Cementing Your Portfolio With The Cement Stocks
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INTRODUCTION
India is the second largest producer of cement in the world. The sector is a vital part of its economy, providing employment to more than a million people, directly or indirectly.
The real estate development industry currently contributes at least 9 per cent to India's gross domestic product (GDP). At the same time, the value of robust processes and new policy reforms such as awarding infrastructure status to affordable housing, RERA and GST will help in unlocking the full potential of the sector, as an industry as well as an investment option. With RERA, GST and demonetisation, 2017 will be one of the most crucial years for the sector. The construction industry is in a transition phase and it is fully prepared to take ahead what has begun and consolidate into a sector that is transparent, accountable, professional and financially viable.
India has a lot of potential for development in the infrastructure and construction sectors and the cement sector is expected to largely benefit from it.
India's cement demand is expected to reach 550-600 million tonnes per annum (MTPA) by 2025. The housing sector is the biggest demand driver of cement, accounting for about 67 per cent of the total consumption in India. The other major consumers of cement include infrastructure at 13 per cent, commercial construction at 11 per cent and industrial construction at 9 per cent.
CONSTRUCTION BOOST
On February 1, the government announced increased budgetary allocation for sectors including highways, railways and other infrastructure, which are the biggest consumers of cement.
The government has raised the allocation for roads in the FY18 budget from Rs.57976 crore in FY17 to Rs.64900 crore in FY18, with a stress on laying 2000 km of coastal roads.
During Union budget 2017-18, Finance Minister Arun Jaitley proposed that affordable housing be given infrastructure status, which will act as a catalyst to meet the objectives of ‘Housing for All' by 2022. The credit offtake towards affordable segment of housing will lead to creation of supply, especially for both stakeholders, the first home buyer and the developer, both of whom will now have access to cheaper funding. To boost construction sector, the government has taken several initiatives such as ‘Housing for All by 2022 and other sops like the interest subsidy scheme under the Pradhan Mantri Awas Yojana (PMAY). The boost in construction will push demand for cement northward in the upcoming years.
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RERA
The Real Estate (Regulation and Development) Act, 2016 (RERA) was passed by parliament last year and the Union Ministry of Housing and Urban Poverty Alleviation had given time till May 1, 2017, to formulate and notify rules for the functioning of the regulator. Now, RERA has become effective from May 1, 2017. The new Act seeks to bring clarity and fair practices that would protect the interests of buyers and impose penalties on errant builders.
According to RERA, each state and Union territory will have its own regulator and set of rules to govern the functioning of the regulator. The Centre has drafted the rules for Union territories, including the national capital. While many states are still behind on schedule for notification of RERA rules, many have notified the rules and a regulator will start functioning. Some of these states are Haryana, Uttar Pradesh and Maharashtra. RERA seeks to address issues like delays, pricing, quality of construction, title and other issues.
THEMATIC BET
Cement is one industry that plays a pivotal role in the growth of the nation.
The industry is also a significant contributor to the government's revenues. After a short-term impact following the government's demonetisation drive, the cement sector is witnessing early signs of a spurt in demand.
Higher government spending on infrastructure and housing and rising per capita income will continue to drive growth for the cement industry. The Central government has been continuously making positive moves on the policy front, by ensuring ease of doing business, rationalising tax structure and administration and opening more areas for foreign investments through the automatic route.
The Reserve Bank of India (RBI) has allowed banks to invest in Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvITs), which are positive initiatives as they would help revive the stressed infrastructure and realty sectors and revival of these sectors would give a direct boost to cement demand.
On the demand front, the cement sector is expected to grow at a healthy pace over the next five years, primarily led by increased consumption from the infrastructure segment. Housing with an increase in independent housing projects, particularly in the semi-urban and rural areas, is expected to further boost cement demand.
VOLUME GROWTH TRAJECTORY
The southern markets have witnessed some slowdown due to water shortage in Tamil Nadu and Kerala. However, the Andhra Pradesh and Telangana markets continue driving demand growth. For Q1FY18, we expect industry volumes to show modest growth on yearly basis on a relatively strong base. Meanwhile, in H2FY18, we expect volume growth to be strong, considering the favourable base.
PRICES OF CEMENT
Cement prices at the national level were increased by Rs.13/bag on a yearly basis in 4QFY17. The North and central regions have seen a growth of more than 14 per cent and 10 per cent, respectively, in Q4FY17 as compared to the same period in the previous financial year.
