Cement

Sector Risk Index

1
Table of Contents
Explanation of Sector Risk Index 01 Demand-Supply Dynamics 12
Demand Growth 12

Demand Drivers 13
Executive Summary 05
Import Export Scenario 14

Capacity Addition 16
Product Profile 06
Price Trend 17

Macro Economic Analysis 07

Macro Economic Growth 07 Competitive Scenario 18
Interest Rate Risk 07 Sector Structure 18

Foreign Exchange Risk 09

Resource Risk 19
Government Regulations 10
Duty Structure 10 Financial Risk 20
Government Initiatives Key Ratios 22
11
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Explanation of Risk Score

Sector Risk Index reflects the effect that various factors shall have on the business prospects and operating
environment of a sector over the next 12 months. The risk index arrived at is an aggregate of the individual scores
assigned to the relevant sector parameters-identified.

The scores have been graded on an 8 point scale with 1 indicating low risk and 8 indicating high risk.

Impact likely to Negative impact over

be Positive
Positive impact over Long Term
Negative impact over
Medium Term 4
Short Term 8
2
6

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3 7
1 Positive impact over 5 Negative impact over
Short Term Medium Term
Positive impact over Impact likely to
Long Term be Negative
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Parameters for Sector Risk Index

The selected parameters are
government regulations,
Government Regulations
demand supply dynamics,
competitive scenario,
macro-economic variables, Demand and Supply
resource risk and profitability Dynamics

and cost structure. The Resource Risk

scores given to individual
parameters reflect the extent
of positive/negative impact
Parameters For
on the business operating
Risk Index
environment.

Competitive
Scenario
Macroeconomic
Scenario

Financial Risk
Financial Risk
 3

India’s cement sector is

expected to grow at a compound
annual growth rate (CAGR) of
9–10% during the period
financial year 2014–2015 (FY
2014–15) to FY 2018-19 on the
back of increasing demand from
real estate and infrastructure
sectors in India.

Risk Index of Cement Sector
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1 2
Demand and Supply Dynamics
With the acceleration in the demand from real
estate and infrastructure sectors, the cement
sector of India is likely to grow by 9-10% during the
period FY 2014–15 to FY 2018-19.
Competitive Scenario
High capital investment leading to high entry
barriers therefore, India’s cement sector is
organised and highly oligopolistic in nature
with production and supply bequeathed in
hands of a few players.
4
Impact likely to be Positive
3 4 5 6 7 8
Macro Economic Scenario Resource Risk
In FY 2014–15 India’s gross domestic India’s cement sector has high resource
product (GDP) has shown a growth rate risk as limestone, which is an important
of 7.29% compared to 6.90% in FY raw material used in the production of
2013–14 and it is expected to grow cement is considered as scarce mineral
around 7.50% in FY 2015–16 and extraction of limestone is controlled by
the State governments.
Financial Risk Government Regulations
The bulky nature of cement leads to In order to boost the cement sector, the
high inventory holding days which government of India has allowed 100%
requires high working capital lock-in FDI in the sector. Also, the government
period consequently increases the cost has incorporated Cement Corporation of
of borrowing. India to attain self sufficiency in the
production of cement in the country.
Positive Negative Neutral
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Executive Summary
World cement production for FY 2013–2014 was estimated Figure 1. Major Cement Producing Countries in FY 2013-14
1 approximately 4105 million tonnes wherein China contributed highest
(In Million Tonnes)

to the production with a proportion of around 59.44%.

India is the second largest producer of cement in the world and the China 2440
2 country accounted for approximately 6.82% of global cement
India 280
production in FY 2013–14. China, India and USA are the top
producers as well as consumers of cement globally.
USA 79

Market size of India’s cement sector, which has reached

3 approximately United States Dollar (USD) 26.45 billion in FY 2013–14,
Iran 73

is expected to cross the mark of USD 39.68 billion in FY 2018–19.

