Industry Risk Score : Cement and Cement Products

Executive Summary

India is the second largest cement market in the world after China, both in production and consumption. Domestic capacity stood at 455 million tonnes as of FY 2016-17, with 575 operational cement plants in the country1. There was a capacity addition of 133 million tonnes per annum during FY13-FY17.

The demand and supply scenario in the cement and cement products industry looks robust and can be attributed to increasing government spending on affordable housing, increase in private housing and growth in urban infrastructure, roads and irrigation spends. However, cement being a bulk commodity and a freight-intensive industry, efficient transportation and stock turnover continue to be a prominent monitorable for manufacturers. A large proportion of cement production in India is transported through the road network; factors such as poor road connectivity to remote areas continue to pose supply chain management related risks.

The Indian cement industry is organised and consolidated in nature, where top 20 companies account for around 70% of the total production. High capital cost, long gestation period and access to limestone reserves act as barriers to entry for new players. Smaller regional competitors, however, continue to gain market share by discounting their prices and building pressure on leading cement companies.

The industry faces risks in terms of raw material costs due to its dependence on limestone, the supply of which is government controlled under the Mines and Minerals (Development and Regulations) Act, 1957, (MMDR Act) and is subject to periodic licence fee review and renewal. Due to the nature of its business, the cement manufacturing industry is subject to operating risks and requires investments towards requisite safety requirements and standards. It is also subject to various central and state environmental laws and regulations relating to pollution control.

Acuité believes that the Indian cement industry will register healthy growth of around 5 per cent in FY 2018-19. Adequate capacities, boost in domestic consumption and favourable government policies will help the industry register healthy growth over the medium term.

Key Risks& Attributes

  • Seasonal and cyclical demand
  • Higher installed capacity vis-à-vis demand, leading to underutilisation
  • Regional oligopolistic market
  • Dependence on limestone as the key raw material
  • Energy intensive industry
  • Exposure to environmental laws and regulations, susceptible to sudden changes in government policies

Demand & Supply Scenario


The demand for cement and cement products is closely linked to the overall economic growth. This is led by government spending in affordable housing, growth in urban infrastructure, road, and irrigation spends and increase in private housing. The Union Budget 2018-19 doubled the allocation for affordable housing to Rs. 8.98 billion1. The Government of India has decided to adopt cement instead of bitumen for the construction of all new road projects as cement is more durable and cheaper to maintain than bitumen in the long run. Further, projects such as dedicated freight corridors, ports and metro rail projects are underway. There have also been positive moves in areas related to ease of doing business and opening up of more areas for foreign investment through the automatic route. Cement industry (including gypsum products) attracted foreign direct investment worth USD 5.25 billion between April 2000 and December 2017.

Cement products primarily comprise ready mix concrete (RMC), cement bonded particle board (CBPB), cement blocks and other ancillary products. Demand for other products is driven by housing and infrastructure development. RMC is a high growth product with an estimated market size of Rs. 50-60 billion. Currently, only 5% of the cement production is consumed by RMC, as against developed countries’ average of 80%. Other products are sold mostly by unorganised local players. Of the total capacity, 98% lies with the private sector, and the rest with the public sector. Capacity utilisation for the cement industry is estimated at 71-72%, exposing it to risks related to capacity underutilisation and high fixed costs.

Further, cement being a bulk commodity, is freight intensive and transporting it over long distances affects the margins. Thus, the cement industry is largely regional in nature on account of significant transport costs involved. Southern India has almost one-third of the country's total installed cement capacity. However, supply chain management continues to be a prominent monitorable for players. As cement quality deteriorates upon contact with moisture over a period of time, prolonged storage or exposure to moisture during transport may result in such cement stocks being written off. A large proportion of cement production in India is transported through the road network; factors such as poor road connectivity to remote areas continue to pose supply chain management related risks.

Acuité expects that the strong industry dynamics and favourable government initiatives in housing and infrastructure spending will extend an overall boost to the cement sector over the long term.

