Cement Industry Analysis – Group 5

(Aditya Vikram Vaid || Arjun Murali || Ankit Agarwal || Sujoy Sengupta)

India with a capacity of 502 million tonnes per annum (MTPA) of cement production in 2018
is the second largest producer in the world. The capacity is further estimated to touch the 600
MTPA mark by 2025 (IBEF report). There are approximately 210 large cement plants in India
which account for 410 MTPA of the installed capacity. The remaining capacity is made up by
350 mini cement plants in the country.

Porter’s Model

1. Buyer’s Power: The main buyers for the industry comprise the construction firms and
the corporates. The buyer buys the cement product in bulk and as such expect a very
heavy discount. The buyer has the power to switch to any other market player (brand)
since the switching cost is low. There is also a threat of importing cement from foreign
cement manufacturers. However, due to high demand and absence of any substitute to
cement, the buyer’s power can be considered to be moderate.
2. Supplier’s Power: The suppliers of the cement firm include vendors for the supply of
coal, limestone, gypsum and coke. The industry will be impacted severely in case of
shortage of any of the above mentioned raw materials. A cement plant will incur heavy
loses if it is closed even for a day due to raw material shortage. However, most of the
plants are integrated cement plants which mean they have access to the mines of
limestone. For coke, gypsum and coal, there are multiple vendors. As such, the cement
firm can demand excessive discounts for bulk supply. The raw materials are necessary
but due to the absence of dominant suppliers, the supplier’s power is moderate.
3. Potential entrants: The following factors are considered to understand the barriers to
entry.
a. Location: The cement plant should be located close to the source of raw
materials otherwise the operational expenses will increase considerably.
b. Competition: The level of competition in the sector is high. Also, it is very
difficult to convert the existing distributors to keep the cement bags of a new
firm on their shelf
c. Capital investment: To produce 1 million tonne of cement per year, a capital
amount of USD 200 million needs to be invested. The gestation period is also
high

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 After analysing the location, competition and capital investment factors, it becomes
clear that the barrier to entry is very high. Threat of new potential entrants is low.

4. Industry rivalry: There are about 210 large cement plants and another 350 mini
cement plants in the country. Setting up a cement plant requires intensive capital
investment. This raises the exit barrier for the companies. There is marginal
differentiation in the cement product and the switching cost for the buyer is less. The
competition is aggressive and price wars (heavy discounts) are a common industry
practice. The industry rivalry is high.
5. Threat of substitutes: Cement is necessary for all construction activities. There is
literally no substitute which can replace cement as of today. Hence, the threat of
substitute is very low.

A brief analysis of the Porter’s model is as per Annexure 1.

Industry life cycle

The cement industry is in the growth/expansion stage. The industry is further expected to grow,
primarily due to the following reasons.

 High demand for cement due to rapid urbanisation and industrialisation. Many
government infrastructure projects and government initiatives like ‘Housing for All’
will further add to the demand of cement
 The FDI in the sector has reached USD 5.26 billion between April 2000 and June 2018.
The high FDI in the sector is another marker which indicates growth
 The industry is dominated by well-established players (only survivors)

Cement
industry

Since the industry is still in the growth stage, it is good to invest in. The industry will tend
to stabilise over time.

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General Framework with 5 point classification
1. Earnings / Growth Analysis
The leading players in the cement industry (Ultratech Cement, Ambuja Cement, Shree
Cement and ACC Ltd) are taken into consideration and their sales revenue and profit before
taxes (PBT) have been analysed from 2014 to 2018.

Sales Revenue (in Crores of Rs)

Mar '14 Mar '15 Mar '16 Mar '17 Mar '18
Ultra Tech ₹ 20,077.88 ₹ 22,656.48 ₹ 23,708.79 ₹ 23,891.43 ₹ 29,790.10
ACC ₹ 11,481.05 ₹ 11,432.76 ₹ 10,936.41 ₹ 12,930.95 ₹ 14,477.47
Ambuja ₹ 9,910.70 ₹ 9,368.30 ₹ 9,160.40 ₹ 10,446.85 ₹ 11,356.76
Shree Cements ₹ 5,567.14 ₹ 5,875.88 ₹ 6,439.88 ₹ 8,429.16 ₹ 9,833.10

Sales Revenue Chart (in Crores of ₹)

Ultra Tech ACC Ambuja Shree Cements

₹ 70,000.00
₹ 60,000.00
₹ 50,000.00
₹ 40,000.00
₹ 30,000.00
₹ 20,000.00
₹ 10,000.00
₹-
Mar '14 Mar '15 Mar '16 Mar '17 Mar '18

Profir Before Taxes (in Crores of Rs)

Mar '14 Mar '15 Mar '16 Mar '17 Mar '18
Ultra Tech ₹ 3,094.68 ₹ 3,433.70 ₹ 3,810.22 ₹ 4,361.03 ₹ 4,714.42
ACC ₹ 1,217.96 ₹ 1,004.46 ₹ 924.55 ₹ 1,400.66 ₹ 1,583.49
Ambuja ₹ 1,847.89 ₹ 1,264.00 ₹ 1,408.79 ₹ 1,726.31 ₹ 1,718.35
Shree Cements ₹ 1,313.62 ₹ 1,024.85 ₹ 556.92 ₹ 1,660.23 ₹ 1,962.43

Profit Before Taxes (in Crores of)

Ultra Tech ACC Ambuja Shree Cements

₹ 5,000.00

₹ 4,000.00

₹ 3,000.00

₹ 2,000.00

₹ 1,000.00

₹-
Mar '14 Mar '15 Mar '16 Mar '17 Mar '18

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As the numbers indicate, the sales revenue has been increasing with a compounded annual
growth rate of 9.13% on an average. The PBT also is on the rise for the aforementioned
firms with a CAGR of 14.36%. This coupled with rising demand and affordable housing
for all initiative by the government are positive signs for the industry.

2. Permanence of the Industry

The industry has been projected to be on the rise with increased usage over the years.
Considering, no substitutes to cement in the industry and the huge capital investments made
by the firms, the cement industry is here to stay. Rapid urbanisation and industrialisation
will further contribute to the growth of the industry.

3. Attitude of the government

The increase in government’s expenditure on infrastructure coupled with the rising per
capita income of the consumers is a positive sign for the industry. The government has also
pushed for increased construction of cement – concrete roads and highways in both urban
and rural areas which will certainly increase the usage of cement in the short to long term.

Also, introduction of Goods and Service Tax has resulted in decrease in logistics costs
(number of warehouses, goods stoppages etc. reduced considerably) thereby, lowering the
cost of cement and increasing the demand.

4. Labour Condition

The labour unions are present and have been demanding a raise in wages over the years
resulting in increase in costs. Therefore, firms are on the lookout for avenues to improve
employee skills. This has impacted the operating expenses considerably. The number of
employees on the company’s payrolls is decreasing as the company resorts to contract
employees.

The companies need to figure out an effective way to keep the rising human capital costs
under check and boost the top line along with its bottom line.

5. Competitive Condition

There are stiff competitors in this space resulting in the underutilisation of capacity by
many firms. The rate of increase in supply is much higher than the demand generated

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 resulting in this underutilisation of installed capacity. The excess supply has also affected
the price of cement commodity in general.

Therefore, unless demand increases considerably, this situation is likely to prevail and will
be a key challenge for the players, ahead.

Therefore, considering the above mentioned frameworks and analysis, barring a few issues that
must be addressed, the cement industry comes across as a positive sector to invest in which
will yield healthy returns to the investor in the medium and long term.

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Annexure – 1 (Porter’s Model)