Cement Industry

Cement – one of the most important input for construction industry. Cement is basically a fine grey powder which is used for construction of roads, housing, school etc. It gives strength to structures. It is basically a cyclical product like it will be in demand when sectors such as infrastructure, construction will be working well. Different kind of cements is available. It can be differentiated based on the amount of raw material present in it.

In India there are around 34 listed companies which are engaged in production of cement and clinkers. Overall there are around 140 companies involved in manufacturing cement and cement products among which UltraTech Cement is the leading cement brand in India. The installed capacity in India is around 500 MTPA (Million Tonnes Per Annum). Global installed capacity is around 6.2 billion tonnes. That means India’s share in global cement market is around 8%.

Cement and cement products contribute around 0.8% of GDP and in construction sector it contributes nearly 16.1%. India is the second largest producer of cement and also the second largest consumer of cement. Talking about employment, it provides employment to almost 1 million people.

Cement sector was able to attract around Rs. 29,327.06 crores of FDI inflows which was almost 1.12% of total inflows between years 2000 to 2020. Even though India is the second largest consumer of cement, per capita consumption of cement in India is very lower compared from global average. In India per capita consumption of cement is between 210-220 kg. Global per capita average consumption of cement is around 500-520 kg. That shows Indian cement industry has good potential to rise.

Talking about the growth of industry in recent years, I will take the production data of cement to analyze growth.

As it can be seen, year on year growth is in single digit except for last year. 7 year growth is around 47%.

Product scope and Geographic scope of industry

Cement is an input for construction sector. It is used in infrastructure development, creating houses, bridges etc. So the demand for this product is derived from other sector. So if construction sector is growing then demand for cement will also grow. In India, government has taken various steps to boost infrastructure and so cement can see good demand. Also cement does not have an immediate substitute i.e. no product has been developed which have the same qualities as of cement. Talking about geographic scope, India’s major export of cement was to Nepal in 2018. Geographically also the demand for cement is driven by the same factors which we discussed above. So any country that does not have enough capacity to produce the cement it requires it can import it as the cement is almost same.

Comparing listed players

Here is the introductory template of top 10 companies (according to revenue).

(For full introductory template, download the excel file attached in post.)

Now let’s take a glance at how cement companies works and who are the participants.

We will begin with the segmentation of industry. Segmentation helps us to see that the company which we are studying is exactly in which sector.

Cement can be under building material sector. Building material sector consists of those sectors which manufactures goods related to construction of building. Before going directly into product there can be segmentation based on which kind of material it is. Like cement, steel etc. comes in structural materials. Whereas furniture and fixtures, electrical equipments can be under fitments division. Now cement comes under structural materials division. As the main role of cement manufacturing companies is manufacturing cement it can be further classified on the basis of product type and on the basis of price. Under product type it can be differentiated based on the type of cement it is producing i.e. white cement, grey cement, construction chemicals etc. The five things I have mentioned in the chart i.e. grey cement, white cement, ready-mix concrete, construction chemicals and dry mix are the general things that almost every cement company produces. Now another classification can be based on the price it is charging like. Like companies create different type of products like weather plus or quick settling cement etc. Some cement can be normal Ordinary Portland Cement (OPC) which is the most commonly used cement.

Now have a glimpse at how the cement is manufactured.

The cement manufacturing process starts from the mining of limestone. Limestone is the key ingredient for producing cement. Limestone is crushed and stored in stockpiles. Then it is transferred to raw mill for grinding it to fine powder. This powder is heated at high temperature. This is called clinkerisation. This clinkerised raw material is stored in the form of concrete silo. This feed is fed into pre heater for pyro processing and cement clinkers are produced by pyro processing. Clinkers are solids formed due to pyro processing. The clinker is first cooled and then gypsum is mixed in it and further grinding is done. It results in fine grey powder known as cement.

Now let’s see the value chain in cement sector.

In value chain we try to create a chain through which the final product is deriving its value. For example, for creating a good ‘A’ raw materials cost is Rs.20. Its manufacturing cost is Rs.10. Now this product will be transferred from manufacturing unit to distributor or other stores. So transportation charge will be added. Assume Rs.5 in this case. Distributor will keep his margin and sell it to wholesaler and then wholesaler will further add his margin and sell it to retailer. So all these amounts will be added up and the final price will be determined.

In value chain we take margin in percentage terms. So if we forecast that cement sector will see a boom in future then we can decide that whom to bet on. Generally money is parked where returns are higher in the same way here money can be parked at the one who is having highest margin.

On talking with various dealers, I got to know that an average bag of cement cost Rs.350 to a customer. Some wholesalers are also involved in retail selling. They charge Rs.10-15 per bag as their margin. They are buying from company at around Rs.330-335 (without considering discount). On going through other sources I was able to break the cost in the manner shown in the picture pasted above.

Now let’s see who are the inputs and outputs for cement industry with the help of industry map.

By industry map, we can see which parties are involved at input side and which are on output side. Input side consists of parties which are involved in manufacturing product. In this case, input side consist of mining companies, finance companies, logistics companies, labour union, ports and machinery supplier. Mining companies are necessary for providing basic raw material to cement companies. Logistics companies are necessary for movement of raw materials and finished products. Logistics work on both sides. On input side it helps companies in getting raw materials because limestone (the most important raw material for making cement) is not available in every part of the country. On output side, it helps companies deliver products at different locations. As cement is an asset heavy business it requires a lot of capital for opening a plant or for buying a machinery etc. So finance companies also play an important role here. Labour is required for plants and hence labour union comes into picture. Large machineries are needed for producing cement so machinery supplier is also important. If company is importing or exporting something then ports are also needed. As cement companies use coal as a raw material, they emit harmful gases also so Ministry of Environment and other government authorities are there to regulate. On output side, cement is manufactured and sold. Company’s can either sell directly to

infrastructure developer companies or it can sell through its distribution channel i.e. distributor, wholesaler and retailer.

Let’s have a look at profit pool.

(This is the profit pool of 10 companies. For full profit pool download the excel file attached in post.)

By profit pool we analyze that which company is having how much share in overall profit of industry. Here economic profit is taken. First economic profit in percentage terms was determined and then it was multiplied by invested capital. As we can see from profit pool, cement companies are not able to generate enough economic profit i.e. profit above their cost of capital.