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VP Cyclicals 2.0: Cement Industry Key Issues & Cyclicality

On prodding of @Donald posting my exisiting work on Cement and further on will add inputs on Birla Corp

Cement can be sold to two sets of customers

  • Retail Customer – Trade Segment – Has Higher Margins
  • Infra Customer – Non Trade Segment – Has Lower Margins

Only those companies which target and grow Trade Segment win games. For that you need brand recall and shelf space availability because as far as the retail customer is concerned – cement is a push market industry – so whoever is able to push its product first to the customer, will be able to successfully sell it.

The reason being – at the end Cement is a commodity. A layman doesn’t differentiate between different brands. The lead sales influencer is the mason and the shopkeeper.

He goes to buy Cement only when he immediately needs it, and will buy whichever is immediately available. So it is important for a manufacturer that he is able to successfully push his product on the shelf of shopkeeper (ship it on time) and incentivise the shopkeeper enough (discount and commission) so that he sells your product…

Further the brand name should ring a bell with consumer so that he accepts easily what is being pushed to him.

  • Sales Price is determined based on demand and supply. It’s a dynamic pricing market.
  • Cement is a bulky material – hence handling this bulky material takes a lot of effort. It occupies a lot of space and carries a lot of weight. Hence higher the distance a cement bag travels, higher is the freight and handling cost involved and lower is the profit a manufacturer makes.

Finally you are selling something which costs 7-8 Rs a kg and hence there is a limit to which you can transport it

Cement also cannot be exported - so no China Risk

It is important that the manufacturer keeps his production unit as close as close as possible to the end customer, so over time players tend to become dominant in some regions, where they have maximum plants.

Obviously some good players like Ramco are exceptions to the rule. When Ramco found its existing South market with no demand, it started inflitrating Eastern India and yet sell above his marginal cost of production. So instead of bringing down production , it sold at small positive contribution in Eastern India so that his overall cost of production remains low (due to higher qty produced) and yet he doesnt suffer losses. Why Ramco was able to do this is his cost control. Ramco cost structure allowed. The cost per ton for Ramco is so controlled that he was able to travel all the way from South to East and still earn positive (but small) margins

  • Cement is basically is made by heating limestone (calcium carbonate) with small quantities of other materials to 1450°C in a kiln. The resultant hard material which is recovered after heating limestone and chemicals is called ‘Clinker’ .

So obviously anyone who has limestone access is a winner.

Clinker looks like small lumps. These lumps are crushed with a small amount of gypsum into a powdery form – which gives the final product – ‘OPC Cement’.

So in essence following components are compulsory for making OPC cement

  • Limestone – Natural Reserve, extracted or mined from Mines
  • Heat – requires heat of 1450°C , ideally obtained from Coal or its variants.
  • Gypsum –a mineral compulsory for providing the binding nature to cement

However with time, people figured out that limestone can be substituted with other materials namely Flyash or Slag, which will still provide the strength but to a lesser extent. The threshold limit of mixing Flyash is maximum 33%

For big infra projects, limestone component of upto 95% is required, but for the daily homebuilding use, the lower component limestone works fine enough.

  • Thus, there are various varieties of Cement depending on the composition of materials, namely OPC (Ordinary Portland Cement), PPC (Portland Pozzolana Cement) and PSC (Portland Slag Cement (PSC).
Clinker 95% 65% 45%
Gypsum 5% 5% 5%
Flyash 30%
Slag 50%
Total 100% 100% 100%
Margin profile for manufacturer Lowest Margin Higher Margin Highest Margin

Now as I mentioned Limestone is very important. And this is the first question that I asked when I was shown Balance Sheet of Shree Digvijay Cement. It had not own mines …

How did I figure that out ?

Well Limestone Mining Rights are awarded by Govt and are for a definite period of time or till you have reserves in the limestone pit (whichever is earlier) . This right is shown as Intangible Asset in Balance Sheet.