Region-wise, North has really gone up substantially demand-wise, but may be not commensurately price-wise. East has always been good, there was no correction of demand there at all. There is lot of volatility in the South unfortunately, but now the demand has kicked in. West is a little cause for concern, if western demand also picks up, with the launch of more projects. The central region is good.
FINANCIALS
So far, out of 47 companies in the cement industry, only six companies have come out results for March 2017 quarter. It is too early to get the exact picture for Q4FY17 performance, but demand-wise, we can bet on a year-on-year performance for the sector to remain robust.
For companies that have declared results for Q4FY17, the topline has increased 32.19 per cent to Rs.18420 crore in Q4FY17 on a quarterly basis. The sector's operating profit also rose 27.04 per cent to Rs.2582 crore in Q4FY17 as compared to previous quarter. Its bottomline surged 54.05 per cent to Rs.1332 crore in Q4FY17 on quarter-onquarter basis.
On the yearly front, for companies that have declared results, revenue has increased 5.38 per cent in Q4FY17 on a yearly basis. The sector's operating profit declined 9.1 per cent in Q4FY17 as compared to the same period in the previous fiscal. Its bottomline also reduced just 0.84 per cent in Q4FY17 on year-on-year basis.
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Heidelberg Cement India
BSE Code: 500292 FV: 10 CMP: 132
Market Cap (F.F.): Rs.937 Crore
Heidelberg Cement India is in the business of manufacturing of Portland cement. The company's product portfolio includes Portland Pozzolana Cement (PPC) and Portland slag cement (PSC). Its manufacturing facilities are located in Ammasandra, Karnataka; Damoh, Madhya Pradesh and Jhansi, Uttar Pradesh.
On the nine-month financial front, Heidelberg Cement India's revenue increased 1.78 per cent to Rs.1272 crore in 9MFY17, as compared to the same period in the previous financial year. The company's EBITDA also rose 31.28 per cent to Rs.217 crore in 9MFY17 on a yearly basis. Its EBITDA margin expanded 383 basis points to 17.06 per cent in 9MFY17, as compared to the same period in the previous fiscal. Heidelberg Cement India's net profit also increased more than two-and-half times to Rs.39.18 crore in 9MFY17 on a yearly basis.
On the trailing twelve-month financial front, Heidelberg Cement India's topline decreased 0.12 per cent to Rs.1631 crore ending December 2016 on a yearly basis. However, company's EBITDA increased 24.78 per cent to Rs.290 crore as compared to the previous year. Its bottomline increased almost three-fold to Rs.63.48 crore ending with December 2016 on a yearly basis.
Heidelberg Cement India's ROE and ROCE stood at 4.44 per cent and 7.77 per cent, respectively, in FY16. The company's total debt-to-equity ratio has come down to 1.19x in FY16 from 1.51x in FY15. At the same time, its interest coverage ratio stood at 1.46x in FY16.
Heidelberg Cement India's shareholding pattern indicates that mutual funds have increased holdings by 67 basis points to 9.6 per cent in the company in Q4FY17 as compared to the previous quarter.
India Cements
BSE Code: 530005 FV: 10 CMP: 209
Market Cap (F.F.): Rs 4,487 Crore
India Cements' brands include Sankar Super Power, Coromandel King and Raasi Gold. The company's plants are located in various locations in India, including Malkapur, Vishnupuram, Chilamkur, Yerraguntla, Vallur, Sankari, Dalavoi, Sankarnagar, Banswara and Parli. Based on customer requirements, it supplies cement in high-density polyethylene (HDPE), paper and laminated packing. India Cements also produces both the variants, viz. blended cement as well as ordinary Portland cement under different grades.
On the nine-month financial front, India Cements' revenue increased 7.67 per cent to Rs.3791 crore in 9MFY17 on a yearly basis. The company's EBITDA also rose 6.76 per cent to Rs.628 crore in 9MFY17 as compared to the same period in the previous financial year. India Cements' net profit also increased 78.37 per cent to Rs.142 crore in 9MFY17 on a yearly basis.
On trailing twelve-month financial front, India Cements' topline increased 8.7 per cent to Rs.4925 crore ending December 2016 on a yearly basis. The company's EBITDA too rose 7.35 per cent to Rs.846 crore, as compared to the previous year. Its bottomline increased 66.34 per cent to Rs.193 crore ending with December 2016 on a yearly basis.
