Thread by @alphaspotcap

Cement Sector in depth Analysis!

A Detailed Thread 🧵👇🏻:
#investing #cement

(1/20)

About:

India is the 2nd largest cement producer in the world with a market share of 8%, behind China (54%)

However the Indian market is one of the most underpenetrated with per capita cement consumption being half of the world, behind countries like Brazil & Indonesia.

(2/20)

Region was cement consumption:

• Cement consumption is lowest in India’s eastern region (131kg)

• West and North belt has the highest cement consumption in India

• However, going forward, east and central India is all set to provide the next leg of growth

(3/20)

• Greater focus by the govt (21 out of the 110 smart cities commissioned in this region)

• Limestone availability makes this market an attractive destination

• Out of the total housing shortage in urban India, east & central India contribute 35% & 25% respectively.

(4/20)

Let’s look at some of the data coming from Indian Urban Housing:

• Urban housing remains in its best-ever scenario with a decadal low inventory and decadal high absorption

• Ready to move in Inventory is decreasing

• Under construction inventory is decreasing

(5/20)

• Cities with highest growth in Housing market (5 year CAGR)

1. Gandhinagar - 32%
2. Nashik - 19%
3. Vishakapatnam - 16%
4. Bhubaneswar - 14%
5. Mohali - 14%
6. Nagpur - 11%
7. Ahmedabad - 10%
8. Vadodara- 8%

MH, UP, TN, WB & AP have the highest urban population in 🇮🇳

(6/20)

• Sector wise annual capital expenditure in infrastructure (INR bn) (FY 20-25)

source: National Infrastructure Pipeline PPT volume I

1. Energy: 26,900
2. Roads: 20,338
3. Railways: 13,676
4. Ports & Airports: 2,646
5. Urban: 19,193
6. Irrigation: 8,945
7. Rural: 7,739

(7/20)

• Major schemes as per India FY22-23 budget:

1. Pradhan Mantri Awas Yojna (PMAY)

2. Pradhan Mantri Gram Sadak Yojna

3. Metro Projects

4. National Highways Authority of India (Highest focus of GOI)

5. Residential

6. Non-residential

7. Road Works

(8/20)

Factors to focus on while looking into the Indian Cement sector for the medium term:

• Inorganic expansions by larger players to gain market share:

Mid-caps / small caps cement stocks are trading at 14% / 44% discount on EV / EBITDA compared to large caps

(9/20)

• Given the significant premium enjoyed by large cap players (especially Ambuja) compared to mid-cap players, and the minimal leverage they enjoy, they remain in an extremely favourable position to bid aggressively for smaller assets and scale up capacity quickly.

(10/20)

• Since large caps are trading at a premium compared to mid/small caps, they tend to benefit when they acquire assets at cheaper valuations

However, target stocks may move further upwards due to higher probability of that company getting acquired.

(11/20)

What the history says:

Acquisitions of Binani, Century, Reliance Cement & ACC & Ambuja have all happened at premium valuations & the ones at discount have some issues related to promoter debt, lower clinker connectivity & lower utilisation, leading to forced selling.

(12/20)

Evidence of consolidation already visible:

• Dalmia / Sagar bidding for Andhra Cement assets
• Shree Cement talking about acquisitions in Central India
• Heidelberg plans to merge with Zuari Cement
• Ultratech to acquire India Cement MP project

(13/20)

• Strong demand - supply match:

1. FY08-17 – where capacity addition was 2x of demand; as a result capacity utilisation fell

2. FY17-22 – where supply was 1.3x of demand

3. FY22-25 – supply addition is broadly equal to demand

(14/20)

• Cost deflation : A Tailwind for cement

Current Margins are under pressure mainly on account of escalation of :

1. power & fuel costs

2. pet coke (a key raw material) prices

3. diesel prices (freight and logistics).

However we believe the peak is behind us.

(15/20)

• Pet coke prices peaked in 1QFY23, it has declined 14% MoM (Aug’22 to Sept’22)

• Diesel prices have declined by 8% since 1QFY23, although the prices are still elevated. The domestic diesel prices (per litre) is hovering around ₹90-95, from ₹70 seen in late 2020

(16/20)

• Increase utilisation of renewable energy sources:

Renewable energy usage has increased in FY22 compared to FY19 for all companies.

UltraTech currently has the highest capacity while Shree Cement has the highest renewable power contribution of 48%

(17/20)

• Premiumisation:

Another reason to expect a recovery in margins is the premiumisation of products across brands.

Rising housing demand will likely to further increase the share of premium products.

(18/20)

Valuation:

• Ambuja cements has the highest EV/EBITDA amongst its closest rivals, followed by Shree, Ultratech, Ramco & ACC

• Ambuja & Dalmia has the highest capacity expansion plans till FY30.
Ambuja has planned 160% expansion vs Ultratech’s 30% expansion plan.

(19/20)

• JK Lakshmi has the highest ROE(20%) and RoCE(16%) amongst its peers.

• Dalmia bharat has the lowest ROE and RoCE of 8% each amongst its peers.

• Ultratech has the highest volume/capacity of 114 MT followed by Shree Cement’s 46 MT

(20/20)

Which company will be your long term pick from the Indian cement sector?

@caniravkaria @stockifi_Invest @VRtrendfollower @kuttrapali26 @mehrotra_saket @aparanjape @MadhusudanKela