Sector Update | 2 June 2020
Cement
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Volumes decline sharply, but margins remain strong
In this note, we assess the performance of the Indian cement sector in light of the Mar-20
results announced thus far. The four largest companies (UltraTech, Shree, ACC, and
Ambuja), as well as several mid-caps (Birla Corp, JK Lakshmi, Orient, etc.), which account
for ~60% of the total industry capacity, have reported their results. We highlight the
following:
4QFY20 industry volumes declined 13% YoY, as expected, due to COVID-19 lockdown,
and 1QFY21 volumes are likely to decline ~40% YoY due to continued lockdown.
Realization improved 3% QoQ (5.5% YoY), driving an improvement in average EBITDA
per ton by 27% QoQ (31% YoY) to INR1,179/t. Total cost per ton also declined 3% QoQ
and 1% YoY) to INR3,673/t, led by lower power and fuel and freight cost.
For FY20, all large players reported decline in net working capital by three–eight days
of sales, whereas mid-sized players such as Birla Corp, JKLC, and Orient reported an
increase in net working capital.
Given the weak demand outlook, several companies (Shree, JK Lakshmi, ACC, and
Orient) have kept their expansion plans on hold, while several others (Ambuja,
UltraTech, and Birla Corp) have postponed the commissioning of ongoing expansions
by 3–12 months. We estimate nearly 15mtpa of planned capacities have been pushed
beyond FY22.
Aggregate volumes declined 13%
YoY
Aggregate volumes (mt)
72
54
36
18
0
Chg yoy %
28%
14%
0%
-14%
-28%
Demand impacted by lockdown; expect ~40% YoY decline in 1QFY21
Refer to our earlier report
Industry volumes declined 13% YoY in 4QFY20, as expected, due to national
lockdown and plant shutdowns from March 24 to combat COVID-19.
We expect 1QFY21 volumes to decline ~40% YoY due to extended lockdown in
April and May. April volumes fell 86% YoY (as per core industry data released by
the Office of the Economic Advisor of India), but May has recovered strongly to
decline only 10-15% YoY as per our channel checks.
Most of the companies in the post-results conference calls reported utilization
has improved to 70–80% currently as demand is strong in the rural and semi-
urban areas with lower COVID-19 cases. Demand in urban areas however
remains weak due to higher COVID-19 cases as well as migrant laborers leaving
for their villages slowing down the pace of construction activity.
Average industry realization (based on companies that have reported) increased
5.5% YoY / 3% QoQ, led by major price hikes in the North (15% YoY) and Central
(8% YoY) regions. Prices rose 4–5% YoY in the West and East regions, and fell 2%
YoY in the South region.
As a result, companies with a higher exposure in North/Central (such as Shree,
Ambuja, and JK Lakshmi) witnessed a realization increase of 6–10% YoY. On the
other hand, companies with a higher exposure in South/East witnessed flat
realization (such as Orient and ACC) or lower realization (Sagar Cement) YoY.
According to our channel checks, cement prices have increased INR10–20/bag
YTDFY21 across regions, except South, where hikes are higher by INR40–
80/bag. These hikes are supported by supply constraints (in logistics and labor)
and a strong production discipline in a weak demand environment.
Realization improves on price hikes across regions (except South)
Amit Murarka - Research analyst
(Amit.Murarka@motilaloswal.com) +91 22 7199 2309
Basant Joshi - Research analyst
(Basant.Joshi@motilaloswal.com)
8 August 2016
Investors are advised to refer through important disclosures made at the last page of the
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.
1
Research Report.
 Motilal Oswal Financial Services
Cement
Cost remains benign, but offset by negative operating leverage
The total cost per ton for the industry declined 1% YoY (and 3% QoQ) to
INR3,673/t in 4QFY20 despite the adverse effect of negative operating leverage
(lower fixed cost absorption due to lower volumes on account of COVID-19). The
reduction was led by lower power and fuel and freight costs.
UltraTech (UTCEM) reported average petcoke consumption cost in 4QFY20 was
USD70/t v/s USD80/t in 3QFY20. Spot petcoke price is USD60/t, the full benefit
of which would be realized in Q2FY21 due to the two-month lag in consumption.
During the quarter, on a per ton basis, other expenses (INR726/t) and staff costs
(INR295/t) were higher by 14% YoY and 25% YoY, respectively, due to negative
operating leverage (13% YoY decline in volumes).
UTCEM targets a 10% reduction in overhead cost (advertising, travel, etc.) in
FY21. Other companies are also focused on reducing fixed cost.