India Cements' ROE and ROCE stood at 4.29 per cent and 9.6 per cent, respectively, in FY16. The company's total debt-toequity ratio has come down to 1.02x in FY16 from 1.14x in FY15. At the same time, its interest coverage ratio stood at 1.48x in FY16.
India Cements' shareholding pattern indicates that mutual funds have increased holdings by 104 basis points to 14.41 per cent in the company in Q4FY17, as compared to previous quarter.
JK Lakshmi Cement
BSE Code: 500380 FV: 5 CMP: 500
Market Cap (F.F.): Rs.3,208 Crore
JK Lakshmi Cement is engaged in providing cement and cementitious materials. It offers cement under JK Lakshmi Pro+ Cement, JK Lakshmi Cement, JK Lakshmi Power Mix, JK SmartBlox, JK GypGold and JK Lakshmiplast brands. JK Lakshmi Cement is in three variants: Portland Pozzolana cement (PPC) (blended), 53 Grade ordinary Portland cement (OPC) and 43 Grade OPC. It markets its products through a network of dealers in Rajasthan, Gujarat, Uttarakhand, Punjab, Jammu and Kashmir, Maharashtra, Madhya Pradesh, Chhattisgarh, Odisha and West Bengal, among others.
On the nine-month financial front, JK Lakshmi Cement's revenue increased 11.62 per cent to Rs.2104 crore in 9MFY17 on a yearly basis. The company's EBITDA also rose 57.37 per cent to Rs.294 crore in 9MFY17, as compared to the same period in the previous financial year. JK Lakshmi Cement posted net profit of Rs.61.15 crore in 9MFY17, as against net loss of Rs.32.43 crore in 9MFY16.
On the trailing twelve-month financial front, JK Lakshmi Cement's topline increased 15.26 per cent to Rs.2839 crore ending December 2016 on a yearly basis. The company's EBITDA too rose 47.08 per cent to Rs.380 crore, as compared to previous year. It posted net profit of Rs.110 crore, as against net loss of Rs.26.38 crore in the previous year.
JK Lakshmi Cement's ROE and ROCE stood at 1.36 per cent and 4.73 per cent, respectively, in FY16. The company's total debt-to-equity ratio stood at 1.68x in FY16. At the same time, its interest coverage ratio stood at 0.82x in FY16.
JK Lakshmi Cement's shareholding pattern indicates that mutual funds have increased holdings by 58 basis points to 15.86 per cent in the company in Q4FY17 as compared to the previous quarter.
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OCL India
BSE Code: 502165 FV: 2 CMP: 1014
Market Cap (F.F.): Rs. 1,592 Crore
OCL India manufactures silica, basic burnt magnesia carbon, fireclay and high alumina bricks, continuous casting, slide gate refractories, castables and precast blocks basic, silica high alumina ramming mases/mortars. Its segments include cement, refractory and others. The company's refractory plant is situated at Rajgangpur and has a total installed capacity of 106,400 million tonnes per annum to produce various types of refractories. The company has operations in Sweden, the Netherlands, Hungary, Italy, Turkey, Japan, South Korea, China, Thailand, Malaysia, Indonesia, Australia, Egypt, Kenya, South Africa and Saudi Arabia.
On segmental revenue front, OCL India earned 89.08 per cent from cement and 10.92 per cent from refractory in FY16. On the nine-month financial front, OCL India's revenue increased 11.48 per cent to Rs.2040 crore in 9MFY17 on a yearly basis. The company's EBITDA also rose 42.4 per cent to Rs.474 crore in 9MFY17, as compared to the same period in the previous financial year. OCL India's net profit has more than doubled to Rs.272 crore in 9MFY17 on a yearly basis.
On the trailing twelve-month financial front, OCL India's topline increased 14.44 per cent to Rs.2195 crore ending December 2016 on a yearly basis. The company's EBITDA too rose 51.56 per cent to Rs.680 crore, as compared to the previous year. Its net profit boosted more than two-and-half times to Rs.405 crore ending with December 2016 on a yearly basis.
OCL India's ROE and ROCE stood at 17.42 per cent and 16.07 per cent, respectively, in FY16. The company's total debt-toequity ratio stood at 0.84x in FY16. At the same time, its interest coverage ratio stood at 3.13x in FY16.