Digivijay Cement had not major value against this


How Does A Cement Manufacturer Optimize His Profits

  • Given the fact that it is a commodity industry, with little or no differentiation in the end product – how does one manufacturer make a higher profit than his peers? Well let’s look at the formula

Sales – Govt Taxes – Discount – Freight – Manufacturing Cost = Profit

Thumb Rule is if you hit the 1000/ton EBITDA mark…you are doing something right.

Now a tale of two cos.

Shree Digvijay and Birla Corp both have hit the 1000/ton EBITDA mark, but one has hit it due to Sales price increase and other due to Cost price reduction.

Which one do you think is more sustainable ??

To me Birla Corp became exciting when I saw it hit the magic mark.

Obviously I know the reason. years of hard work and a team put together carefully by Sandip Ghose (ex Sales head of Lafarge India)

Birla Corp has been making all the right moves.

Hiring good sales guy
Cost Control
Incentivising Dealers
Investing in Brand Recall (look at their ads)


Housing forms 65% of the cement demand in India and hence this is the biggest demand driver. Housing has been growing at a steady modest pace even during lean period. The infrastructure sector adds or restricts the much needed growth.So one needs to judge uptick in demand and more specifically, the demand supply mismatch in the Micro Market where the Cement player is located.

Demand Scenario

  • As a metric, analysts should check the expected demand growth in the micro market and if anything is being done on housing or infra sector in the micro market, which can provide boost to volumes.
  • Whether competition is setting up new capacity in the company’s region of operation? It is normally observed that whenever a new player enters the micro market, they capture market share (through better incentives) thus restricting volume growth of existing players.
  • Whether the company has maintained or increase its market share, with respect to overall demand


  • Are the overall prices in the company’s micro market, headed up or down?
  • Whether the company has a brand good enough to charge premium pricing.
  • Utilisation levels drive the price hikes – Sustainable price hikes hinges on high utilization level. Once the utilisation level starts touching 80%+, the cement manufacturers start getting a lot of pricing power. Optimal Capacity utilisation can only be driven by high infrastructure demand.


The best metric to measure the profitability of a cement company is EBITDA/Ton. Most corporate deals also use this as a measure of payment, and management too uses this metric to judge performance. EBITDA/Ton is a result of lot of small things done right. It starts from better pricing power and ends at better raw material costs and better overhead absorption. The following factors generally drive EBITDA/Ton

  • Whether company has better access to key raw materials viz Limestone, Coal, Petcoke, Flyash, and Power. If a company has captive access to any or all of these factors, its cost of production is reduced and realisations improve.
  • Whether company is enjoying and Government incentive schemes and for what tenure
  • Cost effectiveness in Power and Supply Chain Management.
  • Larger the player, higher is his bargaining power with suppliers. So one should judge whether the company is big enough to negotiate better with vendors.

An analyst should basically check, how much EBITDA growth does he expect and what is the market building in?


Wonderful ongoing education! Finally the boss man is making time :slight_smile:
I am sure picture abhi baki hain… there’s more to come like why WHR (Waste Heat Recovery - another jargon in analyst reports) investments are important…and many more? looking forward to more insights.
Please keep going!

End of day, would love to work with you and create a simple Cement Industry Template :astonished:



  • High Temperature heat is the next biggest requirement in the manufacturing process

  • This high temperature can ordinarily be obtained only from Coal or Petcoke.

    • Coal can be procured from open market – generally costly, or
    • Cheaper coal can be obtained through Government tendering – government rations a quota of cheap coal to each industry, or
    • Petcoke can be substituted for coal – which is less costly than Coal – but reduces the life of plant – and increases maintenance costs
    • Use of Alternate Fuel and new trend in the industry, like Rick Husk, Liquid Solvent, TDI Tar, Etc.
    • Waste Heat Recovery is a mechanism which can lead to huge cost savings in Fuel cost.

What Shree Cement did in its earlier years was that instead of relying on Coal, it’s used a cheaper source of Fuel which is Petcoke.

