Business Valuation

CEMENT INDUSTRY
GUIDED BY: Prof. Ashish

Presented By:
Siddhath Gupta (MBA20303) || Mohammad Ali Siddiqui (MBA20301)
|| Vedula Varun Bhaskar (MBA20279) || Yash Chauraria
(MBA202362) || Ravi Ranjan (MBA20385)
Cement Industry Overview:
India is the second largest producer in the world after China. India’s overall cement
production capacity stood at 545MT in 2020 which accounted for 8% of global installed
capacity in FY 20. Till May 2021, India’s overall Cement production accounted for 262 MT.
Out of the Total Capacity, only 2% lies with the private sector and the rest lies with the
public sector. The Top 20 companies accounted for around 70% of total production.

Demand and Supply in India:

Export and Import Data:

Size of Cement Industry Globally:

Top 10 Cement producers in India:

Capacity Utilization:
Although Infrastructure and affordable housing sectors expects to drive demand, the capacity
utilization is below 70 percent for last three years and is likely to be sub-70 per cent in the next
financial year due to large capacity additions expected in 2019-20 and 2020-21, according to rating
agencies like ICRA. I expect that the sector’s capacity utilization levels to remain below 70% for the
next two years due to large capacity additions. This will result price war in the industry, leading to
pressure on margins.

Consolidation in Cement Industry:

Cement Sector Contribution to Indian GDP stands at 0.06 % as of 2018 and Post covid the
construction industry is blooming in proportional with the economy. The Cement sector has
witnessed consolidation with large cement makers taking over regional heavyweights, and struggling
companies being taken over through competitive bidding, under the Insolvency and Bankruptcy Code
(IBC). The top 20 companies in cement industry accounting for around 70% of total production.
Companies are consolidating and expanding to improve their market shares in existing products and
to enter new product segments. The acquisition of existing cement assets is a cost-effective way for
the existing players to expand into newer markets. It not only cuts costs, but eases the process of not
having to set-up a new plant and arrange for approvals and rights, thus saving on valuable time.
Global Cement Price Changes:

Zone wise Demand of Cement:

Products in Cement Industry:

There is various type of products in Cement Industry. Some of them were given below:
1.Ordinary Portland Cement (OPC)
2.Portland Pozzolana Cement (PPC)
3.Portland Blast Furnace Slag Cement (PBFS)
4. Oil Well Cement
5.Rapid Hardening Portland Cement
6. Sulphate Resisting Portland Cement
7. White Cement
8. Clinker Cement

Production in the Industry:

Power and fuel costs account for 30% of the cement price. As a result, power and fuel have a major
impact on the operating expenditure of Cement Companies. The second major component in the
production of cement is the cost of raw materials. The primary raw material used is limestone. Raw
materials account for 30-40% of sales cost.
2015 MMDR Amendment Act has some impact in profit margin as it states that process of
bidding was resorted to adding significant premiums to the State’s kitty- on the royalty
currently earned – and to ensure minimum disruption in mineral availability.
Cement Industries imports Pet coke. So, price increase in Pet coke increases the operating
cost which in turn decreases the profit margin for Cement Industry

Finance in Cement Industry:

Cement manufactures are not expected to make any additions to the existing CAPEX and
given the limited demand present there have also been CAPEX deferral announcements as
well.

Issues around Borrowing:

Because of Economic Slowdown, Banks are not ready to lend to Business especially small to medium
companies affecting the new entrants as well as small and middle size companies in the industry. The
contraction in gross credit flow to the sector could be on the back of risk-averse lending by top banks
as slowing consumption. This will stall manufacturing growth and rubbed off on many of these
businesses and raised likelihood loans, especially to the corporate sector.
With risk aversion being the new guiding principle of the Indian banking industry, banks
have started to reduce working capital limits, increase risk premium — thereby charging
High effective interest rate which is again a major Issue for Cement Industries.

Growth Drivers and Opportunities:

Housing and Real Estate:

• Government initiatives like Housing for All will push demand in the sector.
• Real estate market in India is expected to reach US$ 1 trillion by 2023.
• Strong growth in rural housing and low-cost housing to amplify demand.
Public Infrastructure:
• The Government is expected to upgrade 1,25,000 kms of road length over the next
five years under NIP as per Union Budget 2019-20.
• The government approved an outlay of Rs. 1,18,101 crore (US$ 16.22 billion) for the
Ministry of Road Transport and Highways as per the Union Budget 2021-22.
• Government of India’s push with Smart Cities Mission and AMRUT.

