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Industry Risk Score CENTURION BANK OF PUNJAB March 2008 Cement & Cement Products Introduction Contents
Industry Risk Score CENTURION BANK OF PUNJAB March 2008 Cement & Cement Products Introduction Contents

Industry Risk Score

CENTURION BANK OF PUNJAB

March 2008

Cement & Cement Products

Introduction

Contents

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 demand- supply 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

Risk factors

1 Extremely negative

2 Extremely negative

3 Negative

4 Marginally negative

5 Neutral

6 Marginally positive

7 Positive

8 Positive

9 Highly positive

10 Highly positive

Executive summary

1

Background

2

Industry risk parameters

3

Demand-supply

3

Government policies

3

Input-related risk

3

Extent of competition

4

Financial risk

4

Annexure

5

Industry Risk Scores

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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Executive summary

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

Weightage

Score

Cement and cement products: Industry risk score

5.6

Industry characteristics

85

5.7

Demand-supply gap

35

6.0

Government policy

15

5.0

Input-related risk

15

5.0

Extent of competition

35

6.0

Industry financials

15

5.1

Operating margin of industry

35

6.0

RoCE of industry

65

4.6

Source: CRISIL Research

Background

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.

Industry risk parameters

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.

Extent of competition In 2006-07, the top five groups (Holcim Group, Grasim-UltraTech Cement, India Cements,

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

unit

1999-2000 2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Aggregate turnover Operating profit margin Return on capital employed

Rs million

79,586

87,348

92,028

93,755

133,807

156,515

148,364

257,838

Per cent

17.07

21.05

19.63

15.29

16.35

18.65

18.82

31.93

Per cent

7.11

9.55

8.11

5.58

7.25

10.04

12.90

28.18

Net profit margin Interest coverage ratio Debt-equity ratio Current ratio

Per cent

3.28

2.41

3.29

2.71

3.95

8.44

10.06

19.90

Times

2.0

1.9

2.2

2.2

3.0

4.9

6.5

16.8

Times

1.9

2.1

2.5

2.3

1.7

1.5

1.2

0.7

Times

2.1

2.0

2.2

1.9

1.8

1.8

1.7

1.9

Raw materials days WIP holding days Finished goods days Debtors days Creditors days

Days

124

144

147

146

146

149

141

142

Days

15

17

17

14

14

13

15

13

Days

9

11

9

8

7

6

6

5

Days

29

27

27

24

19

17

17

12

Days

46

46

37

35

34

32

28

33

No. of companies

No

12

12

12

11

13

13

11

13

Source: CRISIL Research

Cement and cement products: Cost aggregates

 

Cost structure (% of net sales)

Unit

1999-2000

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

 

Raw material cost Power and fuel cost Other operating costs Employee cost Selling cost No. of companies

Per cent

26.42

21.58

21.17

21.97

21.57

23.25

22.11

17.21

Per cent

25.53

26.08

25.77

28.7

27.67

27.98

26.18

20.92

Per cent

4.45

4.04

4.58

5.52

5.14

4.46

4.67

3.84

Per cent

6.24

5.69

6.02

6.36

5.46

4.76

4.7

4.24

Per cent

17.97

17.94

18.2

18.75

19.87

18.97

21.74

19.26

No

12

12

12

11

13

13

11

13

Source: CRISIL Research

Annexure

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.

Cement and cement products: Business risk evaluation Risk entity name Weightages Business risk Operating

Cement and cement products: Business risk evaluation

Risk entity name

Weightages

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

100

60

-

30

10

30

-

-

-

-

-

-

-

-

-

-

-

-

30

-

-

-

-

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

40

-

-

-

-

30

-

-

-

-

10

25

-

-

-

-

-

35

-

-

Source: CRISIL Research