Quantitative Analysis of Cement Sector in India
India ranks second in terms of the largest cement producer in the world. In FY20, cement production in India reached 329 million tonnes, which is expected to grow and reach 381 million tonnes by FY22 (IBEF Report).
The focus of the Government of India towards Infrastructure development and the announcement made about this in Budget 2021 lays the foundation of upcoming strong demand in the Cement Industry.
i) Government’s focus is towards infrastructure development such as rural development, construction sector, etc.
ii) Increasing purchasing power in rural areas and urbanization as well.
iii) Current and upcoming projects of Governments like Highways, etc.
iv) High-Entry Barrier
v) Per Capita Consumption of Cement to increase in future
Please note that we have done this analysis with the only purpose of screening good companies. Research done is entirely on a quantitative basis. This analysis does not recommend investing directly in the highest-scoring companies. To make investment decisions based on risk profiles, one should perform a qualitative analysis of top-scoring companies in this analysis.
We have selected the following Top five Indian cement companies according to their Market Capitalisation for our Quantitative Analysis.
- UltraTech Cement- Rs. 1,94,198 Cr.
- Shree Cement- Rs. 1,02,501 Cr.
- Ambuja Cement- Rs. 60,433 Cr.
- ACC- Rs. 35,554 Cr.
- Dalmia Bharat- Rs. 29,498 Cr.
- These 5 Companies are analysed on the following 19 parameters and ranked and scored accordingly. As an example, a company with a high PE ratio scores lower points because it has a lower ranking. Similarly, if a company has higher RoE, it has a higher level and has achieved higher points.
- Here, 1 means that the company has scored the lowest points, and 5 represents the company has achieved the highest points.
- In the end, we have added all the points together, and companies are ranked accordingly.
- PE of a company means how much investors should pay for the stock based on their current earnings.
- A company with a lower PE is considered better and vice versa.
- Here, ACC cement has obtained the first position as its PE is the lowest among the lot of 25.09, and Shree Cement ranked fifth for trading at the highest PE ratio of 50.49.
- EV/EBITDA ratio measures Enterprise Value (EV) to the Earnings before Interest, Tax, Depreciation, and Amortization (EBITDA). This ratio assesses the overall financial performance of the firm.
- EV/EBITDA value below 10 is considered healthy.
- Since Cement Industry is a Capital-intensive industry, this ratio is essential to consider.
- Dalmia Bharat has the lowest EV/EBITDA ratio of 6.56 and is awarded 5 points and first rank.
- While Ambuja cement and ACC Cement also managed to keep their EV/EBITDA ratio below the ideal ratio of 10 and hence got the 2nd and 3rd rank, respectively, and are also considered one of the best cement for house construction.
Again, Shree Cement has the highest EV/EBITDA of 16.35 and hence is marked and placed accordingly.
- ROCE indicates the ability of the company to generate profits by utilizing the Total Capital Employed
- ROCE % = ( EBIT / Total Capital Employed ) * 100
- Higher the ROCE % of a company, the better it is.
- In this criterion, ACC has efficiently employed their total capital and has generated ROCE of 19.3%, highest among all, and rewarded with 1st rank and 5 points.
- Ambuja Cement is the second most profitable cement company with a ROCE of 17.3%.
- Dalmia Bharat has underperformed all other players with a ROCE of 4.7% and scored the lowest point.
- After ROCE, the following important Return ratio is ROE. It signifies how well the company generates the return on shareholders’ investment.
- A company with higher RoE is considered excellent and vice versa.
- RoE (%) can be calculated as Net Income/Total Shareholder’s Equity.
- UltraTech Cement, with the highest ROE of 17.2%, takes the first position in the list. Next to UltraTech is Shree Cement and ACC Cement, generating an ROE of 13.5% and 12.4%, respectively.
- Dalmia Bharat has performed poorly in this return ratio also. Dalmia has a mere 2.3% ROE and is therefore given 1 point only.
- Since the Cement industry is a capital-intensive industry, it might have certain debts, making it more critical to evaluate this ratio.
- The debt-to-equity is a leverage ratio that measures its debt against its total shareholder’s equity.
- Accordingly, the lesser the debt, the better it is for the company, and vice-versa.
- Surprisingly, ACC Cement and Ambuja Cement are virtually debt-free companies with zero debt-to-equity ratios. As a result, both share the first post, ar, or even 5 points for each a, and are the best cement of India.
- UltraTech Cement, with a D/E ratio of 0.59, gets the lowest point and is ranked last.
- The interest coverage ratio is Earnings before Interest and Taxes (EBIT)/ Interest expense.
- Interest Coverage Ratio indicates the ability of companies to pay interest from their operating profit.
- Interest Coverage Ratio can be regarded as a safety metric for a company based on its high value, and vice versa.
- On account of zero debt, ACC cement and Ambuja Cement have the highest Interest Coverage Ratio; their Interest Coverage Ratio is 24.6 & 23.7, ranking first and second, respectively.
- Despite having outstanding debt on the company, Dalmia Bharat has an Interest Coverage Ratio of only 1.4 and hence gets the fifth position.
None of the promoters of these Top-5 Cement companies hasn’t pledged any shares, and hence all are given 5 points and first rank.
- Institutional Investors participate where there is a free float of shares, i.e., Promoters have fewer holdings in the company.
- Institutional Investors (FII & DII) have their most significant holding in ACC cement of 32.38%, and hence this company gets total points.
