Cement Sector 101

Cement sector is one of the promising sectors in any growing economy, and it’s the same in India as well. However, most of the analysts believe there would an over-capacity in the sector in the coming years, and hence are quite bearish on it.
Overall capacity is 180 Million Ton, and another 90 MT is in the pipeline (to be added over the next 5 years)
Important Factor:

• Overall Capacity: This is again a purely volumes game, and the players are ranked as per capacity. There is as such no pricing power with any of the players, and is a relatively commodity business (except may be some premium or white cement segment).

• Geography: There are two broad regions – North and South, and both have slightly different dynamics. Currently, all the infrastructure push is in the northern region, and hence the prices here are at a premium. Given the bulky nature of cement, usually its quite difficult and cost-ineffective to transport the same within regions.

• Growth Rates: The industry growth rate is directly linked with the GDP growth rate, and more specifically, very closely with the Infrastructure growth. Currently, the cement demand growth is close to 12%.

• Operating Efficiency: The industry operates at a high utilization rate of 85%, though going forward due to high capacity addition in 2010, this is expected to come down to 80%.

• Coal Prices: Usually, coals are an important input to the process, and constitute a good amount of the total cost of materials. Roughly, a 1% rise in coal prices would lead to 35 bps fall in earnings.

• Freight Cost: Cost of transportation is also an important cost as cement is a bulky good. And that indirectly would depend upon the oil prices.

 
Some of the big companies in the sector are as follows:
 

• ACC: Currently trading at a market price of 900, the stock might be a good buy at lower levels (700). The EPS is estimated at INR 75-80 in 2009, though there may slight reduction in 2010 and 2011. High presence in the Northern markets, with a total capacity at 26 MT. It is the largest player in the Indian markets, and has a large presence in Eastern as well as Northern markets.

• Ambuja Cement: Current market price of 100, and target price of 85. EPS is INR 7-8, whereas the capacity is ~24 MT. It’s a big player in north and western region, and usually is one of most richly valued stock in the sector.

• Ultratech Cement: It’s the 2^nd largest cement company in India, and is being controlled by Aditya Birla group. Overall capacity of 23 MT, with presence in southern and western markets. Again, target buying level would be INR 800.

• Grasim: This is also one of the largest companies in the sector, with an overall capacity of 25 MT. However, this is not a pure-play cement company, and has textile exposure as well. Again, this too is controlled by Aditya Birla group (along with UTCEM), and there are plans of merger between Grasim Cement and Ultratech.

• India Cement: Has a good presence in south india, and buy target at INR 100. Current capacity is 14 MT, however, its present mostly in the southern region where there is substantial capacity addition plans. Also, they are the owners of the Chennai Super Kings, and a small part of their valuation comes from the IPL revenues as well (around INR 20-25 per share).