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 has 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.
Key Drivers for the growth of the Cement Sector:
i) Government’s focus towards infrastructure development such as rural development, construction sector, etc.
ii) Increasing purchasing power in rural areas and urbanization as well.
iii) Current as well as 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. Analysis done is completely on a quantitative basis. No suggestions are being made to directly go and invest in the top-scoring companies of this analysis. We suggest that one should perform a qualitative analysis of top-scoring companies in this analysis and take investment decisions based on risk profile.
Top-5 Cement Stocks Quantitative Analysis
Companies selected for Analysis:
We have selected the following Top five cement companies according to their Market Capitalisation for our Quantitative Analysis.
Market Capitalization of 5 Cement Stocks:
- 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.
The procedure of Analysis and its Interpretation
- These 5 Companies are analyzed on the following 19 parameters and ranked and scored accordingly. For example, a company with a higher PE ratio is provided a lower rank, hence has scored lesser points. Similarly, if a company has higher RoE, it has a higher rank and has scored higher points.
- Here, 1 means that the company has scored the lowest points and 5 means the company has scored the highest points.
- In the end, we have added all the points together and companies are ranked accordingly.
Parameters of Quantitative Analysis:
1) PE Ratio:
- PE of a company means that 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 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 important to consider.
- Dalmia Bharat has the lowest EV/EBITDA ratio of 6.56 and hence 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.
Again, Shree Cement has the highest EV/EBITDA of 16.35 and hence is marked and placed accordingly.
3) Return on Capital Employed (ROCE):
- 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, better it is.
- In this criterion, ACC has efficiently employed their total capital and has generated ROCE of 19.3% highest among all and hence rewarded with 1st rank and 5 points.
- Next to ACC cement is Ambuja Cement which has a ROCE of 17.3%.
- Dalmia Bharat has underperformed all other players with a ROCE of 4.7% and hence scored the lowest point.
4) Return on Equity (ROE):
- After ROCE, the next important Return ratio is ROE. It signifies how well the company generates the return on shareholders’ investment.
- A company with higher RoE is considered good and vice versa.
- RoE (%) can be calculated as Net Income/Total Shareholder’s Equity.
- UltraTech Cement with the highest ROE of 17.2% makes place for the first position in the list. Next to UltraTech is Shree Cement and ACC Cement which has generated an ROE of 13.5% and 12.4% respectively.
- Dalmia Bharat has performed poorly in this return ratio also. Dalmia has an ROE of a mere 2.3% and is therefore given 1 point only.
- Since the Cement industry is a capital-intensive industry, it might have certain debts, which makes it more important to evaluate this ratio.
- The debt-to-equity is a leverage ratio that measures the debt of a company against its total shareholder’s equity.
- Accordingly, lesser is the debt, better it is for the company, and vice-versa.
- Surprisingly, ACC Cement and Ambuja Cement are virtually debt-free companies and hence having zero debt-to-equity ratios. Both of them share the first position and are given 5 points for each of them.
- UltraTech Cement with a D/E ratio of 0.59 gets the lowest point and is ranked last.
6) Interest Coverage Ratio:
- 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.
- The higher the Interest Coverage Ratio of a company safer it is considered for the company and vice versa.
- On account of zero debt, ACC cement and Ambuja Cement have the highest Interest Coverage Ratio among others, their Interest Coverage Ratio is 24.6 & 23.7 and hence ranked first and second respectively.
- Despite having a notable amount of debt on the company, Dalmia Bharat has an Interest Coverage Ratio of only 1.4 and hence gets the fifth position.
7) Pledged (%):
None of the promoters of these Top-5 Cement companies haven’t pledged any shares and hence all are given 5 points and first rank as well.
8) Institutional Holdings (FII + DII):
- 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 largest holding in ACC cement of 32.38% and hence this company gets full points.
- Yet again, Dalmia Bharat fails to attract the FIIs and DII and having only 17.53% of institutional holding in its shareholding pattern and hence given only 1 point.
9) Operating Profit Margin:
- Operating Profit Margin can be calculated by dividing Operating Profit by Total Revenue. It is sometimes also called EBIT (Earnings before Interest and Tax) Margin.
- This is another important ratio to look after in any capital-intensive industry.
- Shree Cement has the best OPM of 30.4% and therefore given full 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.
10) Sales and Net Profit (PAT) Growth- 5 years CAGR:
- 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 hence awarded with 5 points.
- Sales growth on basis of 5 years CAGR of Shree Cement, UltraTech Cement, ACC Cement is 14.2%, 11.6%, and 5.9% respectively. These companies are ranked accordingly.
