Introduction: Cement IndustryThe global cement market generated
total revenues of $262.5 billion representing compounded annual
growth rate (CAGR) of 9% for the period spanning 2008-2012. The
cement industry of India is the second largest producer in the
world. The production of cement has increased at a CAGR of 9.7% to
reach 272 million tons (MT) during FY 0613. The production capacity
is expected to grow to 550 MT by FY20 India's potential in
infrastructure is huge. According to a study by Global Construction
Perspectives and Oxford Economics, India is expected to become the
world's third largest construction market by 2025, adding 11.5
million homes a year to become a US$ 1 trillion a year
market.Comment by Mohana Vaidya: Capacity addition every year for
next three years more relevantShort Term Outlook - The cement
sector, which saw a temporary drop in demand and prices in past
months due to weak economic conditions, is expected to see its
fortunes turn around soon. The short term outlook for the industry
is positive as indicated by an expected growth of more than 8% in
the short term. Because of the recent market euphoria, Cement and
Gypsum products attracted foreign direct investment (FDI) worth $
2.24 billion between April 2000 and February 2014. However Bank
should remain cautious in short term outlook considering a
slow-down in coal production may cause a strong impact on the
cement production. Also the ongoing monsoon season can cause a
temporary slowdown in demand.Medium Term Outlook - Medium term
outlook looks highly impressive as the Governments thrust on
Affordable Housing and increasing expenditure in Infrastructure
Development (Budget 2014) is bound to cause an indirect benefit to
the cement industry and the benefits are more likely to offset any
possible hike in the fuel prices in future (that increases the
transportation cost). Margins may decrease due to rise in costs and
intense competition but the demand is going to be very large and
the high volumes will maintain and improve the profits. Industry
Risk AnalysisDemand and Supply: The major chunk of demand for the
Cement Industry comes from the Construction companies and is
primarily derived from growth in segments like housing (60-65 per
cent), infrastructure (20-25 per cent), commercial construction
(10-15 per cent) and industrial segments (5-10 per cent). The
construction industry is fairly fragmented and, with many potential
customers available to Cement Companies, the buyer power is
weakened. It is not common for vertical integration either forwards
or backwards to occur between the cement and construction industry.
As it is difficult for construction companies to operate without
this important raw material and on the same side, there are few
uses for cement other than in construction, so the companies in the
two sectors are highly dependent on each other. Rating: 4Government
Policy: Infrastructure (both commercial and housing) accounts for a
major portion of the total domestic demand for cement in India. The
Indian Govt. is strongly focused on infrastructure development to
boost economic growth and plans to increase investment in
infrastructure to US$ 1 trillion in the 12th Five Year Plan
(201217). During the Plan, the industry is estimated to add a
capacity of 150 MT. The Budget outlays for the Infrastructure and
Housing sector can increase the annual cement consumption growth by
0.5-1.5%. However proposed hike in the rail-fares by the Govt. is a
cause of concern as the cement industry depends heavily on
transportation also. This may cause their operating margins to
decrease by 75-100 bps. The Govt. proposal to hike the minimum tax
slab from Rs 2 lakh to Rs 2.50 lakh, and increase in the deduction
on interest paid on a housing loan for a self-occupied property to
Rs 2 lakh will promote investments in the housing sector. Govt.
