There is a lot of discussion online if cement if going to breakout esp. after huge consolidation happening. In my view we are still sometime away before dust settles down both on supply and input cost side. However we can focus on high margin growth and a small player which will be taken over or beaten down eventually down the lane. Valuations are near median… doing some more crunching this weekend -
Hi @Lavanya_Tomar - do you have the above table with latest data?
Ramco’s management says that in the next 10 years, there will only be two cement producing regions in India - the north and the south while the rest of the country will be a net importer from these regions. Looking at region wise trajectory of limestone production data published by the Indian Bureau of Mines (latest available data being 2022) , it is self explanatory that IF the demand cycle does pick up in South, it is going to A) improve CUs of players down there AND B) create ripple effects across western and eastern markets as both these regions are highly limestone deficit, and hence, rely on the 5 southern states to fulfill their demand
Western India - Gujarat and Rajasthan and in Eastern India - Chattisgarh and MP have loads of limestone. No deficit there
Indeed RakeshJi, infact bulk of the auctions of Limestone have taken place in Rajasthan over the past 10 years along with MP. My inclusion of Rajasthan in the ‘west’ part was double counting, my apologies (its there included in the North Zone)
Coming to limestone, what I also understand is that the better way to analyze it is to see organic clinker capacity addition - Listening to various calls I have understood that merely looking at grinding capacity increase may not be the right way to analyze demand supply dynamics as companies open up standalone grinding units to also improve on logistical efficiency (making clinker at one place and setting up GU near to the end market.)
And if we were to chart organic clinker capacity addition over the next 2-3 years, i dont think that number would be in excess of 5% - which means if demand were to increase by more than that number, it would effectively lead to higher clinker Utilizations, and hence, maybe some sort of mean reversion in pricing?
yes, tracking clinker capacity is a better way but let’s also keep on eye on Conversion factor (cement made per ton of clinker) as companies can increase blending with materials like flyash and slag. Flyash can be added upto 30-35% and Slag upto 50% of cement. Some of the grinding units are near to power plants were flyash is available.
However, in last few years demand supply has been a less of driver and more driven by coordination among industry players
With two large players looking to grab market share, I assume somewhere down the line, all these investments will have to make sense from an RoIC level. What one can clearly interpret from the situation on ground is that there might be a vested interest to keep prices so low so that the smaller players face financial duress and hence, pull the plug on capex/or even look to get acquired (Penna for ex, some others in progres.) Once the industry is consolidated to a fair degree (infact the top 2 players are now nearing 40% of industry capacity) , pricing discipline would ensue, much like the Telecom cycle played out?
What is the relevance of EV/MT in cement industry? Isnt ebitda per ton a better metric? Also could someone provide a link for market share data?
Hi Pranav,
EV/ton or MT is a valuation metric, as in what is the value for per ton or mt capacity that the company has. EBITDA per ton would be a better metric to see the profitability or efficiency of the company, as in How much earnings the company is generating for each ton or mt capacity. Hope this was helpful
**My Notes on Cement Industry - **
1. Industry Overview and Demand Dynamics
Cyclical Demand Drivers: Cement demand is closely tied to housing and infrastructure developments. During economic expansions or increased infrastructure spending, cement demand rises, whereas it contracts during downturns.
Price Competition: Cement is a commodity product with low customer stickiness, leading to limited pricing power for manufacturers. Companies often rely on volume growth and cost efficiency to drive profitability.
2. Cost Structure Analysis
Power & Fuel (35%): Coal and other fuels represent the largest cost factor. The volatility of these inputs directly impacts profitability, with potential savings from alternative energy sources (green energy or Waste Heat Recovery Systems, WHRS) boosting margins.
Transportation/Freight (25%): With transportation costs comprising a large portion, reducing lead distances and optimizing logistics can significantly impact margins. Notably, the industry practice is to produce clinkers near limestone mines and transport them to grinding units near consumption centers, reducing transportation costs on raw materials but increasing it for clinkers.
Raw Materials (15%): Limestone, which is highly regulated with royalty and lease costs, creates barriers to entry due to government-controlled mining rights.
Labor and Other Costs: Combined, these costs form a sizable portion, though less variable than fuel and transportation.
3. Investment Considerations and Competitive Analysis
Investors should prioritize companies that exhibit:
Low-Cost Production: Firms with strategic access to limestone (reducing raw material transport costs) or other location-based advantages.
Operational Efficiency: Plants using the latest technology for energy and fuel efficiency typically enjoy a cost advantage, especially in a high-volume business.
Financial Strength: Cement’s cyclical nature means cash reserves and low debt-to-equity ratios are vital for weathering downturns. A debt level of 1.5x EBITDA/Ton is a critical threshold for sustainability.
Economies of Scale: Larger players generally have more bargaining power in raw material sourcing and logistics.
High Profitability: Firms consistently achieving a 1,000/ton EBITDA, either through sales price growth or cost reduction, demonstrate strong management and operational resilience.
4. Regional Market Insights
North: Strong pricing and utilization rates make this a preferred market for established players.
West: Slower growth with lower pricing power due to a high base from prior growth periods.
Central: Ultratech-led consolidation has created a growth-friendly environment with reduced competition.
East: Recent expansion by top players makes the market competitive but with good growth potential.
South: Fragmented and oversupplied due to abundant limestone, leading to intense price competition and unattractive margins.
5. Key Metrics and Valuation Benchmarks
Unit Economics:
Retail price per ton: ~7,000 INR.
Realization by company: ~5,500 INR.
EBITDA per ton: 1,200 INR is considered a decent benchmark.
Capex Requirements: Building capacity costs around 8,800 INR/ton.
EBITDA Sensitivities:
5% reduction in lead distance: 4% increase in EBITDA.
10% reduction in petcoke price: 6% increase in EBITDA.
These sensitivities highlight how small changes in logistics, fuel prices, or efficiency can impact profitability.
Valuation (EV/Ton):
Large companies: $120–$140 per ton.
Small and mid-sized companies: ~$100 per ton.
6. Summary and Recommendation
Strategic Geographic Advantage: North and Central regions are currently the most attractive markets.
Cost Leadership: Companies with lower logistics, fuel, and labor costs are better positioned for sustained profitability.
Balance Sheet Strength: Firms with low debt-to-equity ratios and a debt level not exceeding 1.5x EBITDA/Ton are preferable.
Large-Scale Operations: Companies benefiting from economies of scale, with EV/Ton near $120–$140 (if large) or ~$100 (if smaller), are generally valued attractively in this capital-intensive industry.
** I have completed the exercise below using data from the 2024 annual report. ACC and Ambuja have approximate values since, post-Adani takeover, we do not have the split for ACC and Ambuja. **
From the information below, can we infer that Birla Corp and JK Lakshmi appear fairly valued for now w.r.t their efficiencies, while other companies are overvalued with an EV/Ton greater than $85.