Although variable cost is likely to decline in FY21 on account of lower fuel and
other input costs, this benefit is likely to be negated by higher per ton fixed cost
(staff and other expenses). We estimate the total cost to rise 3% YoY in FY21.
Working capital decline for large players; balance sheet improves
In FY20, all large players (ACC, Ambuja, UTCEM, and SRCM) reported a reduction
in net working capital (NWC) by 3-8 days. On the other hand, Birla Corp, Orient,
and JKLC reported an increase in net working capital by 4-12 days.
The balance sheet positions of most of the cement companies improved in FY20.
While UTCEM reduced net debt by 24% YoY to INR164b, ACC and Ambuja
reported a 51% and 42% YoY increase, respectively, in net cash. Shree reported a
net cash balance of INR41.2b (v/s net debt of INR2b in FY19). While net debt for
Birla Corp remained flat at INR35.0b, it declined 9% YoY to INR11b for Orient
Cement. JKLC’s net debt declined 18% YoY to INR10.1b.
Net debt to EBITDA improved significantly in the industry, with the highest net
debt to EBITDA reported by Orient Cement (3.1x v/s 3.9x in FY19), and the
lowest by UTCEM (1.7x v/s 3.0x in FY19). ACC, Ambuja, Shree Cement, and
Heidelberg Cement reported net cash to EBITDA in the range of 1.1–2.2x.
Focus on cash conservation; capacity expansions on hold
Due to the adverse demand environment caused by COVID-19, companies have
shifted their focus from growth to cash conservation.
While all new capacities that were in the planning stage have been put on hold
indefinitely, projects in the execution stage have been delayed by three–nine
months due to the unavailability of labor and focus on cash conservation.
UTCEM has deferred capex for its 2.2mtpa Cuttack grinding unit to FY22. The
company has guided for a lower capex spend of 10b in FY21 (v/s INR17b in
FY20), most of which is on account of normal maintenance capex.
JKLC has put its planned capex for a new 2.5–3mtpa integrated plant in the
North on hold, which would have amounted to capex of INR14–15b.
Shree has also put its expansion plans in East and South on hold.
Birla Corp has put capex of INR2.5b for its 1.2mtpa Kundanganj grinding unit on
hold. The commissioning of the Mukutban greenfield capacity of 3.9mtpa has
been postponed by about three months to Jun’21.
2 June 2020
2
 Motilal Oswal Financial Services
Cement
Valuation and view
The COVID-19 pandemic has dented the prospects of the Indian Cement sector.
We estimate all-India clinker utilization to drop to 62%/72% in FY21/FY22E (from
79% in FY19) on account of a 3.5% capacity CAGR amid weak expected volumes.
Given the sub-optimal expected utilization across regions, the sustenance of
production discipline would be critical to prices and margins. This, we believe,
would be tougher to achieve for regions with higher capacity growth; East India,
with ~30% capacity growth, is the worst placed.
In such an uncertain demand environment, we prefer companies that: a) are
moving down the cost curve, b) have strong balance sheets, and c) provide
valuation comfort. Thus, UltraTech and ACC are our top large-cap picks and JK
Cement our top mid-cap pick.
