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Amidst IT and Pharma assuming the centre stage, a few old economy businesses are making a smart comeback—cement companies, for instance.  In fact, some of the leading cement companies, such as UltraTech, ACC and Ambuja, which declared their Q2FY21 numbers early this week have been making the rounds for a while now.

Is worst behind us?

Value of Rs 10,000
(Source: BSE India)

Looking at the stock price movement of ACC and UltraTech in the last one month, it seem savvy market investors had perhaps sensed a strong recovery in their Q2FY21 earnings. The rally that started in the last week of September took them close to their January 2020 highs. However, there hasn’t been a follow-on buying on these counters, post results.

Concrete position…

(Source: Company records)

Cement is a cyclical industry and considering the present downtrend in the economy, it’s natural for investors to worry about the sustainability of the strong performance of leading cement companies. However, as they say, market cycles are ahead of economic cycles on both sides. Hence, one should ideally pick up cyclical stocks when the sector is due for an upturn.

Is this true for cement stocks at this juncture? And how should you approach them post Q2 earnings?

Let’s first take a helicopter view of the sector.

According to Cement Manufacturers Association (CMA), India has a total installed capacity of 545 Million Tonnes Per Annum (MTPA). India is the second largest manufacturer of cement globally and accounts for 8% of the world’s production. However, the geographical distribution of installed capacity isn’t even across India. Southern India accounts for 35% of the industry’s total capacities. Northern states contribute 20% while eastern, western and central parts of India make up 18%, 14% and 13% respectively.

Limestone is the most important raw material in cement manufacturing and 7-8 states account for nearly 75% of production of cement-grade limestone, hence production of cement is concentrated in select states.

The top 4 Pan India players—UltraTech, Shree Cements, ACC and Ambuja Cements comprise 40% of India’s total installed cement production capacity. In other words, a number of regional players—large and small, are competing with industry giants. And needless to say, companies having a pan India presence are better insulated against weakness in some regional markets and geographies.

Production capacities

(Source: Company annual reports)

Situation at the grassroots level…

Based on the information available in the public domain, the demand-supply situation is in favour of manufacturers as far as India’s northern, central and eastern markets are concerned. On the other hand, the prices have been on a strong wicket in the southern markets despite their having a supply glut. This shows there’s no price war (unlike telecom operators) among cement players.

UltraTech: ultra high-volt performance in Q2FY21

UltraTech is the market leader. The acquisitions it made in the past few years which include Binani Cement and Century Textile’s cement business have helped it strengthen its position in northern and eastern parts of the country. UltraTech is the only player outside China to have the installed capacity of over 100 MTPA.

UltraTech has made some interesting comments in its communication with investors post Q2 earnings.

The company has clocked a volume growth in the northern, eastern and central parts of the country. Rural demand has been strong across India. Commercial sector has done poorly across the regions. Southern markets along with Maharashtra continued to see poor volume growth in Q2; nonetheless, things started looking up in September. Moreover, infrastructure demand has been catching up fast as the government spends on infra have picked up.

The company’s rural market penetration has gone up 5% in Q2FY21 and fixed costs dipped 14%.

Integration of UltraTech Nathdwara (earstwhile Binani Cement) appears to be coming out quite well. In Q2FY21, UltraTech Nathdwara reported a 17% fall in the production costs on a Y-o-Y basis. On the other hand, variable costs of Century’s cement business went down 12% Y-o-Y.

In FY20, UltraTech had reported an average capacity utilization of 69% (down from 76% in FY19). On this backdrop, investors were anxious about UltraTech’s aggressive acquisitions and rise in the net debt position.  Operating EBITDA per tonne—a crucial performance parameter—improved 30% in Q2FY21 to Rs 1,387 from Rs 1,069 in Q2FY20.

In Q2FY21, the company reduced its long term debt by Rs 1,622 crore. Moreover, leveraging its strong balance sheet position and credit rating, it sourced short term funds from the market (through commercial papers) at a rate cheaper than the repo rate in H1FY21. This suggests that debt markets weren’t as worried about the company’s debt position as equity markets were, apart from indicating a surplus liquidity position in the system.

Savings in financial costs have been margin accretive.

Saving financial costs…

(Source: ACE Equity)

Between March and September 2020, UltraTech’s net debt position has improved from Rs 16,860 crore to Rs 12,132 crore. Consolidated Net Debt to EBITDA ratio improved to 1.2 times from 1.7 times in March 20.

Will this trend continue?

 The Non-Convertible Debentures (NCDs) of the company worth Rs 1,560 are falling due for repayment in the calendar year 2021. Their coupon averaged 7.4%—significantly higher than the cost of funds for “AAA” securities with 3-year and 5-year maturities under the present market conditions. It remains crucial to see how much UltraTech manages to save on this count over the next few quarter—especially given that experts are anticipating the lower interest regime to stay longer.

From ACC to ACE…

Its close competitor ACC has also witnessed a steady improvement in demand in the retail and rural markets, thanks to a good monsoon, easing constraints on economic activity and revival in the affordable housing market. The company has seen some traction in the infrastructure, commercial and industrial segments.

ACC witnessed an impressive 17% fall in the raw material cost per tonne in the September quarter as it renegotiated contracts and optimized supply chain efficiencies.

Similarly, the focus on optimizing energy usage helped the company report a 21% Y-o-Y fall in power and fuel cost/per tonne in the September quarter. In the quarter gone by, ACC undertook space optimization programmes at its warehouses, worked on improving network efficiencies and emphasized on direct deliveries. The results were visible—freight and forwarding costs witnessed a 9% fall on a per tonne basis.  

Ambuja Cements reported a 7-percentage point expansion in the EBIDTA margins and witnessed a total cost reduction of 8% per tonne on Y-o-Y basis. The company guided that its Greenfield expansion project at Marwar Mundwa (Rajasthan) will come on stream in the June quarter of calendar year 2021.

In summary…

Even if you attribute the stellar performance of cement companies partially to the pent-up demand, cost-savings and improvement in operational performance of leading cement companies is noteworthy. If strong demand from the rural markets, affordable housing segment and infrastructure segment sustains beyond the December quarter, cement could become an attractive space to watch.

Demand-supply appears to be in favour of manufacturers outside southern markets. Higher government spending in the northern and eastern parts of India might offer an edge to companies having a dominant position in these markets. A pan India presence may help market leaders.

Unutilized consolidated capacity of UltraTech (~35 MTPA i.e. 31% of 115 MTPA) equals the total installed capacity of some of its competitors. You see, scale matters in a capital intensive business. Harmonization of acquired businesses, debt reduction and cost optimizations would offer immense tailwinds to the market leader if the cycle turns. Other prominent pan India players may benefit too.

Going forward, tracking Q3 and Q4 numbers will be crucial. Monthly IIP data on cement production may offer some peep.

Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.


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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.




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