Plants have to be configured to use Petcoke / Mix of Petcoke and Fuel.

Petcoke has its own problems - the life of a plant reduces due to use of Petcoke and hence needs higher maintenance and capeX costs.

If available a company should always use Linkage Coal (coal linked to be used for few specific plants). With the new Coal Policy, this will become better.

*Another often used word is Waste Heat Recovery *

In a cement plant, nearly 35% heat is lost, primarily from the preheater and cooler waste gases. This corresponds to around 70 to 75 MW of thermal energy. This energy can be tapped by installing a Waste Heat Recovery Power Plant (WHRPP).
Size of WHRPP is influenced by the moisture content present in raw material and fuel (coal). Even after considering heat for drying-off nominal moisture content, around 30 kwh/ t clinker of power can still be generated by WHRPP, i.e. say, 7.5 MW for a 6,000 tpd plant.
The cost of installation of WHRPP is around Rs. 10 crores per MW, and the operating cost is less than Rs. 0.5/ unit (excluding interest & depreciation).


India is many markets within one country. Typically each market has its own leader and leader sets the price.

Whenever Cement Cos want to raise prices, they first take small hikes and judge whether the market is absorbing it or not. If not, the prices are rolled back in name of higher discounts etc.

It is like a classical game theory …Leader is the first one to make a move and others then follow.

Many times leader may have his own compulsions , because he wants Volumes over Pricing.

For eg, whenever there is a big Capex or a Merger, there is a price pressure , because some players looks to ramp up volumes even at cost of margins

Remember , cement is a very Fixed Cost Heavy Industry and its important that you sell sufficient volumes to absorb your overheads


Nowadays Consolidation is happening at a very fast pace. There are a few big players emerging in the market.

Some unlisted strong players in the segment are Wonder Cement, Nuvoco Vistas (formerly Lafarge).

Cement is becoming a big boys game, with most trying to get control of Limestone.

It’s the limestone that matters. There is a finite amount of limestone available. Limestone auctions can nowadays be checked online. Limestone mines cannot be transferred or sold. They go into re auction. So typically no Cement co in India can sell few plants+mines. A full sale of entire shareholding has to be done, which allows transfer of mines without triggering the MMDR Regulations

I normally prefer to buy Cement cos with own mine and having a capacity of 10MT at least. Bigger the better. With size comes bargaining capacity


Wonderful detailed and informative write up.This helps a lot to learn the dynamics of the industry in a short time.
I would like to know your views on the NGT limestone ban near Chittorgarh last year.Since captive limestone increases the operating margins,dont you think this ban limits the margin expansion of Birla Corporation?They seem to be buying limestone from the market for Chaderia plant operations currently.
Thanks a lot

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Power and beauty in simplicity. This kind of grip on subject to transfer insights so elegantly that everyone gets it can only come from solid structured work in the domain. Add me to your fan base, Ashwiniji - kis chakki ka khate hon?

And what a quick fire intro to the basic industry dynamics. This is equipping novices like me solidly. Mere Thanks are not enough.

Waiting for more. Don’t want to interrupt your flow. Please continue. When you find it appropriate, please share your perspective on some basic questions

  1. The bargaining power of the biggest players like Ultratech in driving cost efficiencies from suppliers of every hue - power or flash or pet coke. And perhaps unique strengths that some of the others bring to the table - apart from regional presence strength. Like a brief Competitive strengths Map of few key players. Why is someone like say Shree Cement achieve lower average Capex/Tonne much lower than industry average.

  2. Current Demand pattern map in different regions south, north, east, etc. and the conflicting supply situation depressing prices/margins like in the East despite the very strong demand.

  3. Very basic. Why is it that when capacity utilisations in a region goes up significantly, price increases can be taken - is it because no player has excess capacity to ramp up incremental volumes to take away market share by reducing prices, so the leader sets the game. Getting confused here.

  4. Getting greedier here. From Ultratech Q3ConCall. Couldn’t connect the last line in italics, high capacity utilisation, good operating leverage huh! yet nobody with 1000Cr EBITDA/Tonne?

