Industry Risk Score

CENTURION BANK OF PUNJAB March 2008

Cement & Cement Products

Introduction
Industry Risk Score (IRS) reflects the impact of industry variables on the cash flows and debt repayment ability of the companies in the industry over a 3-4 year period. The risk score for an industry is arrived at by aggregating the scores assigned to the relevant parameters for the industry. Industry parameters include variables such as demandsupply outlook, cost structures, competition and financial performance. Parameters are selected based on the extent to which they affect the debt servicing ability of the companies operating in the industry. Scores on these parameters reflect the extent of positive/negative impact on cash flows, and the degree of variability in cash flows of the companies. The industry risk scores have been graded on a ten-point scale, with 1 indicating high risk and 10 indicating low risk.
Risk score 1 2 3 4 5 6 7 8 9 10 Risk factors Extremely negative Extremely negative Negative Marginally negative Neutral Marginally positive Positive Positive Highly positive Highly positive

Contents
Executive summary Background Industry risk parameters Demand-supply Government policies Input-related risk Extent of competition Financial risk Annexure 1 2 3 3 3 3 4 4 5

Industry Risk Scores Industry Risk Scores (available on 135 industries) capture the influence of industry variables and the extent of positive/negative impact on the cash flows and debt repayment ability of companies in an industry over a 3-4 year horizon. The risk score for an industry is arrived at by aggregating the scores assigned to the relevant parameters like demand supply outlook, cost structures, competition and financial performance.

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Disclaimer CRISIL Research, a Division of CRISIL Limited has taken due care and caution in preparing this Report. Information has been obtained by CRISIL from sources which it considers reliable. However, CRISIL does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. CRISIL is not liable for investment decisions which may be based on the views expressed in this Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers/ users/ transmitters/ distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISILs Ratings Division, which may, in its regular operations, obtain information of a confidential nature which is not available to CRISIL Research. No part of this Report may be published/reproduced in any form without CRISILs prior written approval.

Executive summary
Industry There is a sharp increase in cement prices on the back of higher operating rates, with strong demand from all user segments. The industry`s operating rate, which was around 90 per cent in 2005-06, went up to 94 per cent in 2006-07. Large capacities, expected to be commissioned from 2008-09, are likely to soften the tight situation. This will result in lowering of operating rates and softening of prices. The cement industry has seen a tussle between cement manufacturers and the government. The government has taken various steps to control cement prices. However, this has not resulted in any price reduction and cement prices have increased during this period. Cement players will continue to enjoy pricing flexibility in the short-to-medium term due to a tight demand-supply situation, but the rise in cement prices is not expected to be as significant as seen in the last 12-15 months. The market share of top five players grew from 48 per cent in 2003-04, to 56 per cent in 2006-07, leading to an increased level of consolidation in the Indian cement industry. Moreover, few players such as Lafarge and India Cements are branching into new regions by setting up fresh capacities. This is likely to intensify competition, with new players establishing themselves in those regions. Input costs such as energy, freight and raw material are expected to rise. But a rising level of blending coupled with increase in cement prices will provide players some flexibility for mitigating the risk arising out of these increases.
Parameter Cement and cement products: Industry risk score Industry characteristics Demand-supply gap Government policy Input-related risk Extent of competition Industry financials Operating margin of industry RoCE of industry Source: CRISIL Research 85 35 15 15 35 15 35 65 Weightage Score 5.6 5.7 6.0 5.0 5.0 6.0 5.1 6.0 4.6

CRISIL RESEARCH CEMENT & CEMENT PRODUCTS

MARCH 2008

Background
Limestone is the main raw material used for manufacturing cement. Various types of cement include Ordinary Portland Cement (OPC), Portland Blast Furnace Slag Cement (PBFSC) and Portland Pozzolona Cement (PPC). OPC is a product with a high percentage of limestone, while PBFSC and PPC are blended cement, where limestone is blended with slag and fly ash, respectively. Blending norms help reduce the use of limestone, which in turn will save the limited mineable reserves of limestone. India is the world`s second-largest producer of cement after China. In 2006-07, the total capacity of large cement players in the country stood at about 166 million tonnes. Apart from large and small players, mini cement plants are spread across the country, which have an effective capacity of around 6 million tonnes.

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CRISIL RESEARCH CEMENT & CEMENT PRODUCTS

Industry risk parameters

Demand-supply The cement industry is witnessing robust growth. In the last 2 years (2005-06 and 2006-07), demand for cement has grown at a Compound Annual Growth Rate (CAGR) of over 10 per cent. CRISIL Research expects demand to grow at CAGR of 9 per cent over the next 4 years, due to growth in end-user segments. Going forward, CRISIL Research expects a major thrust to cement demand to come from higher infrastructure investments. In the last 4 years, the cement industry`s demand-supply gap has narrowed, leading to higher operating rates of over 90 per cent. In the next 2-3 years, CRISIL Research expects nearly 70-80 million tonnes of cement capacities to come on stream, and majority of them are expected to bunch up in 2008-09 and 2009-10. Going forward, this is likely to result in the lowering of operating rates and easing of demand-supply gap. CRISIL Research expects prices to soften from the fourth quarter of 2008-09 onwards, due to incremental capacity additions that are expected. Government policies Till mid-2007, the cement industry saw a lot of tussle between cement players and the government. The government took various steps to control cement prices. It announced a differential excise duty and removal of all duties on import of Portland cement. All these steps have not resulted in any price reduction; on the contrary, they have increased during this period. CRISIL Research believes that the cement industry will continue to enjoy the pricing flexibility in the short-to-medium term, due to a tight demand-supply situation. However, price increases will not be as significant as seen in the last 12-15 months. Input-related risk Limestone, fuel (coal and lignite) and power are the main inputs in the manufacture of cement. The industry is dependent on the government for the pricing and availability of these inputs, which account for a significant portion of the total production cost. In the last 10 years,limestone cost has not increased significantly. But as more capacities come on stream, it is expected to exert pressure on the country`s limited mineable limestone reserves. Going forward, prices of limestone are not expected to rise significantly. However, increased level of blending is likely to help cement players lower their consumption norms of limestone, thereby mitigating the risk of a price hike. Energy costs, which account for nearly 26-30 per cent of net sales, have been rising steadily. In 2006-07, energy cost decreased to 21 per cent from 26 per cent in 2005-06. This has been primarily on account of the increasing focus of companies on captive power plants. Currently, 52 per cent of the total production of cement is through captive power plants. Going forward, CRISIL Research expects this percentage to go up. We expect grid power tariffs and captive power (thermal and diesel) costs to increase due to rising fuel prices. However, the usage mix will provide cement players some flexibility to offset this rise on the input side.