Industrial Development:
Strong economic growth is expected to lead to growth of the industrial sector and in turn
increase in demand in the long run.
The Sector is expected to grow at medium pace due to consolidation and pricing war prevailing in the
industry. Furthermore, the investments are increasing in the sector as FDI inflow in the industry
related to manufacturing of cement and gypsum products reached US$ 5.87 billion between April
2020 and March 2021. National Infrastructure Pipeline (NIP) introduced projects worth Rs. 102 lakh
crore (US$ 14.59 billion) for the next five years. Finally Based on the above analysis we can conclude
that Push from Government and Continuous demand from metro and railway projects will boost the
demand for cement.

Porter 5 Forces Analysis of the Cement Industry

Supplier power - Moderate
• Most companies have captive limestone reserves, so no supplier power here.
• Coal linkages have reduced so companies depend more on alternative fuel sources where
suppliers can dictate prices.
• Price hike in industry is due to increase in price of both transportation and raw materials.
Suppliers are powerful enough to force new prices on the industry
Buyer power – Low
• Around 65% cement in India is consumed by housing sector, with retail customers
accounting for the bulk of customer base. But retail buyers do not have much leverage in
dictating the pricing.
• Lack of substitutes also causes no buyer power.
• Local markets are dominated by small no. of cement firms. Demand is inelastic- it exists at
all price levels
Competitive Rivalry – High
• Large companies enjoy economies of scale.
• Competition is regional in nature, as cement cannot be transported across regions.
• Given over-capacity, slowdown in demand weakens prices, so no real pricing power.
Threat of new entry – Low
• Entering the industry is expensive, given the capital cost of around Rs. 7,200 per tonne.
• Limited raw material sources and tough govt. clearances also restrict new competition.
• Large players benefit from economies of scale.
• Wide distribution and marketing channels are important strategic assets that are difficult to
replicate by new players.
Threat of substitution – Low
• No threat, as there is no substitution for cement. Other building materials like timber are
only used for low-rise buildings.
• On the other hand, although steel can be used for medium to high rise buildings, building
regulations require structural steel to be encased in concrete for fire protection purposes.
• This increases the importance of cement and hence reduces the threat of its substitutes.

Ambuja Cements:

Company Overview:

Ambuja Cements Ltd, a subsidiary of Holcim, a global leader in creative and sustainable
building solutions, is one of India's largest cement firms, renowned for its hassle-free house
construction solutions. It has become the most trusted brand in the Indian cement business
because to its unique products tailored for Indian climatic conditions, sustainable operations,
and activities that further the company's philosophy of contributing to the greater benefit of
society.
It is the industry leader in the responsible use of natural and man-made resources. The firm
has been recognised as being almost eight times water positive, an achievement accomplished
through water saving and plant efficiency improvements. It is also plastic negative, since it
burns 75,000 tonnes of plastic waste in its kilns, which is 2.5 times the entire amount of
plastic utilised. Renewable energy accounted for 7.1 percent of the company's total energy
consumption.

The firm has a captive port with four terminals that has allowed it to carry bulk cement to its
clients in a timely, cost-effective, and greener manner. Ambuja Roof Special, Ambuja Cool
Walls, Ambuja Kawach, and Ambuja Cement Compocem are some of the unique products
the business has introduced to offer value to our consumers. The new goods not only meet
essential consumer demands, but they also assist to reduce carbon emissions substantially.

Ambuja Cements (Projections)

FCFF Valuation

Sensitivity Analysis - FCFF

FCFE Valuation

Sensitivity Analysis - FCFE

Comparison between FCFF and FCFE (SensitivityAnalysis)

ACC

Company Overview:

ACC Limited is one of the largest producers of cement in India. With a pan-India
administrative and commercial presence, ACC Limited (ACC) is a leading player in the
Indian building materials industry. With our creative research and product development, we
have built a reputation as a pioneering organisation that has constantly set new milestones.
We have actively contributed to India's growth with our knowledge and skills spanning eight
decades.
With a pan-India production and marketing presence, ACC Limited (ACC) is a prominent
participant in the Indian construction materials industry. It contributes significantly to the
country's landscape with 17 cement production facilities, over 90 ready mix concrete
factories, over 6,600 brilliant employees, a huge distribution network comprising 50,000+
dealers and retailers, and a national spread of sales offices.