For East, I think there is so much of demand today also. And whenever new capacity stabilizes, there is some correction in prices and then prices comes back. However, it has not helped the overall EBITDA for the zone to improve. If you were to analyze each as a stand-alone, if you have results of companies for that East zone only, then nobody would be generating a 4-digit number in the Eastern markets. So it’s a market for high-capacity utilization, good operating leverage.

Looking forward to more insights


Great write up ashwini. Someone who has digested the subject can write with such simplicity.

In your flow, whenever possible, please share your views on how cement companies are valued. I heard from an analyst tracking cement companies that when the capacity of a company crosses, 5 metric ton, 10 metric ton and finally 15 metric ton the valuation multiples in terms of EV per ton are different. !5 metric ton is the benchmark to get good valuations. Is it so, kindly elaborate.


This is so intense. Thanks a lot of @ashwinidamani for giving such great insights. I have been reading about “Star Cements” as they claim to be the market leader in North East (33% of the total capacity) and slowly setting them up in Bihar and WB. For Year 2018-19, their EBIDTA/ton fell to Rs. 1591 from Rs. 2018 on account of the expiry of freight subsidy support to the company.
They have product mix as 18% OPC , 2 % PPC and 80% PSC - I want to understand how much they can offset the reduction in this EBIDTA/ton by increasing “what % more” of PSC and do the plants that are making OPC ?

What about companies that are selling “clincker” separately ? How does it contributes to EBIDTA/ton ?

Again, really looking forward to learn a lot from this thread and getting a strong hold on this industry.



Thanks for the cement industry 101 in such a comprehensive manner.

It would be very helpful if you can take us through following 2/3 questions -

  • First question is very topical on Emami Cement. The asking EV valuation was 8000cr but eventually deal happened at 5500cr. If you can explain what happened, what were the weaknesses of Emami cement, what were buyers looking for etc., that would be very helpful. Challenge I have with Cement industry is valuations & I hope some insights can be gained by this exercise.

  • Second obvious question is Shree Cement. This looks like “THE” business in cement industry & people often quote Shree Cement as an example of enormous wealth creation in commodity industry like cement. It’s long term price chart is more like a secular story than cyclical. Quick cursory look shows that it’s OPM are higher by far in Industry & so are EV/EBITDA valuations (no idea on EV per tonne valuations). So if you can write 2/3 paras about Shree cement and bring home some key differentiatiors that business had, that would be very useful.

  • The last question is on demand side of Cement & product mix. What are some key monitor-ables that one shall track to understand acceleration/deceleration in demand of Cement - NHAI road data? Builder construction data? Water Dams/Irrigation projects data etc.?
    Also if you can educate about top 5 brands in trade segment & some of their history - that would be great.

Thanks again!



Q1 - Why is cement a cyclical sector? I have seen most well run companies actually do not exhibit much cyclicality? (Case in point - Shree cement, Ramco etc)

Q2 - Why do companies keep adding capacity when their utilisation continues to lag below 70-75%? Is it a relative market share game?

Q3 - A slightly higher level question – we have seen lot of modernisation in building materials. Any new materials that can disrupt cement? Or make its usage less?


Typical you can sell 100% PSC, provided you have Slag Availability. Slag is a bye product of Steel Industry and in earlier years it used to be sold free (coz there were environmental hazards around slag disposal).

Soon it was realised that Slag can be added to limestone and this gives the cement more binding capabilities. This also reduced the cost for cement guys.

When demand for Slag increased, the steel makers started charging for it.

Nowadays what typically happens is that Cement Cos enter into a Take or Pay agreement with Steel players . A fixed quantity of slag is committed and both players stick to the schedule.