Turkey 72

In order to meet the growing demand from domestic housing,

4 construction and infrastructure sectors, the production capacity of
Brazil 71

India’s cement sector, which is estimated at 373 million tonnes in FY Russia 67

2013–14, is expected to reach over 518 million tonnes in FY 2018–19.
Vietnam 59
Prices of cement are expected to rise across the country in FY
5 2015–16, as transportation cost of the raw material will rise due to the Saudi Arabia 59

proposed increase in freight rates of coal, slag as well as cement

transportation in the rail budget February, 2015. Indonesia 57

Source: minerals.usgs.gov
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Product Profile
Cement is a binder, a construction material, which is
1 manufactured in the form of powder and categorised under Figure 2. Product Profile of Cement
three major heads, namely Portland Pozzolana Cement
(PPC), Ordinary Portland Cement (OPC) and Portland Blast
Furnace Slag Cement (PBFSC).
0.31%

On the basis of characteristics and usage, the three

2 categories are further classified as Sulphate Resisting
Portland Cement, Rapid Hardening Portland Cement, Oil
Well Cement, Clinker Cement and White Cement.
67.06%
32.63%
Portland Pozzolana Cement is constituted around 80%
3 clinker, 15% pozzolana and 5% gypsum. OPC is also
known as grey cement, which comprises 95% clinker and
5% gypsum and other materials. PBFSC, on the other
hand, consists of approximately 45% clinker, 50% blast
furnace slag and 5% gypsum.
Portland Pozzolana Cement (PPC)
Ordinary Portland Cement (OPC)

Portland Blast Furnace Slag Cement (PBFSC)

Source: www.cii.in
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Macro Economic Analysis

Macro Economic Growth Interest Rate Risk

With GDP growth rate of 5.08% in FY 2012–13 and 6.90% in

1 FY 2013–14, India’s economy is on the path to recovery and
has shown a growth rate of 7.29% in FY 2014–15.
Manufacturing sector has registered a growth rate of 4.53% in
2 FY 2013–14 and has shown a growth rate of 6.13% in FY
2014–15, as the central government is planning to support the
sector with better foreign trade relations.
Cement, which is one of the key indicators of construction
3 sub-sector, has shown a growth rate of 5.60% in FY 2014–15
as compared to 3.70% growth rate in the corresponding
period in the previous fiscal.
The interest rates in the international markets, have been low in FY
2013–14 compared to FY 2009–10.
The domestic interest rate decreased in FY 2012–13 over FY 2011–12
and remained stable in FY2013–14, whereas international interest rate
reached at the lowest levels in FY 2013–14 compared to the
preceding five years since FY 2009–10, which have been providing a
relief in the borrowing cost to the companies dependent on the Indian
or outside sources of funds.
A lower financing cost may provide an advantage to increase the net
profit margin or price competitiveness in the market.
Figure 3. Interest Rate Trends (Domestic and International)
10.75 10.25

8.50 10.50 10.25

0.83
0.93 1.01 0.68
0.56

FY FY FY FY FY
2009-10 2010-11 2011-12 2012-13 2013-14

Source: www.bloomberg.com USD LIBOR (%) Lending Rate / Base Rate (%)

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Macro Economic Analysis

Figure 4. Interest Rate Risk Figure 5. Interest as a % of Sale

7.58
5.43
6.44 6.41
3.16
3.16 5.15

1.85 1.90 3.94

0.95 0.97 0.87 0.85

0.86

FY FY FY FY FY FY FY FY FY FY
2009-10 2010-11 2011-12 2012-13 2013-14 2009-10 2010-11 2011-12 2012-13 2013-14

Interest Coverage Ratio (Times) Debt-Equity Ratio (Times)

Source: CMIE Prowess Source: CMIE Prowess

Debt-equity ratio of cement sector has declined from 0.95 times to 0.85 times during the period from FY 2009–10 to FY 2013–14. The
sector is considered as high capital-intensive; hence, the additional requirement of fixed capital investment is dependent on the external
sources of funds. The interest coverage ratio (ICR) of the sector has decreased in FY 2013–14 as compared to FY 2012–13

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Macro Economic Analysis

Foreign Exchange Fluctuations

By exporting cement majorly to the neighbouring countries, India sources foreign currencies mainly Sri Lankan Rupee, Nepalese Rupee,
Saudi Riyal, Bhutanese Ngultrum and Bangladeshi Taka. The depreciation in the value of these currencies and appreciation of INR against
USD may only increase the foreign exchange risk for enterprises in the sector.

India, being the second largest producer of cement, has low dependency on import of cement as it can suffice the demand through
domestic production. Hence, there is a minimum impact of foreign exchange risk on the sector.

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Government Regulations
Duty Structure

In India, cement production attracts excise duty

at 12.00% as per Union Budget FY 2014–15. The
duty has remained stable since FY 2011–12,
when excise duty of 12.00% plus excise cess of
3.00% was imposed.
Under the import policy notes, the basic customs duty in FY 2014–15
on cement stood at 10.00% with additional countervailing duties
(CVD) of 12.50% and special CVD at 4.00% and customs cess at
3.00%.