Nature & Extent of Competition


The Indian cement industry is more organised and consolidated now than it was a decade ago. The top 20 companies account for around 70% of the total production. The top five players as per market share in the Indian cement industry are UltraTech Cement Limited, ACC Limited, Ambuja Cements, Shree Cements Limited and Nuvoco Vistas Corporation Limited.

The Indian cement market is largely consolidated, with large players’ partially controlling supply. Substantial market concentration among large players is leading to low bargaining power of buyers. High capital cost, long gestation period and access to limestone reserves act as significant barriers to entry. High distribution and marketing costs associated with the commoditised product, and requirement of several government approvals for setting up new plants add to the entry barriers. Smaller regional competitors, however, continue to gain market share by discounting their prices and building pressure on leading cement companies to lower their prices.

Though there are partial substitutes such as asphalt, glass, steel, and wood, cement practically has no direct substitutes. Given the high transportation costs and the commoditised (undifferentiated) nature of the product, competition in the cement industry is mostly local in nature. Larger plants can earn better margins by achieving economies of scale and command some pricing power in their region. Further, companies that have a strong distribution network and retail presence tend to have better realisations.

Acuité believes that the competitive landscape in the cement industry will continue to be moderate. Top 15-20 companies are expected to dominate 80% of the market in the medium term.

Input Related Risk


Limestone is the primary raw material for cement industry. Other principal raw materials include iron ore, gypsum, fly ash, slag, coal and pet coke.

Limestone mining rights are government controlled. Typically, large cement manufacturers engage in the mining of limestone and pay royalty or dead rent to the government. Limestone mining rights are subject to periodic compliance checks and clearances by various government bodies and royalty amounts are subject to periodic reviews, posing input risk in terms of availability and pricing of this key raw material. The amendment to the MMDR Act in 2016, allowing the transfer of captive mines granted through non-auction routes, has been a positive move for the industry.

Other raw materials are sourced from third-party suppliers or the open market and are subject to general business risks related to price fluctuations and availability.

The cement industry is energy intensive, with energy costs comprising 35-50%1 of the total expenditure. Therefore, dedicated and low-cost supply of energy is one of the most critical factors in cement manufacturing. Cement companies are increasingly employing cheaper sources of energy such as waste heat recovery power generation, captive thermal power plants based on coal, and solar power, wherever feasible.

The industry employs a sizeable number of contract labourers, which varies based on the nature and extent of work. Productivity of workforce, and recruitment and retention of technical personnel with the requisite skills are continuous challenges for most manufacturing facilities. Due to the polluting nature of cement manufacturing, the industry is subject to operating risks and has to comply with safety requirements and standards.

Acuité believes that the dependence of the industry on limestone availability and prices, fuel costs, transport costs and availability of skilled labour, poses moderate risk to the cement industry in the medium term.

Regulatory Risk


Limestone mining is governed by the MMDR Act, 1957 and its recent amendment in 2016. Mining lease is required to be obtained from the relevant state government for limestone mining, which has to be renewed from time to time. Players are susceptible to compliance risk, and any slippages can lead to adverse actions such as fines, restrictions, revoking or varying the mining rights or changing in the royalty amount.

Further, the cement industry is subject to various central and state environmental laws and regulations relating to pollution control. Increasing impetus on pollution control and environment protection regulations may impose new liabilities on manufacturers in the form of additional investment in pollution control equipment.

While cement and most of the related products fall in the highest Goods and Services Tax (GST) rate1 slab of 28%, RMC at 18% and CBPB at 12%, the overall the industry may stand to gain in the new tax regime. The higher tax rates, to some extent, would be offset by the low tax rate of 5% on the primary inputs such as limestone and coal and no tax being applied to electricity used by manufacturing plants. Consolidation of warehousing activities and lower transportation costs may further improve operational efficiencies.

Acuité believes that the risk faced by the cement industry with respect to government regulations is moderately favourable. This is mainly due to constant risk related to sudden change in policies related to environment protection, among others.

Technology Risk


Manufacturing of cement is technology and capital intensive. Frequent advancements in technology can often render existing technologies and equipment obsolete, requiring substantial new capital expenditure.