Financial Statements:
We have projected the next five-year financial data using the historical data available with
some basic assumptions. We’ve taken the very first assumption is to remove outliers that has
occurred due to sudden macroeconomic factor impacting the industry. For the year-on-year
growth rate, we’ve taken arithmetic mean and further extended it as straight-line method for
projections.
The revenue growth rate for each and every year has been taken as the average of the past 5
years. However, the year 2020 has been considered as an outlier. Hence it has not been included
in the calculations. Other items have been taken as a fixed % of Revenue with a small growth
rate wherever required.

The capital expenditure has been taken as a fixed percentage of revenue. After adjusting
depreciation and amortization expenses, net CAPEX has been calculated. The debt taken has
been assumed as a fixed % of CAPEX.

Working Capital requirements has been calculated. The projections are based on a fixed % of
total revenue. Below a comparative assessment of the projected Current Assets and Current
Liabilities is done.
Fig: Revenue

Fig: EBIT
 Fig: CAPEX

Fig: Cash free current asset & Debt free current liabilities

We’ve projected a higher revenue looking at the market sentiments and expected demand to
rise as the industry is expected to grow and the government is also pushing the consumption
through multiple schemes. Therefore, taking a higher rate of growth is justified. This further
leads to EBIT and CAPEX to be higher in order to maintain the growth and higher sales.

VALUATION

FCFF Valuation
We’ve done the FCFF valuation through the projected data and taken the terminal growth rate
to be 6.5% along with the WACC calculated which is 11.21%.
Sensitivity Analysis
This brings into different fair values of the firm based on the combination of different growth
rates and WACC. As we can see the combination with 6.5% growth rate and 11.28% WACC
brings out the most relevant data.

FCFE Valuation
Sensitivity Analysis

This brings into different fair values of the firm based on the combination of different growth
rates and Cost of Equity. As we can see the combination with 6.5% growth rate and 11.21%
Cost of Equity brings out the most relevant data.

FCFF vs FCFE
 FCFF vs FCFE
3500

3000

2500

2000

1500

FCFF FCFE

Inference: In case of the financial structure of this company, the FCFF method of valuation
portrays the clearer picture. The approximate value of share price using this method comes
out Rs. 2349. This is when we take the terminal growth rate as 6.5% and WACC as 11.21%.
However, through sensitivity analysis we have calculated different probable values of the
firm with different combinations of growth rate and Rate of Equity.
With the current Market Price of the company being Rs. 2392, we can conclude that the share
is barely overvalued. Therefore, a recommendation of hold for longer period is to be given.
As we have considered a higher growth rate or else it shows significantly overvalued.
The company has strong fundamentals and a good market share. The revenue and PAT rate is
estimated to grow at a very healthy rate. The company is debt free and a high return on
capital employed.

Indian Cements Ltd.

Company Overview

The largest cement manufacturer in South India is India Cements Ltd. All main
markets in South India and Maharashtra are served by the company's four factories
in Tamil Nadu and four in Andhra Pradesh, India. With a market share of 28 percent
in South India, they are the market leader. With over 10000 stockists, they have a
large distribution network. Sulphate Resisting Portland Cement, Coromandel King-
Sankar Sakthi-Raasi Gold Coromandel-Sankar-Raasi blended cements, and
Coromandel-Sankar-Raasi blended cements are some of their trademarks. Ready-
mix concrete is one of their items (RMC).
In the previous two decades, India Cements has expanded steadily to a capacity of
15.5 million tonnes per year (MTPA). The firm now operates seven integrated
cement facilities in Tamil Nadu and Andhra Pradesh, one in Rajasthan, and a
grinding facility in each of these states. Other relevant industries in which the firm
has dabbled include transportation, captive electricity, and coal mining.

We have projected the next five-year financial data using the historical data available with
some basic assumptions. We’ve taken the very first assumption is to remove outliers that has
occurred due to sudden macroeconomic factor impacting the industry. For the year-on-year
growth rate, we’ve taken arithmetic mean and further extended it as straight-line method for
projections.