- Yet again, Dalmia Bharat fails to attract the FIIs and DII and has only 17.53% of institutional holding in its shareholding pattern and hence given only 1 point.
- Operating Profit Margin can be calculated by dividing Operating Profit by Total Revenue. Therefore EBIT (Earnings before Interest and Tax) Ma is sometimes called in.
- A capital-intensive industry must also pay attention to this ratio.
- Shree Cement has the best OPM of 30.4% and is therefore given total points and first rank.
- Here, Dalmia Bharat has also delivered a significant figure; the company has an OPM of 27.7% and thereby given 4 points and 2nd rank.
- ACC has an OPM of just 18.5%, the lowest among its peers and hence given only 1 point.
- In terms of sales growth in the last 5 years, Ambuja cement has performed much better than others and has recorded 22.1% sales growth and awarded 5 points.
- Sales growth based on 5 years CAGR of Shree Cement, UltraTech Cement, ACC Cement is 14.2%, 11.6%, and 5.9%, respectively. Therefore, these companies are ranked accordingly.
- Dalmia Bharat gets the last position due to no sales growth.
- My focus has shifted in the last five years to increase Profit After Tax (PAT). In this ranking Shree Cement takes the top spot by registering 29.2% PAT growth.
- UltraTech Cement has also performed well here with PAT growth of 22.6% and therefore given 4 points and second rank.
- Ambuja Cement and ACC cement PAT growth remain single-digit of 7.1% and 3.5%, respectively.
- Dalmia Bharat gets the last position and one point only.
- UltraTech has an enormous capacity of 114.8 MTPA, only a company with a total of more than 100 MTPA, therefore gets the first position and total points.
- It took Shree Cement 40.4 MTPA to grab the second spot, while ACC Cement took third place with 33.4 MTPA.
- Dalmia Bharat has the capacity of only 28.5 MTPA and therefore is ranked and marked accordingly.
- As per the capacity, UltraTech Cement has a market share of 24%, thereby giving 1st rank and 5 points. In addition, the company enjoys the benefit of Operating Leverage.
- Despite the vast difference in market share, Shree Cement has an 8.4% market share and ACC cement has 7%; they receive four and three points respectively.
- With only a market share of 5.6%, Dalmia Bharat gets the last position and only 1 point.
- Capacity Utilization is expressed in terms of percentage and can be calculated by dividing Sales Volume from the Total Installed Capacity.
- In Q3FY21, Ambuja Cement has recorded the highest capacity utilization of 94.3%, receiving the top-most position.
- Next to it comes ACC Cement and Dalmia Bharat, which have Utilization capacity of 92.2% and 81.4%, respectively.
- It is ranked and scored accordingly, because Shree Cement has the lowest capacity utilization of 71.3%.
- Higher the realization per tonne, the better it is and vice versa.
- On this basis, UltraTech Cement receives the first position with the highest realization per tonne of 5,132.
- Little behind the UltraTech Cement, ACC Cement with 5,028 realizations per tonne and Ambuja Cement with 5,014 realizations per tonne make their places for 2nd and 3rd position respectively.
- Shree Cement has the lowest 4,622 realizations per tonne, only one point, and the fifth reel.
- Due to high entry barriers and high capital requirements in this industry.
- Like the previous per tonne ratio, it is also better for the company if it is higher and vice versa.
- Shree Cement grabs the first position in this evaluation; its EBITDA per tonne is 1,521 highest among its peers.
- While ACC cement has EBITDA per tonne of only 908 and therefore provided with only one point.
- Shree Cement acquired the fifth position in Realization per tonne, and UltraTech cement took the first place.
- Whereas in the case of EBITDA per tonne, the first rank is ranked by Shree Cement, and ACC cement gets the fifth rank.
- Inventory Turnover Ratio is Cost of Goods Sold/ Average Inventory. Average Inventory is (Starting Inventory + Ending Inventory)/2.
- It gives us an idea of the shelf life of the company product and provides an overview of how the company is stocking up its inventory and how many times the company has sold its list in a given period.
- It is better for a company to have a higher Inventory Turnover Ratio, and vice versa.
- ACC cement has the highest Inventory Turnover ratio of 15.23 and therefore is rewarded with total points and first position.
- Meanwhile, Shree Cement records the lowest Inventory Turnover Ratio of just 7.15, thereby scoring only 1 point.
- Debtor Days measures how much time does company’s debtor takes to repay the payment.
- The lesser the debtor days, the better is considered and vice versa.
- ACC cement outperforms others with the lowest debtor days of 15.5 and total full points in this scenario.
- Yet again, Shree Cement performs poorly and gets only 1 point. The company has debtor days of 29.8.
- Here, ACC cement has a negative Cash Conversion Cycle of -4.3 days which yields him the top-most position and total points.
- Shree Cement performs worst in Operating Performance Ratios and possesses the most extended Cash Conversion Cycle of 60 days, thereby getting the last position and one point only.
- Summing up all the ranking and points received by the Top-5 Cement Companies, we get ACC cement as the best performer with the highest score of 77 points and hence gets the first rank and as the best cement of India among all the cement brands.
- The second position is shared with UltraTech Cement and Ambuja Cement. Both companies have scored 71 points each.
- Shree Cement only receives 59 points because of poor performance in Operating Performance Ratios and some other parameters.
- The worst performance among all the players was Dalmia Bharat and therefore received only 48 points.