Exhibit 1: Cement: Valuation
summary
CMP
(INR)
UltraTech
Shree Cement
Ambuja Cement
ACC
The Ramco Cement
Dalmia Bharat
JK Cement
Birla Corp
India Cement
JK Lakshmi
3,833
21,184
191
1,288
641
564
1,201
532
127
241
Mcap
(USD b)
14.6
10.1
5.0
3.2
2.0
1.4
1.2
0.5
0.5
0.4
RECO
Buy
Neutral
Neutral
Buy
Neutral
Buy
Buy
Buy
Neutral
Buy
FY20E
26.0
48.7
16.9
17.8
27.0
49.3
20.4
8.1
34.9
10.7
P/E (x)
FY21E
41.3
70.9
25.3
31.7
42.4
NA
33.5
13.9
60.0
18.5
FY22E
24.1
40.7
19.6
20.0
26.8
72.0
16.9
8.8
18.7
11.9
13.4
19.4
9.2
8.0
15.1
6.1
9.8
4.5
10.1
5.5
EV/EBITDA (x)
FY20E
FY21E
15.6
23.3
11.7
11.8
18.3
8.0
11.2
5.5
10.8
6.8
FY22E
11.6
16.6
8.9
7.6
13.5
5.7
7.7
5.4
8.1
5.2
FY20E
150
234
88
77
110
66
92
52
60
37
EV/Ton(x)
FY21E
144
200
84
77
111
53
91
53
59
36
FY22E
139
188
83
69
112
46
86
55
58
33
Story in charts
Exhibit 2:
Aggregate volumes declined 13% YoY
Aggregate volumes (mt)
18%
5%
6%
8%
7%
-1%
0%
7%
7%
Chg yoy %
23%
14%
13%
19%
20%
16%
18%
0%
-1%
0%
-13%
Source: MOFSL, Company
2 June 2020
3
 Motilal Oswal Financial Services
Cement
Exhibit 3:
All-India cement prices are up 3% YoY in May’20
All India retail price INR/ 50 kg bag
450
390
330
270
210
150
% Change YoY (RHS)
24%
12%
0%
-12%
-24%
7%
-1%
1%
1%
0%
Exhibit 4:
Realizations were up 6% YoY / 3% QoQ in 4QFY20
Aggregate Realizations (INR)
11%
7%
Chg yoy %
6%
3%
Exhibit 5:
Imported coal prices are down 12% YoY in May’20
Imported coal price/ t in INR (LHS)
YoY growth (%)
Exhibit 6:
Imported petcoke prices are down 32% YoY in
May’20
Imported petcoke price in USD
YoY growth (%)
88
86
80
78
76
75
73
67
68
68
70
60
60
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 7:
Power and fuel costs fell 5% YoY
Aggregate Power and fuel cost/t
24%
10%
-1%
19% 19% 20%
12% 13% 11%
Chg yoy %
Exhibit 8:
Total cost/t declined 3% QoQ and 1% YoY
8%
Total cost/t (INR)
6%
3%
2%
3%
-5%
5%
3%
5%
4%
1%
Chg yoy %
3%
-3%
0%
-1%
Source: MOFSL, Company
Source: MOFSL, Company
Exhibit 9:
Aggregate EBITDA/t increased 31% YoY and 27% QoQ
Aggregate EBITDA/t (INR)
982
856
836
16%
6%
4%
Chg yoy %
906
23%
-13%
-16%
-14%
-1%
858
897
1,252
46%
994
38%
930
29%
31%
1,179
721
722
Source: MOFSL, Company
2 June 2020
4
 Motilal Oswal Financial Services
Cement
Exhibit 10:
Working capital reduction observed, except for Birla Corp, JK Lakshmi and Orient
FY18
Inventory days
ACC*
Ambuja Cement *
Ultratech Cemco
Birla Corporation
Shree Cement
JK Lakshmi Cem.
Orient Cement
Heidelberg Cement
Receivables days
ACC*
Ambuja Cement*
Ultratech Cemco
Birla Corporation
Shree Cement
JK Lakshmi Cem.
Orient Cement
Heidelberg Cement
Payables days
ACC*
Ambuja Cement*
Ultratech Cemco
Birla Corporation
Shree Cement
JK Lakshmi Cem.
Orient Cement
Heidelberg Cement
Net working capital Days
ACC*
Ambuja Cement*
Ultratech Cemco
Birla Corporation
Shree Cement
JK Lakshmi Cem.
Orient Cement
Heidelberg Cement
39
37
38
44
58
34
27
25
18
11
26
12
16
10
25
4
50
37
28
33
27
34
34
45
7
10
37
23
47
10
18
(16)
FY19
41
41
36
44
49
29
27
29
21
15
24
15
23
10
26
4
47
37
28
35
14
48
27
48
15
19
33
23
58
(9)
26
(15)
FY20
27
30
36
42
44
37
36
25
15
16
19
13
25
8
24
4
34
30
30
28
16
42
27
43
7
16
25
27
53
3
33
(15)
Change (in days)
(15)
(11)
(0)
(2)
(6)
8
9
(4)
(7)
1
(5)
(1)
3
(2)
(2)
(0)
(13)
(7)
3
(7)
2
(6)
(0)
(4)
(8)
(3)
(8)
4
(5)
12
8
(0)
Source: MOFSL, Company; *follows calendar year
Exhibit 11:
Net debt position in control; net debt to EBITDA improves for industry in FY20
Net Debt (INR b)
FY18
ACC*
Ambuja Cement*
UltraTech Cemco
Birla Corporation
Shree Cement
JK Lakshmi Cem.