Final Projections:
We have projected the next five-year financial data using the historical data available with
some basic assumptions. We’ve taken the very first assumption is to remove outliers that has
occurred due to sudden macroeconomic factor impacting the industry. For the year-on-year
growth rate, we’ve taken arithmetic mean and further extended it as straight-line method for
projections.
For Calculating Rd, Re, and WACC,
 FCFF Valuation

Sensitivity Analysis (FCFF)

FCFE Valuation

Sensitivity Analysis (FCFE)

UltraTech Cement:
Company Overview
The Aditya Birla Group's cement flagship firm is UltraTech Cement Limited. UltraTech is
India's largest maker of grey cement, ready mix concrete (RMC), and white cement, with a
market capitalization of USD 5.9 billion. Except for China, it is the world's third largest
cement production. UltraTech is the only cement business in the world (outside of China)
with a cement manufacturing capacity of more than 100 MTPA in a single country. The
company's operations are spread across the UAE, Bahrain, Sri Lanka, and India.
The Global Cement & Concrete Association counts UltraTech as a founding member
(GCCA). It has signed the GCCA Climate Ambition 2050, a sectoral goal of producing
carbon-neutral concrete by 2050. UltraTech has implemented cutting-edge tools such as the
Science Based Target Initiative (SBTi), Internal Carbon Price, and Energy Productivity
(#EP100) as part of its efforts to accelerate the adoption of low-carbon technologies and
processes across its value chain and, as a result, reduce its carbon footprint over time.
UltraTech is the first firm in India to issue dollar-based sustainability related bonds, and the
second in Asia.
Ultratech Cement

A subsidiary of Aditya Birla Group, Ultratech Cement is a Flagship Company in the

Cement segment. The company is the largest manufacturer of Grey Cement, RMC
and white Cement in India. Also it is third largest Cement producer in the world,
excluding China. The company gives focus on innovation offer wide variety of
scientifically arrayed products for the purpose of modern age construction. With over
2500 retail stores UBS i.e. Ultratech Building which is pioneered by Ultratech
Cement is the largest retail store in India.

EBIT Capex and Revenue for the firm

There is positive change for EBIT and total Revenue for the company every year
and the projections also show a positive trend in upcoming years too. On the other
hand for Net capex showed a decline in the middle but based on investment and
earning capacity of the firms it is expected to rise in the coming years which can be
seen in the graph too.

Capex Schedule

The capital expenditure has been taken as a fixed percentage of revenue. After adjusting
depreciation and amortization expenses, net CAPEX has been calculated. The debt taken has
been assumed as a fixed % of CAPEX.

Income Schedule
The revenue growth for Ultratech also is the average of the past five years. For the
upcoming years it is assumed that the growth of revenue will be the same as in 2021
i.e 8.3%. This projection is similar for the other components too.

Working Capital Schedule

Working Capital requirements has been calculated. The projections are based on a fixed % of
total revenue. Below a comparative assessment of the projected Current Assets and Current
Liabilities is done.
By using the Terminal growth rate we obtained the value of the company using FCFF
approach.

Sensitivity analysis
Based on our calculations and using sensitivity analysis the value per share of the
company is assumed to lie between 6504.618 and 9758.704 and this appears to be
true as using both the approach of FCFF and FCFE the value per share lies between
these terminal values.

As per the FCFE approach value per share is 8207.668.

Recommendation

We have used both the FCFF and FCFE methods of valuation. Both of them are
giving an approximate price of Rs.8287 and Rs. 8207. In case of FCFF the growth
rate has been taken as 6.5% and WACC as 12.99%. On the other hand, in case of
FCFE the growth rate is taken as 6.5% and the Rate of Equity is taken as 13.16%.
Therefore, it can be concluded that the share price of the firm should be close to Rs. 8240.
However, the current market price of the firm is Rs. 7739. This is lower than the price
generated using the above two methods of valuation.
Therefore, it can be concluded that the share is currently Undervalued. A Buy
recommendation can be given on this particular share.
Overall, this firm has very strong fundamentals, with a healthy expected growth rate. India is
a developing country; therefore, it is expected that the demand for cement would be very high
in the upcoming future. Hence investing in Ultratech Cement for long term is the
recommended strategy.