- Dalmia Bharat gets the last position due to no sales growth.
- Moving towards Profit After Tax (PAT) growth in the last 5 years, in this case. Shree Cement outscores others by registering the highest PAT growth of 29.2% and hence given the first position.
- 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 in the single-digit of 7.1% and 3.5% respectively.
- Dalmia Bharat gets the last position and one point only.
10) Sales and Net Profit (PAT) Growth- 3 years CAGR:
- In the context of Sales Growth on a 3-year CAGR basis, UltraTech Cement tops the list with a sales growth of 18.4%.
- Dalmia Bharat with a sales growth of only 9.1% gets the fifth rank.
- Surprisingly, in terms of net profit, Dalmia has out mastered all others with a massive difference and has registered PAT growth of 72% in the last 3-year CAGR basis and hence grabs the first position here. The reason behind this huge PAT growth is due to a low-base effect, Dalmia Bharat has faced losses in terms of 5-years CAGR.
- Here, Shree Cement fails to impress and records PAT growth of only 4.7% and therefore ranks the lowest.
11) Capacity Metrics: Capacity in Million Tonnes per Anum (MTPA):
- UltraTech has an enormous capacity of 114.8 MTPA, only a company with a capacity of more than 100 MTPA, therefore gets the first position and full points.
- Shree Cement receives the second position with 40.4 MTPA, and ACC Cement receives the third position with 33.4 MTPA.
- Dalmia Bharat has the capacity of only 28.5 MTPA and therefore is ranked and marked accordingly.
12) Capacity Metrics: Capacity Market Share:
- As per the capacity, UltraTech Cement has a market share of 24%, thereby given 1st rank and 5 points. The company enjoys the benefit of Operating Leverage.
- With the huge gap, next comes Shree Cement with 8.4% market share and ACC cement with 7% market share, They are given 4 points and 3 points respectively.
- Dalmia Bharat with only a market share of 5.6% gets the last position and only 1 point.
13) Capacity Metrics: Utilization (%):
- 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% and hence receives the top-most position.
- Next to it comes ACC Cement and Dalmia Bharat, which have Utilization capacity of 92.2% and 81.4% respectively.
- The lowest capacity utilization is of Shree Cement of 71.3% only and hence scored and positioned accordingly.
14) Per Tonne Ratio Analysis: Realization Per Tonne:
- 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 and hence given one point only and the fifth rank as well.
15) Per Tonne Ratio Analysis: EBITDA Per Tonne:
- Due to the presence of a high entry barrier in this industry and also the huge capital requirement, the analysis of the EBITDA per tonne ratio becomes important.
- 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, it has EBITDA per tonne of 1,521 highest among its peers.
- While ACC cement has EBITDA per tonne of only 908 and therefore provided with only one point.
16) Per Tonne Ratio Analysis:
- In terms of Realization per tonne, UltraTech Cement gets the first position and the fifth position is obtained by Shree Cement.
- Whereas in the case of EBITDA per tonne, the first rank is ranked by Shree Cement and ACC cement gets the fifth rank.
17) Inventory Turnover Ratio:
- 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 also gives an overview of how the company is stocking up its inventory as well as how many times the company has sold its inventory in a given period.
- The higher the Inventory Turnover Ratio, the better it is for the company and vice versa.
- ACC cement has the highest Inventory Turnover ratio of 15.23 and therefore is rewarded with full points and first position.
- Meanwhile, Shree Cement records the lowest Inventory Turnover Ratio of just 7.15 and thereby scores only 1 point.
18) Debtor Days:
- Debtor Days measures how time does company’s debtor takes to repay the payment.
- The lesser the debtor days, the better is considered and vice versa.
- In this scenario, ACC cement outperforms others with the lowest debtor days of 15.5 as a result gets full points.
- Yet again, Shree Cement performs poorly and gets only 1 point. The company has debtor days of 29.8.
19) Cash Conversion Cycle:
- Here, ACC cement having a negative Cash Conversion Cycle of -4.3 days which yields him the top-most position and full points.
- Shree Cement continues to perform worst in Operating Performance Ratios and possess the longest Cash Conversion Cycle of 60 days and thereby gets the last position and one point only.
20) Final Score:
- 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 receives the first rank.
- The second position is shared with UltraTech Cement and Ambuja Cement. Both companies have scored 71 points each.
- On account of poor performance in Operating Performance Ratios and some other parameters, Shree Cement gets only 59 points.
- The worst performance among all the players was of Dalmia Bharat and therefore receives only 48 points.