Most of the Indian cement plants employ the environment friendly dry process kiln technology, which is one of the most advanced technologies to manufacture cement. The industry has progressively reduced its thermal energy consumption from 800-900 kcal/kg of clinker in the 1980s to 650-750 kcal/kg in 2015. Similarly, power consumption registered a remarkable improvement from 105-115 kWh/tonne cement to 70-90 kWh/tonne cement during the period1.

With periodic capital investments and technology upgrades, large organised players face low risk of technology change vis-a-vis smaller players in the industry.

With most large players using advanced technologies already, Acuité believes that the industry faces low risk in the medium term on account of continuous advancement in technology and related capital expenditure.

Operating Margin


In terms of net sales, Cement industry witnessed a consistent growth in the last three years and reported a robust Y-o-Y increase of 10% during FY16-FY18. Industry also witnessed stable and consistent operating margins at around 18% in FY 2017-18 and FY 2016-17, reflecting a highly favourable position. Average EBITDA margins for the industry have been at 18% for FY 2016-18. Key drivers included robust sales growth and efficient cost management.

Interest Coverage


Despite the overall interest expense increase during FY 16-18, improved profitability resulted in an improved average interest coverage ratio at 4.1 times during FY 2017-18 compared to 3.7 times in FY 2016-17. Overall, average industry interest coverage ratio was reported as highly favourable at 4.46 times during FY 16-18.

Return on Capital Employed


Industry ROCE remained unfavourable during the period FY 16-18 as the average ROCE for the three-year period was reported as 6%. Further, decreasing PAT margins presents a concerning trend of the industry as the industry ROCE was reported as 5% in FY 2017-18, 6% in FY 2016-17, and 7% in FY 2015-16.

Debt / Equity


The industry showed a stable and highly favourable debt-equity ratio with an average of 0.31 times, during the three-year period. Debt-Equity ratio has been stable in FY 2017-18 and was reported as 0.4 times compared to 0.3 times in FY 2016-17.

GCA Days


Though gross current assets (GCA) remained highly favourable during FY 16-18, the industry presented a slight concerning trend in terms of GCA increasing from 55 days in FY2016-17 to 60 days in FY2017-18. The industry had an average GCA of 57 days, during the three-year period.

IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating 'High Risk' and 6 indicating 'Highest Safety'. The intermediate scores are defined in the table below:

Fact Sheet (As on Year Ended March 31st) SUM Unit 201803 201703 201603
Net Sales Rs. Cr. 83,417 77,350 75,855
OPBDIT (Excl. NOI) Rs. Cr. 15,367 14,024 13,054
Depreciation Rs. Cr. 4,280 3,992 3,819
PAT Rs. Cr. 5,652 5,373 5,167
Net Cash Accruals Rs. Cr. 9,933 9,364 8,987
Networth Rs. Cr. 74,092 69,830 57,477
Total Debt Rs. Cr. 27,533 17,860 16,494
Average Unit 201803 201703
EBITDA Margin % 18% 18%
PAT Margin % 7% 7%
ROCE % 5% 6%
Interest Coverage Times 4.1 3.7
Debt to Equity Times 0.4 0.3
Debt to EBITDA Times 1.8 1.3
GCA Days Days 60 55

The entities considered in the static pool are as under:

  • Ambuja Cements Ltd.
  • Birla Corporation Ltd.
  • Heidelberg Cement India Ltd.
  • India Cements Ltd.
  • J K Cement Ltd.
  • J K Lakshmi Cement Ltd.
  • O C L India Ltd. [Merged]
  • Orient Cement Ltd.
  • Ramco Cements Ltd.
  • Star Cement Ltd.
  • Ultratech Cement Ltd.


IRS Definitions

Acuité Industry Risk Scores are assigned on a six-point scale, with 1 indicating ‘High Risk’ and 6 indicating ‘Highest Safety’. The intermediate scores are defined in the table below:

Industry Risk Score Risk classification of the Industry
ACUITE IRS 1 Highly Unfavourable
ACUITE IRS 2 Unfavourable
ACUITE IRS 3 Neutral
ACUITE IRS 4 Marginally Favourable
ACUITE IRS 5 Favourable
ACUITE IRS 6 Highly Favourable



Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.

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