policies on coal procurement especially after the coal-gate scam is
also likely to cause an impact of the production factors of Cement
industry. In the budget the Duties and tariffs directly levied on
cement have been left unchanged. Rating: 5Extent of competition:
Cement production is an industry where scale economies are
important. The capital required for this is very large which
creates a high barrier to entry, thereby protecting the incumbent
players. However weak product differentiation and low switching
costs for buyers make it easy for buyers to change from one player
to another. The high sunk costs of establishing huge cement plants
becomes a barrier to exit. The threat of indirect competition from
substitutes is very low. Reinforced concrete and other cement-based
building ` are very common, especially for infrastructure projects
and there are not too many substitutes available Rating: 3Input
Related Risk: The major materials required for Cement production
are large quantities of Minerals like limestone, sand, clay, and
iron ore and fuel such as coal to power the kilns. The prices and
supply of fuel sources (Coal) can be volatile. Indian Cement
Industry uses >25% CILs new pricing system for coal, hike in the
clean energy cess on coal (domestic & imported) from Rs 50 per
tonne to Rs 100 per tonne and hike in the basic customs duty on
imported Coal (from 2% to 2.5%) will increase pressure on costs but
there is some scope for some substitute fuel inputs. It is common
for cement manufacturers to integrate backwards into the domain of
its suppliers. Many large cement companies offer both cement and
also aggregates (sand, gravel, etc.), which require quarrying. This
reduces supplier power. Procurement of Limestone is a challenging
task. Also due to various restrictions in mining practices
implemented now-a-days and the legal hassles (Court directives to
State and Center on Mining Issues), there is a significant risk
factor involved in securing the raw materials. Rating:
4FactorsRatingWeightsRational
Qualitative Factors
Demand Gap Supply420%Good linkages with overall growth. Supply
overcapacity situation presently
Government Policy520%Govt. policies are conducive for
infrastructure sector like 100 smart cities etc. which will stir
growth in cement industry
Extent of Competition310%Fairly fragmented structure, High Entry
Barrier, Low switching cost , High Sunk Cost on exit
Input Related Risks415%Profitability is dependent on raw
material prices,Low Supplier power due to prevalent backward
integration
Quantitative Factors
Return on capital employed3.7515%
Refer: To working Sheet Comment by Mohana Vaidya: Need data
here
Operating Margins310%
Growth in operating Margin45%
Variability in operating margin15%
Rating3.775100%
Quantitative Factors: The financials is being calculated by
taking weighted average of industry data for last 7 years from
CRISIL Research. Data represents a set of players comprising 60-70
per cent of the market share by Risk Factors and Key
Characteristics of Capital Goods Industry:Increasing Raw
Material/Energy Prices: One of the major Raw material for
production of cement is Coal which is used to fire up the kiln for
producing cement. Slowdown in Coal production in the past months
after the coal-gate scam and buzzes of restructuring in CIL have
caused a volatility in the supply of Coal. The Govt. is also
considering in opening up coal-mining to international competition
that could increase the cost of power. Also with increase in clean
energy cess and diesel prices CIL is likely to raise the Coal
prices. All these factors are likely to increase the production
costs.High Set-Up costs and High Exit Barriers: Cement production
is economical viable only at a Large Scale Production. Initial
capital requirement is high. Also the exit barriers are high
because once a company has set up a factory and even if it is not
realizing significant profits still then it continues production
because of the capital that is tied up (sunk costs). Most of the
loss making companies get trapped in this vicious cycle.Comment by
Mohana Vaidya: Data supportDependency on Transportation: Cement is
a bulk commodity. Factories are fixed but the places they are
demanded are not. So transportation costs have a significant impact
on the production costs. Hike in Diesel prices, Rail Fares and
Inadequate availability of railway wagons during peak period are
some of the risk factors to watch out for.Comment by Mohana Vaidya:
Data neededTechnology and Other Regulations: Regulation and
intellectual property are less important issues in this market, and
the technology of cement production is mature. Environmental
regulation may, however, become more stringent in future.High
Demand for Housing and public Infrastructure: Indian Cements
Industry is strengthened by a high projected demand of spending in
Housing and InfrastructureMain locations in India for the
industryTamil Nadu, Orissa, Rajasthan, Andhra Pradesh (including
Telengana), West Bengal, Himachal Pradesh, Gujarat, Punjab, Bihar,
Madhya Pradesh, West Bengal (Kolkata), Maharashtra (Bombay), Tamil
Nadu (Mysore)Top and Bottom Five Companies
Top 5Bottom 5
Cera SanitarywareJai Prakash
Grindwell Norton LtdKakatiya Cement Sugar & Inds Ltd
AmbujaNitco Tiles
Birla CorpNCL Industries Ltd_PL
Shree CementRegency Ceramics Ltd.
FOCUS FOR THE BANKAssumptions:1. Average Lending Rates will
remain around 16%, maintaining the same spread above PLR2.
