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Indian Cement Industry
A presentation By Zain Shaikh – LOTUS GLOBAL EQUITIES

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Outline
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Economic Analysis Industry Analysis Company Analysis Recommendation

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Economic Analysis - India

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Economic Analysis-EconomyGDP
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According to Ministry of Finance, India to grow 8% this Financial year (‘10) – vs. 6.7% in 2008 According to Indian Prime Minister, Manmohan Singh, India could see growth between 9 – 10% this year – causing Investors to reconsider their positions Economic Growth is fueled by investment in Infrastructure, which primarily comprises of Cement and Steel.

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Economic Analysis – Cement Price
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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). Increased Risk

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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
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The rupee is said to strengthen against the green back; Current rate: $1 = Rs. 47.4 Expected rate in near future: $1 = Rs. 45.0

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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
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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. 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
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Cement Industry has grown at an average of 10% in the last 3 years. - This years growth estimated to be around 9 – 10%. 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
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The Industry is filled with around 108 firms*, the top 8 of which account for more than 50% market share [according to ‘Capitaline Software’] 132 Large plants – owned by top 15 firms 365 Small plants – owned by small firms Market Structure seems to be Oligopolistic Competition

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Industry Analysis - Regulation
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Imported cement has no import duty levied on it – 0% Essential components of Cement [such as limestone and coal] have a 5% import duty Cement remains one of the highest taxed essential goods, even more regulated than its counterpart Steel. Government levies and taxes, taken together, constitute over 60 per cent or more of the ex-factory price. 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
  North Central East West Current             FY 09-10 9.9 0.3 7.9 3.6 Expected           FY  Expected                  FY  10-11 11-12 6.2 0 2 5.5 0 3 2.1 6

No drastic changes in Capacity expansion in the Central region, mainly due to th
South Total 18.1 39.8 10.8 24.5 5.3 16.4

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Industry Analysis – Demand/ Supply- Scenario
Current FY 09-10 242 Expected FY 10-11 288 Expected FY 11-12 304

Supply - Demand Scenario Installed Capacity

Increasing Surplus may cause pric
Consumption 196 215 236

Export

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Surplus

41

68

62

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Industry Analysis – Price per bag
State/ City Maharashtra – Mumbai Hyderabad Northern Region – New Delhi Ahmadabad, Baroda, Baruch Price (Rs.) /Bag 240 165 227 195 – 200 Price Increase (Rs.)/Bag 10 10 5

Source: CMIE + [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:
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Governments reallocation of the budget to suit the National Highway Development Project Cement Demand increases post Monsoon Season (heavy rains and floods) Construction activity at its peek Projects in Delhi such as the Delhi Metro and projects involving Common Wealth Games 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
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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 "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 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
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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. Talks about the Merger initiated on July 2006. The actual merger took place during August of the same year. After the merger the entity was known as Mysore cement, which on April 16th 2009, changed to Heidelberg Cement Inda. LTD

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Why the proposed merger is said to be beneficial:
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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.

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- MCL – Mysore Cement Limited - ICL – Indore Cement Limited - HIPL – heidelberg India Private Limited

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Other benefits:
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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: 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:
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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. 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:
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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. 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:
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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. 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. 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:
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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.

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Company Analysis – Financial Information –as of 8/01/10
Important Financials: Current Price (Rs.) – 13-01-10 Market Cap (Rs.) Total Debt (Rs.) Cash & Bank (Rs.) Enterprise Value (Rs.) Total Installed Capacity (MT) EV/Tonne (Rs.) EV/share (Rs.) EV/EBIDTA Heidelberg Cement 49.40 1118.37 10 337.81 790.56 3 2635.2 50.03288 3.69 x

> Current Price: Rs. 49.4 – Increasing

> Installed capacity to reach 4.7 M

> EV/tonne is at Rs. 2635, attr

> Good Operational Effi

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Other Financials: Volume: Prev. Close:

Heidelberg Cement as of 13/01/10 - 49.40 – [rediff.money]
162,145 49.00 50.45 – 48.90 51.90 – 13.45

Heidelberg Cements:

Day’s high/low (Rs.): 52wk H/L (Rs.):

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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
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Currently the Industry price for purchasing 1 ton of Cement is Rs.3500/ton By calculating the EV/ton for Heidelberg, we attained the following value: Rs. 2010/ton [Rs. 2635 updated] The Replacement cost in the Industry is set at Rs.3500/ton Vs. Rs.2010/ton [Rs. 2635 updated] 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:
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Good purchase for the medium/long term.  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: Heidelberg’s attractive investment opportunities: - Debt free – Buoyant growth – low replacement costs (per/tonne) – nature of industry

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- 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.

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