The basic customs duty and special CVD on

cement has remained stable over the last 3
financial years. However, the additional CVD was
increased from 12.00% to 12.50% in March 2015.

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Government Regulations
Government Initiatives

The government of India (GoI) has allowed 100% Foreign Direct Investment (FDI) in the cement sector. Cement and gypsum
1 products have attracted FDI of INR 133.70 billion during April 2000 to February 2014.

Indian Ministry of Road Transport and Highways (MoRTH) under the central government has decided to construct concrete (cement)
2 roads in India, which are cost-effective and more durable compared to traditional asphalt (bitumen) roads.

To ensure uninterrupted and cheap supply of cement in various projects under central government, MoRTH has launched an online
3 platform in FY 2014–15 with the name INAM-PRO, which will facilitate cement procurement and fulfil the demand-supply gap.

In order to promote infrastructural development, the GoI has planned to increase the investment to approximately INR 62 trillion and
4 increase the industry's capacity by 150 million tonne.

Cement Corporation of India (CCI), a wholly-owned government corporation was incorporated to achieve self-sufficiency in cement
5 production in the country. Currently, CCI has ten units spread over eight states in India.

‘Amma’ cement, a low price cement brand, has been launched by the Government of Tamil Nadu. The cement is priced at INR 190 a
6 bag, which is sold through the Tamil Nadu Civil Supplies Corporation (TNCSC).

Proposals worth of INR 92 billion have been approved by the Andhra Pradesh State Investment Promotion Board (SIPB) to set up
7 three cement plants with total capacity around 12 million tonne per annum.

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Demand-Supply Dynamics
Demand Growth

Cement sector in India has expanded at a compound annual growth rate (CAGR) of approximately 8.42% during the period from
1 FY 2009–10 to FY 2013–14.

The sector has been growing year-on-year (YoY) basis due to the gradual increase in the domestic demand of cement from public
2 and private real estate and infrastructure projects in India.

Globally, India holds second rank in the production of cement after China, followed by USA, Iran, Turkey and Brazil. Cement
3 production in India during FY 2013–14 is approximated at 280 million tonne, which is 11.47% of China’s cement production.
887.01

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Demand-Supply Dynamics
Demand Drivers

Cement is one of the main raw materials required in the construction Figure 6. Demand Driver of Cement Sector

1 activities. Therefore the biggest demand drivers of cement are real

Industrial
estate and infrastructure sectors.
Construction 9%

In India, 64% of cement demand is generated from real estate sector,

2 followed by infrastructure sector with 16% demand. Commercial
construction and industrial construction account for 11% and 9%,
Commercial
Construction 11%

respectively, of total cement consumption.

887.01
Infrastructure
In India, where housing is the basic need due the second most Construction 16%
3 populated country in the world, GoI allocated funds to the Rural Housing
Construction 64%
Housing Fund and the National Housing Bank (NHB) in the Union
Budget FY 2014–15.

Source: www.indiainbusiness.nic.in
Real estate sector in India has shown a CAGR of 13.75% during the
4 period from FY 2009–10 to FY 2013–14, which will gradually lead the
demand for cement in the coming fiscals also.

The demand in sector is expected to accelerate shortly due to the

5 recent announcement in the Union Budget FY 2014–15 from MoRTH to
construct cement roads in India.

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Demand-Supply Dynamics
Import Export Trend

Cement import in India is very low due to the abundant

1 production in the country, which fulfils the domestic demand.
Figure 7. Import (In USD Million)

119.87

In FY 2013–14, the country’s import declined to USD 59.34

2 billion from USD 119.87 million in FY 2009–10.
77.38 79.18
94.62

India imports cement mainly from Pakistan, which is

3 consumed mainly in Punjab, Haryana and Himachal
59.34

Pradesh.

FY FY FY FY FY
2009-10 2010-11 2011-12 2012-13 2013-14

Source: www.commerce.nic.in

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Demand-Supply Dynamics
Import Export Trend

Despite a high cement demand in India, the country is a net exporter of cement. In FY 2013–14, the total value of cement export
1 constituted approximately 1% of its total market size.

The export has increased at a CAGR of 16.82% during the period from FY 2009–10 to FY 2013–14. In FY 2013–14, the export of the
2 country reached USD 261.55 million from USD 140.42 million in FY 2009–10.