Shree Cements:
Company Overview
Shree Cement Ltd is a leading cement manufacturer in India. The company's production
operations are distributed throughout six states in North and East India. The firm has a total
capacity of 44.4 million tonnes per year (MTPA) of cement production and 742 MW of
electricity generating. The company is an energy-efficient and environmentally concerned
enterprise. Their portfolio includes three brands: Shree Ultra Jung Rodhak Cement, Bangur
Cement, and Rockstrong Cement. Their manufacturing operations are situated at Beawar Ras
Khushkhera Suratgarh and Jobner (Jaipur) in Rajasthan Laksar (Roorkee) in Uttarakhand
Aurangabad in Bihar Panipat in Haryana Baloda Bazar in Chhattisgarh.
Shree JungRodhak, Bangur, and Rockstrong are among of the company's brands. A separate
trading segment of the firm caters to third-party buyers and sellers. It manufactures synthetic
gypsum to substitute natural gypsum in cement production. The company's subsidiary is
Shree Global Pte. Ltd. By FY26, the business expects to have increased capacity by 12%
CAGR to 80 million tonnes.
SHREE CEMENTS
Shree Cement is an Indian cement manufacturer, founded in Beawar, Rajasthan, in 1979.
Now headquartered in Kolkata, it is one of the biggest cement makers in Northern India. It
also produces and sells power under the name Shree Power (Captive Power Plant) and Shree
Mega Power (Independent Power Plant). .
Plants are located in Beawar, Ras, Khushkhera, Jobner (Jaipur) and Suratgarh in Rajasthan,
Laksar (Roorkee) in Uttarakhand, Panipat in Haryana, Bulandshahar in UP, Raipur in
Chhattisgarh and Aurangabad in Bihar.
Shree cements was clearly the second largest cement company in India (By Market Cap) in
2018.
Calculations:
The revenue growth rate for each and every year has been taken as the average of the past 5
years. However, the year 2020 has been considered as an outlier. Hence it has not been included
in the calculations. Other items have been taken as a fixed % of Revenue with a small growth
rate wherever required.

The capital expenditure has been taken as a fixed percentage of revenue. After adjusting
depreciation and amortization expenses, net CAPEX has been calculated. The debt taken has
been assumed as a fixed % of CAPEX.

Working Capital requirements has been calculated. The projections are based on a fixed % of
total revenue. Below a comparative assessment of the projected Current Assets and Current
Liabilities is done.
The projected graphs for Revenue, EBIT and CAPEX for the next 5 years.
The Value of the company has been calculated through the FCFF method
This brings into different fair values of the firm based on the combination of different growth
rates and WACC. As we can see the combination with 6.5% growth rate and 11.5% to 12%
WACC brings out the most relevant data.

The Value of the company has been calculated using FCFE method

This brings into different fair values of the firm based on the combination of different growth
rates and Cost of Equity. As we can see the combination with 6.5% growth rate and 11.5% to
12% Cost of Equity brings out the most relevant data.

Analysis & Recommendation:

Value of Share

1. FCFF: Rs. 15,197.90

2. FCFE: Rs. 27,580.96

In case of the financial structure of this company, the FCFE method of valuation portrays
the more clearer picture. The approximate value of share price using this method comes out
Rs. 27,580.96. This is when we take the terminal growth rate as 6.5% and Rate of Equity
as 11.81%.

However, through sensitivity analysis we have calculated different probable values of the
firm with different combinations of growth rate and Rate of Equity.

With the current Market Price of the company being Rs. 30,663.35, we can conclude that
the share is currently overvalued. Therefore a recommendation of sell is to be given.

An investor can also wait for a correction in the market, and purchase the share at a lower
price. The company has strong fundamentals and a good market share. The revenue and
PAT rate is estimated to grow at a very healthy rate. Therefore the future prospects for the
company looks bright.

India is a developing country, which is growing at a very healthy rate. Cement will be
playing a pivot role in infrastructural development in the country. Therefore it can be
considered a safe bet investing in the Cement Sector.

However, as mentioned above the share is currently trading at a very high price and
therefore it is considered as overvalued. It is recommended to wait for a correction before
investing in this share for long term perspective.