Orient Paper
Heidelberg Cement
(26.4)
(35.1)
138.3
36.8
(23.5)
15.7
12.8
(1.9)
FY19
(30.0)
(33.0)
216.9
35.1
2.0
12.3
12.0
(2.7)
FY20
(45.4)
(46.8)
164.5
35.0
(41.2)
10.1
11.0
(6.0)
FY18
(1.4)
(1.8)
2.3
4.6
(1.0)
3.8
4.0
(0.5)
Net Debt to EBITDA (x)
FY19
(1.5)
(1.7)
3.0
3.7
0.1
3.0
3.9
(0.5)
FY20
(1.9)
(2.2)
1.7
2.6
(1.1)
1.7
3.1
(1.1)
Source: Company, MOSL; *follows calendar year
2 June 2020
5
 Motilal Oswal Financial Services
Cement
NOTES
2 June 2020
6
 Motilal Oswal Financial Services
Cement
Explanation of Investment Rating
Investment Rating
Expected return (over 12-month)
BUY
>=15%
SELL
< - 10%
NEUTRAL
< - 10 % to 15%
UNDER REVIEW
Rating may undergo a change
NOT RATED
We have forward looking estimates for the stock but we refrain from assigning recommendation
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following 30 days take appropriate measures to make the recommendation consistent with the investment rating legend.
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2 June 2020
7
 Motilal Oswal Financial Services
Cement
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The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or
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informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing
in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.
The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment
objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. Each recipient of this
document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document
(including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed
may not be suitable for all investors. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade securities - involve
substantial risk and are not suitable for all investors. No representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and
opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated
as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and
alternations to this statement as may be required from time to time without any prior approval. MOFSL, its associates, their directors and the employees may from time to time,
effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform
investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate,
distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that
is already available in publicly accessible media or developed through analysis of MOFSL. The views expressed are those of the analyst, and the Company may or may not
subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or
indirectly, to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who
is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or
which would subject MOFSL to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions
or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not
its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits
that may arise from or in connection with the use of the information.
The person accessing this information specifically agrees to exempt MOFSL or any of its affiliates or employees
from, any and all responsibility/liability arising from such misuse and agrees not to hold MOFSL or any of its affiliates or employees responsible for any such misuse and further
agrees to hold MOFSL or any of its affiliates or employees free and harmless from all losses, costs, damages,
expenses that may be suffered by the person accessing this
information due to any errors and delays.
Registered Office Address: Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai-400025; Tel No.: 022 71934200/ 022-71934263;
Website www.motilaloswal.com.CIN no.: L67190MH2005PLC153397.Correspondence Office Address: Palm Spring Centre, 2nd Floor, Palm Court Complex, New Link Road,
Malad(West), Mumbai- 400 064. Tel No: 022 7188 1000.
Registration Nos.: Motilal Oswal Financial Services Limited (MOFSL)*: INZ000158836(BSE/NSE/MCX/NCDEX); CDSL and NSDL: IN-DP-16-2015; Research Analyst:
INH000000412. AMFI: ARN - 146822; Investment Adviser: INA000007100; Insurance Corporate Agent: CA0579;PMS:INP000006712. Motilal Oswal Asset Management Company
Ltd. (MOAMC): PMS (Registration No.: INP000000670); PMS and Mutual Funds are offered through MOAMC which is group company of MOFSL. Motilal Oswal Wealth
Management Ltd. (MOWML): PMS (Registration No.: INP000004409) is offered through MOWML, which is a group company of MOFSL. Motilal Oswal Financial Services Limited is
a distributor of Mutual Funds, PMS, Fixed Deposit, Bond, NCDs,Insurance Products and IPOs.Real Estate is offered through Motilal Oswal Real Estate Investment Advisors II Pvt.
Ltd. which is a group company of MOFSL. Private Equity is offered through Motilal Oswal Private Equity Investment Advisors Pvt. Ltd which is a group company of MOFSL.
Research & Advisory services is backed by proper research. Please read the Risk Disclosure Document prescribed by the Stock Exchanges carefully before investing. There is no
assurance or guarantee of the returns. Investment in securities market is subject to market risk, read all the related documents carefully before investing. Details of Compliance
Officer: Name: Neeraj Agarwal, Email ID: na@motilaloswal.com, Contact No.:022-71881085.
* MOSL has been amalgamated with Motilal Oswal Financial Services Limited (MOFSL) w.e.f August 21, 2018 pursuant to order dated July 30, 2018 issued by Hon'ble National
Company Law Tribunal, Mumbai Bench.
2 June 2020
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