India exports major proportion of cement mainly to its neighbouring countries Sri Lanka, Nepal, Saudi Arabia and Bhutan.
3
Figure 8. Export (In USD Million) Figure 9. Country Wise Contribution to Export Revenue
of India's Cement Sector in FY 2013-14
CAGR 16.82%

261.55

217.38 Other 20.50%

201.54
177.89
Sri Lanka 39.25%
140.42
Bangladesh 4.43%

Bhutan 7.32%

Saudi Arabia 10.36%

FY FY FY FY FY
2009-10 2010-11 2011-12 2012-13 2013-14
Nepal 18.60%
Source: www.commerce.nic.in
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Demand-Supply Dynamics
Capacity Addition

As per the industry-wise deployment of gross bank credit data, banks have been Figure 10. Gross Bank Credit Deployement
1 deploying funds in cement production at a CAGR of 21.64% from FY 2009–10 to
2013–14. Banks have deployed INR 541.16 billion during FY 2013–14 as compared
to INR 247.22 billion in FY 2009–10. CAGR 21.64%
541.16

458.58
On the other hand, the sector has seen some major investments and developments
2 in the recent years. Ultratech Cement Limited has announced a capital expenditure
296.15
369.10

of INR 70.56 billion for expansion, brownfield projects and grinding units at various 247.22
plants. After the takeover of two cement plants owned by Jaypee group, UltraTech
has planned to set up two greenfield grinding units in Bihar and West Bengal.

JSW Cement Limited, which is presently operating three plants – Vijayanagar in

3 Karnataka, Dolvi in Maharashtra and Nandyal in Andhra Pradesh – with a combined
FY
2009-10
FY
2010-11
FY
2011-12
FY
2012-13
FY
2013-14
capacity of 6 million tonne per annum, has planned to set up a 3 million tonne per
Source: Reserve Bank of India
annum clinkerisation plant at Chittapur in Gulbarga district at an estimated cost of
INR 25 billion.

Dalmia Cement (Bharat) Limited, which presently has three manufacturing units in
4 the North-East Region (NER), i.e. one in Meghalaya and two in Assam, has invested
around INR 20 billion in the last three fiscals for the development and expansion of
business in NER.

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Demand-Supply Dynamics
Price Trends

Cement price has shown an increasing trend during the period Figure 11. Cement Wholesale Price Index
1 from FY 2010–11 to FY 2013–14. The price of Ordinary Portland 175.20
Cement (White Cement) is greater than the price of the Ordinary 171.90
Portland Cement (Grey Cement) as the production of white cement 169.50
168.80
requires special cooling technique.
163.10 166.40 166.67

157.50
The price of cement is directly correlated with the demands of real
2 estates and construction industries. Slag cement is used to
152.20
155.40 155.30

151.00
157.00

construct dams and bridges. Government spending on

148.90 150.90
infrastructure projects has increased, thereby creating a demand
and pushing up the prices of slag cement. FY FY FY FY FY
2009-10 2010-11 2011-12 2012-13 2013-14

Ordirnary Portland Cement (Grey Cement)

In Rail Budget February 2015, freight rates of cement and its raw
3 material has hiked, which will increase cement prices by
Ordirnary Portland Cement (White Cement)

Ordirnary Blast fumance Slag Cement (Grey Cement)

approximately INR 40–60 per tonne across the country in FY
2015–16. The minister has proposed to increase cement freight
Source: Reserve Bank of India

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Competitive Scenario
As production and supply bequeathed in hands of a few players, India’s Figure 12. Market Share

1 Cement Sector is organised and highly oligopolistic in nature.

Ultratech Cement Ltd. 23.19%

The sector requires high capital investment, which marks high barriers for
2 entry. Other 36.00%

Cement manufacturing companies are restricted to a few locations due to

3 geographical concentration of raw material availability.
ACC Ltd. 12.61%

India Cement Ltd. 5.11% Ambuja Cement Ltd. 10.53%

The bulky nature of limestone (a key ingredient in manufacturing cement),
4 also restricts the cement market to a few regions.
Prism Cement Ltd. 5.69% Shree Cement Ltd. 6.87%

Source: CMIE Prowess

Cement has no substitutes in real estate, infrastructure and industrial
5 development; therefore, the threat of a substitute entering the market is low.

The bargaining power of buyers is low, which leads to dominance of market

6 players in the local markets.

The price of cement in India is determined by the market forces as the

7 cement industry has been de-licensed under the Industrial (Development
and Regulation) Act, 1951. The price and distribution control of cement has
been deregulated since 1989. Cement has also been struck off from the List
of Essential Commodities on February 05, 2002.