Non-Interest Income-to-Total Income remain around 11% for the
bankINDUSTRY EXPOSURE CALCULATION
Total Portfolio5000
Industry Rating3.77
Corresponding Industry Exposure4.77%
Total Exposure to Cement Industry238.5
Maximum Individual Exposure20.00%
Maximum Individual Exposure47.7
Cement Industry in India is positively correlated to
infrastructural growth rate. India's potential in infrastructure is
huge. The country is expected to become the world's third largest
construction market by 2025, adding 11.5 million homes a year to
become a US$ 1 trillion a year market, according to a study by
Global Construction Perspectives and Oxford Economics. Total
portfolio for Laxmi bank is of Rs 5000 crore and the industry
rating is 3.77. The corresponding industry exposure for cement
industry is 4.77%. Thus, we are proposing the total exposure to the
cement industry as Rs 238.5 crore. Considering a maximum individual
exposure of 20%, the individual exposure amounts to Rs. 47.7 crore.
Considering a revenue bracket of Rs 150 crore to Rs 1500 crore, 9
companies were shortlisted for giving loan. Of those 9 companies,
six companies were finalized based on the risk rating and the
credit rating of respective companies.
Selected Companies and Exposure S. NoCompany NameRisk RatingLong
Term DebtsShort Term DebtMaximum Exposure favorable for bank (a) In
Crore
1Cera Sanitaryware4.96875AA-A1+39.50
2Grindwell Norton Ltd.4.8125A1+A1+38.26
3Ramco Industries Ltd.4.03125A1A132.05
4Visaka Industries Ltd.3.5625A+A1+28.32
5Everest3.5A+A+27.83
6Hume2.96875A+A1+23.60
8Estimated Interest Income (@16% of Advances)30.33
9Estimated Non Interest Income (11% of Interest Income)3.34
10Estimated Total Revenues from the sector33.67
Company Comparison with Industry Average
Shortlisted CompaniesScoreRevenueCurrent RatioGross Profit
MarginROCEInterest Coverage
INDUSTRY AVERAGE1.835.82%10%2.37
Cera Sanitaryware4.96875487.872.379.03%31.45%6.52
Grindwell Norton Ltd.Comment by Mohana Vaidya: These two are not
really cement companies. Check contributions from major products
and revert4.8125965.51.918.11%21.53%27.68
Ramco Industries Ltd.4.03125903.363.086.82%12.16%2.19
Visaka Industries Ltd.3.5625915.64.441.22%6.45%0.56
Everest3.50001040.961.600.82%5.02%0.72
Hume2.96875695.792.182.91%14.80%0.71
Although for Everest Industries Ltd., the current ratio, gross
profit margin, ROCEandInterest Coverageare way below the industry
average, we still consider it suitable for giving loan after
enforcing covenants (like achieving industry current ratio in the
next one year, etc.) on the company. Similar covenants apply on
Visaka Industries Ltd. and India Hume Pipe Ltd. as their interest
coverage ratio and gross profit margin are quite low.
References
1.
http://advantage.marketline.com/Product/Download?pid=MLIP10350008&role=MainDeliverable&mimetype=application/pdf2.
http://www.ibef.org/industry/cement-india.aspx3.
http://www.business-standard.com/article/budget/rail-freight-hike-may-impact-margins-for-cement-players-report-113022700424_1.html4.
http://www.rediff.com/business/report/union-budget-sector-its-impact-on-the-cement-industry/20140711.htm5.
http://www.reuters.com/article/2014/05/21/india-coal-india-idUSL3N0O6458201405216.
https://www.crisilresearch.com/industryasync.jspx?serviceId=10&State=null#storyId#96937#sectionId#425#newsFeedId#undefined7.
http://timesofindia.indiatimes.com/india/Govt-looks-at-price-reforms-for-coal/articleshow/37661147.cms8.
http://www.dnaindia.com/money/report-cil-restructuring-price-free-up-buzz-resurfaces-20010149.
https://www.crisilresearch.com/industryasync.jspx?serviceId=10&State=null10.
http://www.capitaline.com/user/framepage.asp?id=111.
http://indiaratings.co.in/upload/research/specialReports/2014/1/20/indra20Cement.pdf
Submitted By Group-12
NameRoll No.
Ankita Prasad2013PGP007
Dipak Bajaj2013PGP017
Dipak Senapati2013PGP018
Gaurav Kala2013PGP019
Neha Shashi Upadhyay2013PGP037
Satyavir2013PGP045