CRISIL RESEARCH CEMENT & CEMENT PRODUCTS

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Extent of competition In 2006-07, the top five groups (Holcim Group, Grasim-UltraTech Cement, India Cements, Jaiprakash, and Century Textiles) accounted for over 56 per cent of the industry`s market share. However, fragmentation still prevails, with the presence of 50 players having the remaining 46 per cent the market share. The industry is witnessing a mixed trend. On one hand, consolidation in the industry is increasing and on the other, players such as Lafarge and India Cements are setting up fresh capacities outside their current operational regions. The increasing level of consolidation helps in price stability, while the entry of new players into a particular region results in price disruptions, as they try to establish themselves in new markets. CRISIL Research believes that overall the cement industry is fairly consolidated and, going forward, consolidation in the industry will increase, but at a slower pace. Financial risk
Cement and cement products : Financial parameters
Select financial parameters Aggregate turnover Operating profit margin Return on capital employed Net profit margin Interest coverage ratio Debt-equity ratio Current ratio Raw materials days WIP holding days Finished goods days Debtors days Creditors days No. of companies Source: CRISIL Research unit Rs million Per cent Per cent Per cent Times Times Times Days Days Days Days Days No 1999-2000 2000-01 2001-02 2002-03 79,586 17.07 7.11 3.28 2.0 1.9 2.1 124 15 9 29 46 12 87,348 21.05 9.55 2.41 1.9 2.1 2.0 144 17 11 27 46 12 92,028 19.63 8.11 3.29 2.2 2.5 2.2 147 17 9 27 37 12 93,755 15.29 5.58 2.71 2.2 2.3 1.9 146 14 8 24 35 11 2003-04 133,807 16.35 7.25 3.95 3.0 1.7 1.8 146 14 7 19 34 13 2004-05 156,515 18.65 10.04 8.44 4.9 1.5 1.8 149 13 6 17 32 13 2005-06 148,364 18.82 12.90 10.06 6.5 1.2 1.7 141 15 6 17 28 11 2006-07 257,838 31.93 28.18 19.90 16.8 0.7 1.9 142 13 5 12 33 13

Cement and cement products: Cost aggregates

Cost structure (% of net sales) Raw material cost Power and fuel cost Other operating costs Employee cost Selling cost No. of companies Source: CRISIL Research Unit Per cent Per cent Per cent Per cent Per cent No 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 26.42 25.53 4.45 6.24 17.97 12 21.58 26.08 4.04 5.69 17.94 12 21.17 25.77 4.58 6.02 18.2 12 21.97 28.7 5.52 6.36 18.75 11 21.57 27.67 5.14 5.46 19.87 13 23.25 27.98 4.46 4.76 18.97 13 22.11 26.18 4.67 4.7 21.74 11 17.21 20.92 3.84 4.24 19.26 13

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CRISIL RESEARCH CEMENT & CEMENT PRODUCTS

Annexure
Companies used for calculating sector aggregates
Andhra Cements Ltd. A C C Ltd. Chettinad Cement Corpn. Ltd. Ambuja Cements Ltd. Gujarat Sidhee Cement Ltd. India Cements Ltd. Ultratech Cement Ltd. Madras Cements Ltd. Mangalam Cement Ltd. Prism Cement Ltd. Rain Commodities Ltd. Shree Cement Ltd. Shree Digvijay Cement Co. Ltd. As the companies have changed their year ending, the companies' set is uncommon.

CRISIL RESEARCH CEMENT & CEMENT PRODUCTS

MARCH 2008

Cement and cement products: Business risk evaluation

Risk entity name Business risk Operating efficiency Access to cost-effective technology Capacity utilisation Availability of raw materials Energy cost Raw material usage Management of price volatility Product design and development Adherence to environmental regulation R&D activities FCA/MDA-approved plants Efficiency of beneficiation process Availability of skilled labourers Hygienic processing facility Indigenisation level Integration of operations Multi-locational advantage Selling cost Employee attrition rate Vulnerability to event risk Bargaining power with suppliers Proximity to customers Market position Brand equity Customisation of product Project-management skills Size-related pricing advantages Diversified markets Replacement markets After-sales service Proximity to market Long-term contracts/assured offtake Distribution set-up Financial ability to withstand price competition Access to patents Consistency of quality Product range Deficit region Value addition Consolidation of markets Support service facilities Other promotional ventures Source: CRISIL Research Weightages 100 60 30 10 30 30 40 30 10 25 35 -

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CRISIL RESEARCH CEMENT & CEMENT PRODUCTS