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Resource Risk
Limestone is a vital raw material that is used for the production of cement. The bulky nature of limestone makes it difficult to
1 transport over long distances. Limestone reserves are concentrated in certain regions of the country in turn leading to
establishment of cement plants at few locations. As per the estimation of the Indian Bureau of Mines (IBM), the total cement
grade limestone reserve available to meet the industry requirements is around 89,862 million tonne, which is expected to last for
another 35–41 years.

Gypsum is another important mineral, which is used as a raw material in cement production. It controls the rate of hardness of
2 cement. India has around 115 million tonne of gypsum reserves and it produces around 3.50 million tonne of natural gypsum,
which is around 2.50% of world’s total production.

In India, limestone is open-cast mined from quarries, therefore leaving cement sector players mostly dependent on the allocated
3 captive mines leased by state governments. Royalties correlated with quality and quantity of cement is decided by state
governments as well. Presently, the royalty on LD grade (limestone that has less than 1.50% silica content) is INR 72 per tonne
and for other quality it is INR 63 per tonne.

Dependency on cement import in India is very less owing to self sufficiency in cement production. Therefore, the sector faces
4 low risk of foreign market fluctuations. However, gypsum, which is one of the major raw materials used in the production of
cement, is imported from Thailand and Iran due to limited reserves in India.

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Financial Risk
Net sales of cement sector registered a CAGR of approximately 12.64% during the period from FY 2009–10 to FY 2013–14.
1
The steep fall in the growth rate of turnover in FY 2012–13 and FY 2013–14 can be attributed to various stalled real estate projects
2 and poor spending on infrastructure and also a sluggish GDP growth rate during the period.

Growth rate in cement sales turned negative during FY 2013–14 due to low spending by GoI in construction and infrastructure
3 projects, slow recovery in the capital expenditure cycle by the private players and tepid demand in the country.

Figure 13. Sales Trend (In INR Billion)

CAGR 12.64%

765.02 762.10
686.84

538.62
473.42

FY FY FY FY FY
2009-10 2010-11 2011-12 2012-13 2013-14

Source: CMIE Prowess

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Financial Risk
The raw material cost as a percentage of sales increased in FY 2013–14 to 22.29% from 17.56% in FY 2009–10 due to the surge
1 the freight cost of raw material.

On the other side, the employee cost increased to 6.03% in FY 2013–14 than 4.94% in FY 2009–10. The power and fuel cost also
2 increased during the period from FY 2009–10 to FY 2013–14 due to the gradual increase in the prices of diesel and electricity.

The fuel cost is expected to decrease in FY 2014–15 and FY 2015–16 due to decrease in the prices of diesel; however,
3 transportation of raw material through rail will become costly due to freight hike.

Companies using pet coke (petroleum coke) are likely to see rise in power and fuel cost due to price hike of pet coke by 5%. There
4 has also been an increase in the selling and promotion expenses during the period from FY 2009–10 to FY 2013–14.

Figure 14. Cost Structure

27.12 27.45 26.78

26.68

21.47 22.29
19.96 20.15 Power & Fuel
19.20
22.19
17.56
Raw Material
19.03 18.98 19.08

15.32
Selling & Promotion

6.03 Employee Cost

4.94 5.46 5.23 5.39

FY FY FY FY FY Source: CMIE Prowess

2009-10 2010-11 2011-12 2012-13 2013-14

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MACRO ECONOMIC ANALYSIS GOVERNMENT REGULATIONS DEMAND-SUPPLY DYNAMICS COMPETITIVE SCENARIO RESOURCE RISK FINANCIAL RISK
 22

Financial Risk
Key Indicators
Data Unit FY 2013-14
EBITDA Margin % 11.33

Net Profit Margin % 3.80

Return on Capital Employed % 4.59

Return on Equity % 6.37

Current Ratio Times 0.76

Quick Ratio Times 0.40

Debtor Days Days 15

Payable Days Days 83

Inventory Days Days 207

Interest Coverage Ratio Times 1.90

Total outside liabilities/ Total Net worth Times 1.39

Sales to Capital Employed Times 0.90

Debt-Equity Ratio Times 0.85

Asset Turnover Times 0.80

Sample Set : 16 Companies Source: CMIE Prowess

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MACRO ECONOMIC ANALYSIS GOVERNMENT REGULATIONS DEMAND-SUPPLY DYNAMICS COMPETITIVE SCENARIO RESOURCE RISK FINANCIAL RISK
Key Contacts
Vishnu Ramachandran Manish Goyal Ranjeet Singh
Senior Vice President General Manager Deputy Manager
Contact No. : +91- 124-4125487 Contact No. : +91-124-4125707 Contact No. : +91-124-4125710

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