A. India doesn’t display cyclicality in demand, but in prices. The sheer amount of construction that keeps on happening in country aids demand. The demand can however be of Retail or Infra. If there is more retail demand, obviously prices go up. If there is no demand , people fill gap by selling to Infra Players but that leads to lower realisation. Also it is lot to do with regions you are operating in. Ramco operates in South , where demand hasn’t picked up in years. Ramco guys however infiltrated Eastern India and started selling there. They were cost efficient and hence able to transport so far off and still sell at marginal profit. Moreover they were visionary enough to do branding in East India and create a demand for their product

B. Capacity addition is done for twin purposes. If we allow competitors to gain volume share, they will sooner or later edge you out on shelves. There is sheer power that comes with volumes in this game. Also you forecast demand 5-7 years down the line and then add capacity. Cement cos as it is can not operate at full capacity due to unplanned maintenance shutdowns, rains etc. Any co doing 90% capacity utilisation is good.

One should also check if management ps report their capacity correctly. Do they remove planned shutdown days (typically 20-30 days) while calculating capacity. If not then you over report the capacity by 10% and what looks like 75% is actually 85%

C. People keep inventing material that can disrupt cement, but point is how many items will be cheaper than 7-8 Rs a kg and exhibit similar strength and have mass adoption.

Even in Western markets there has been new products which use some portion of cement with a combination of other materials , but most of these are used for Non Structural uses only.

Also cement has shown environmental acceptance. Few other materials may not be good in say Heat or Cold. So They are not all weather proof,


This is a capex and fixed costs heavy business.

With volumes you get bargaining power.
When you reach certain scale you are able to dictate so many things due to sheer volume.

Today a Shree Cement has Transporters doing reverse bidding for logistics. Imagine the volumes that they give. It is mouth watering to the transporter. They compete on who quotes the lowest to Shree Cement.

Similarly you dictate better costs with Refractory Players, Contractors etc.

Cement blocks a lot of space in the godown. A lot of physical infrastructure is required. As a dealer I won’t block it for smaller volumes. Infact today dealers pay in advance to big cement cos so that they can get quantity in time. For a big buyer, if he doesn’t get cement of Co A at Dealer X, he will end up going to Dealer Y and buy either brand A or B.

That’s why dealers don’t want to block working capital with smaller players who may or may not supply timely the desired quantity. If there is a big building project going on, then you need similar brand cement for whole structural work. You can’t mix and match because each cement brand has its own texture and water mixing requirements

After you reach certain volumes , you can afford many machines , which make sense only at higher volumes. So today a Lafarge has a Wagon Tippler and a railway siding in its own plant. The coal wagons from Indian Railways come directly into the plant, the tippler automatically empties it in under an hour and sends it back.other players would incur so much more cost in unloading the coal, paying waiting charge to Indian railways etc.


Good Morning @ashwinidamani,
Hope you are doing good.

In the starting you mentioned that you look for companies above 10 MT capacity, I wasn’t able to get a rational there but now I do.
It would be great if you can talk a bit more about “What a bad cement company would be like , their characteristics ?” - In few bullet points.

I noticed that Shree Cements have its material cost as a part of expense in the range of 7-8% while Ultratech has it in range of 17% and Star in the range of 14-23% and many other in range above 14% and it certainly shows where Shree is getting its edge from, at least on the material procurement part.

Q- Does being an “established player in eastern region” provides any sort of durable competitive advantage ?

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Thank you @ashwinidamani for such a detailed thread.

  1. You mention that India doesn’t display cyclicality in demand, but in prices. How do you identify these cycles? As I understand one of the indicators is cement prices.
  2. Valuations seems to be primarily based on operating efficiency, EV/EBITDA ratios and sales growth.
  3. Ultratech cement & Shree cement has been able to grow at a faster pace compared to other players. Could you throw some light on the same?. Why they are able to have better growth compared to say ACC or Ambuja with pan india presence?

good read on cement industry by vishal khandelwal


Some more data set for you to chew upon @Donald @basumallick @hitesh2710 @rupeshtatiya

Look at the Valuation gaps , but also look at EBITDA/Ton

@Donald Couldnt find merit in that statement, no company with absolute EBITDA of 1000/Ton