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VP Cyclicals 2.0: Cement Industry Key Issues & Cyclicality

Hi Ashwini,

First of all thanks for a very informative thread on cement sector. I haven’t tracked this sector in past and don’t have any knowledge.

As discussed earlier with you, and to carry forward the discussion on Shree Digvijay Cement, you have been highlighting risk on their mining reserves - however, the co keeps mentioning about a high number (reserve) and there were rumors about them bagging some additional mining right (though cost maybe higher than before). So what are the concern here? Do they have RM linkage for next few years only or there is no risk for next 5-7 years?

Personally I used to feel its like a simple side-car investment as TrueNorth fund seems to have acquired the company at a real distress valuation from Brazilian company. Based on the numbers of the company and the youtube talk it seems the company was turning around but the earlier promoters lost patience.
I feel a PE fund will only come in if it believes that it can generate good IRRs from investment till selling off of the company.
The most interesting thing has been that they have roped in Anil Singhvi who has been a veteran in the cement industry and it was interesting to see that he has been incentivised to generate an high IRR. Extract from AR19:
image

Recently he was buying aggressively from the open market when the market was melting down in Feb and March. I was surprised to see the action but now one can understand seeing the March qtr nos and the liberal dividend.
Co has generated fantastic cash flow in FY20.

Given Covid, H1FY21 maybe really bad for cement cos. So I’m trying to understand more about ShreeDigvijay and if in coming months if the stock falls sharply, will it be an opportunity? What all should we track here? Can you include Shree Digvijay in your peer comparison and share the key metrics?

Thanks,
Ayush
Disc: Invested along with clients

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@ayushmit

Shree Digvijay is a case of Good management trying to turn around things.

Couple of things which an analyst can do. Try converting all PL line items into per ton basis.

1.So take Net Sales and divide by per ton produced
2. Divide RM Cost by per ton produced
3. Divide Power Cost by per ton produced
4. Divide Other Expenses by per ton produced

Plot all these numbers over 5-6 qtrs and see where is the profit coming from.

  1. Is a particular line item contributing to profit
  2. Are volumes als contributing.

In my view , in Shree Digvijay most of the profits are coming from Sales Price increase. Is it sustainable (after Corona)

Also where will next leg of growth come from. Co is operating at 98-99% capacity.

So they are sitting on peak sales price, peak capacity utlisation.

As far as limestone is concerned, if we do google searches, we can clearly observe that their limestone mines havent been approved since 15 odd years, The one which they might win is also very small and hardly will suffice 2 years.

Now good things are

  1. Very capable management
  2. Cost levers can be managed and next set of profit growth will come from there.

Disclosure : Not a registered investment advisor

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Cracks loom for cement dealers

CRISIL Research conducted a survey of 100+ dealers across 13 states. Notably, trade channels account for ~60% of total annual sales of cement and are, therefore, a vital indicator of the sector’s condition.

Covid-19 to stretch credit cycle, up working capital needs

Key takeaways from the survey

  • Almost all the dealers foresee 10-30% drop in demand in fiscal 2021 due to delay/freeze in construction activity

  • More than 60% respondents have a minimal inventory of 2-4-days, but spoilage is a concern nonetheless

  • The dealers’ credit cycle is likely to get stretched from 4 weeks to 8 weeks over the next 2-3 quarters

  • Working capital requirement is expected to increase 12-17% in a best case scenario, assuming dealers are able to limit operational expenditure, reduce credit sales and infuse additional capital in their business. A probable risk of retailers defaulting on payment dues will aggravate the financial pain

  • Traders are hoping for manufacturers’ support in terms of better margins (higher incentives)

  • Chances of swift resumption to normalcy post the unlocking look bleak because of delay in return of migrant workers and resumption in freight operations

  • Urban centres are likely to fare worse than rural ones given higher dependence on migrant labourer

Shree Digvijay Cement Reports Strong Q4 Numbers : Anil Singhvi

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@ashwinidamani

Hi Ashwini ,
What are thoughts on star cement and if you can throw some light as to why the tax outgo for star cement is so low ?

Thanks
Chirag

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Got this from Shree Cement’s Investors’ presentation and found it useful in understanding the region wise demand-supply dynamics. Will be glad be know views.

