350 337.9
12%

10%
297.7
300 283.5 280.0 8%
270.9
255.8
246.6 6%
250
229.5
216.0 4%
206.6
2%
200 186.9

0%

150 -2%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019F

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Industry Comment Cement

Qua r te rl y Ce me n t P ro d uc ti o n a n d Gr o wt h

90,000 Production (thousand tonnes)-LS 25%

Growth (yoy)-RS
85,000 20%

80,000 15%

75,000 10%

70,000 5%

65,000 0%

60,000 -5%

55,000 -10%

50,000 -15%
Q1FY15 Q3FY15 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19

 Domestic cement prices declined 0.1% in 9MFY2019 and prices have been declining since
early-February 2018 because of oversupply and lower than expected demand in Southern
states. Prices could stabilise during the short-term because of seasonal increase in demand in
H2FY2019, increase in power costs and higher freight rates.

A nn ual a n d Q ua r te rl y Cha n ge i n P ri c es o f Cem e nt

(yoy), percent
2016 2017 2018 Q4 Q1 Q2 Q3
FY18 FY19 FY19 FY19
CEMENT, LIME AND PLASTER -0.9% 0.6% 2.9% 4.6% 0.1% 0.0% -0.4%
Lime and calcium carbonate 0.5% -0.5% 4.6% 6.3% 4.6% 4.1% 4.9%
Clinker 2.8% -0.3% 2.8% 3.6% -4.8% -4.7% -6.5%
Ordinary Portland cement -2.8% 0.8% 3.3% 5.6% 0.2% 0.7% 0.6%
slag cement 1.3% -0.4% 7.0% 10.9% 7.5% 1.5% 0.1%
Pozzolana cement -1.8% 1.5% 1.4% 2.0% -2.9% -1.1% -0.6%
White cement 1.5% 1.6% -0.1% 0.9% 3.9% 5.1% 5.3%
Cement superfine -2.9% 0.5% 2.8% 2.1% 1.6% -1.4% -1.7%
Source: GoI, IMaCS Analysis

 The regional demand-supply variations in the Indian market have resulted in price differences
across regions. Prices are generally lower in Southern regions where there is normally a supply
surplus. However, prices are higher in Eastern and Western regions where shortages exist.
Further, from late-2009, cement prices have increased at a low rate in all regions because of a
decline in cement consumption.

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Industry Comment Cement

Re gi o na l Ce m en t Pri c es
Rs./50 kg bag
Mumbai Ahmedabad
400 Delhi Kolkata
Chennai
380

360

340

320

300

280

260

240

220

200
Nov-15

Nov-16

Nov-17

Nov-18
Mar-15

May-15

Mar-16

May-16

Mar-17

May-17

Mar-18

May-18
Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

Jan-19
Sep-15

Sep-16

Sep-17

Sep-18
R E C E N T F I NA N C I A L P E R F O R M A N C E
During 9MFY2019, operating income (OI) of listed sample companies in the industry increased 12%.
OI growth has improved from 16% in Q3FY2017 to 14% in Q2FY2018, and 15% in Q1FY2019.
However, OI growth has been declining to 12% in Q2FY2019 and 9% in Q3FY2019 because of
fading of the base effect. Margins have declined from Q1FY2018 because of higher growth in
energy costs.

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Industry Comment Cement

Rec e nt Fi na nci a l Per f orm a n ce

Rs. Million, except percentages
Rs. Million Change % of OI
(%)
9MFY 2019 2018 2019 2018
Net Sales/OI 865,366 774,954 11.7 100.0 100.0
Raw Material Cost 158,202 142,973 10.7 18.3 18.4
Employee Costs 53,996 50,994 5.9 6.2 6.6
Power & Fuel 190,301 150,243 26.7 22.0 19.4
Other Operating Costs 340,639 297,854 14.4 39.4 38.4
Cost of Sales 743,137 642,064 15.7 85.9 82.9
OPBDIT 122,229 132,890 -8.0 14.1 17.1
Interest 27,102 26,382 2.7 3.1 3.4
Depreciation 48,175 43,572 10.6 5.6 5.6
OPBT 46,952 62,936 -25.4 5.4 8.1
Other Income 19,745 22,152 -10.9 2.3 2.9
PBT 66,697 85,088 -21.6 7.7 11.0
Tax 9,154 23,787 -61.5 1.1 3.1
PAT 57,543 61,301 -6.1 6.6 7.9

On a quarterly basis, operating margins declined from 15.4% during Q3FY2018 to 13.3% in
Q3FY2019.

Tre n ds i n O pe ra ti n g I nco me a n d O per ati n g M ar gi ns

OI (Rs. million) Operating Margin

320,000 22%

300,000
20%
280,000
18%
260,000

240,000 16%

220,000
14%
200,000
12%
180,000

160,000 10%
Q1FY15 Q3FY15 Q1FY16 Q3FY16 Q1FY17 Q3FY17 Q1FY18 Q3FY18 Q1FY19 Q3FY19

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Industry Comment Cement

Key Ratios (FY2018)

Item
PDBIT/Net Sales 18.9%
Operating Margin 16.9%
Net Margin 6.7%
Return on Capital Employed (ROCE) 10.0%
Interest Coverage 3.2
Debt-Equity 0.7
Inventories Days 50
Receivables days 22
Current Ratio 1.2

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