Regards

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Find enclosed my working on calculation of ACC return since listing. It may provide good insight of growth over the years and wealth creation by the company.

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Just going by pure metrics, Ambuja looks best of the lot. It is Pan-India operator, with strong presence in North and West. Next few years can be interesting.

Disc: Not invested in any stocks discussed

Regards
SJ

1 Like

Hi Ashwini,

Star cement in the annual report has repeatedly mentioned proximity to Limestone quarries as a key component of their margins. Considering the positive outlook for Rural demand in the east, is this enough of a Moat for a small player like Star?

Or can biggies like Shree, Ultra tech simply reduce prices to dilute the margins of Star

Shree Digvijay FY20 Annual Report key takeaways:

  • Declared dividend 15% after 33 Years.

  • Reduced debt 40 Cr and now the company is debt free along with a cash balance of 70 Cr.

  • We were also impacted, our operations were closed from 25th March, 2020, as per the lock down directives.

    • We were fortunate that Sikka and Jamnagar did not have many cases and we could start our operations from 10 April.
  • The growth was recorded mainly due to higher market realisation, raw material cost optimization, reduction in overall fuel cost and sustainable plant operations.

  • The Capital investment on energy conservation equipment is 10.97 Cr.

  • EBITDA / Ton increased to 1049 from 296 in FY19.

  • EV / EBITDA stands at 2.18 times.

  • Cement industry is highly energy intensive and 29% of its total expenditure consists of power and fuel costs.

    • At Digvijay Cement, 80% of our requirement for kiln fire is met by Petcoke.
    • In case of increase in Petcoke prices or nonavailability, we use imported or indigenous coal (through e-auction) as the availability of linkage coal is limited.
10 Likes

hello sir,
could you please specify, this data is of which year?

For JK, Ramco and India Cements March results were not out so TTM (Dec 19) and for the others its TTM (March 20).

Regards
Shobhit Jaju

The prices seem to be holding up in June, but that can be attributed to lack of supply due to lockdown. They seem to suggest a 10-12% impact on demand for FY21. I think it will take another quarter atleast to get a better sense of pricing and demand situation for FY21. Link to report: PL Cement June 2020

Regards
SJ

2 Likes

Shree Digvijay Cement at current price of Rs.58 is trading at Mcap of 815 Cr. It has debt free BS and 74 Cr of Cash & Cash equivalents. Hence, at EV of 741 Cr its trading at $91, almost at replacement cost.

1.07 Million tons capacity trading almost at replacement cost with BS size of only 400 Cr.
For FY20 its EBITDA/ton of 1027 which is gold standard in the industry and limestone lease already an overhang, I feel stock is extremely overpriced especially when you have larger players with growth visibility trading much cheaper!

Other views welcomed
Disclosure: Not invested

6 Likes

Has anyone attended Shree Digvijay AGM today and can post the takeaways?

Would be very-2 helpful.

Thanks & Regards

SOME LATEST REPORTS ON CEMENT SECTOR


Hi Aashav, the $91 dollar calculation isn’t absolutely correct. The company will incur a CapEx to increase it’s capacity by 75% to 100% in a year or two funded mostly via internal accruals.

Also, recently the company has announced that they have incorporated a subsidiary Digvijay Logistics, which means that they will soon get the license to operate the Jetty that they have to handle third party logistics and will also help them import coal and other raw materials which will aid the margin.

Above mentioned plans will change the valuation of the company especially for a strategic buyer. Also now since a couple of quarter they are able to maintain an EBITDA of Rs.1100+ per tonnes which is exceptionally for such a small plant.

Considering this I think there is still an upside of 75% to 100% from the current market price of 47.

Disclosure: Invested.

Hello, where have the co. officially informed about the CAPEX? I am not aware of any communications from their end.

Any meaningful capex for a cement co. would be 1 Mn ton and that would cost around 500-700 Cr. But co. has around 75 Cr of cash & equivalents. How can they fund entire capex from internal accruals?

Hi Aashav, the chairperson of the company had communicated that in the annual general meeting.

As you rightly mentioned that even a million tonne plant would take about 750 crores but he company has basic infrastructure ready in place, they will not need to shell out the entire 750 crores.

The chairperson said that they would not shy to take debt to incur the CapEx but largely the requirement will be met by internal accruals.

Disclosure: Invested.

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