credence capital sector analysis 08-14

8/10/2019 Credence Capital Sector Analysis 08-14

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CREDENCE CAPITAL

SECTOR ANALYSIS AN APPROACH

Aug 9, 2014


2/22

FAQ

How should I start analyzing a particular sector?

Is there any common approach for analyzing sectors?

What is expected of me in the interview?

Do I need to remember any financial numbers for my

sector?

Which sector should I start off with?


3/22

AGENDA

Market Landscaping

Drivers of Demand and Supply

Deepdive into revenue and costs

Key Success Factors External and Internal

Players Profiling

Way ForwardKey metric financial analysis

Sources


4/22

MARKET LANDSCAPING

Cement demand based on infrastructure potential

India requires about US$ 1 trillion inFY13 to FY17 to fund

infrastructure like ports, highways, airports.

Dominated by private players and large plants (~98%)

Oligopoly market with large players having partial pricing control

Robust investments by existing players to expand their capacity.

Excess capacity may be a short term concern.

FY13 production capacity at 272 MT (million tonnes) with FY20E

production capacity at 407 MT


5/22

INDIA IS THE SECOND LARGEST CONSUMER AND

PRODUCER OF CEMENT


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UT IS THE LEADER IN THE CEMENT MARKET

WITH STRATEGIC POSITIONING

North East South West Central Overall

Mkt Size 20% 15% 40% 15% 10% 100%

UT 15% 12% 10% 30% 15% 15%

ACC 7.50% 6% 8% 0% 12% 7.50%

Ambuja 30% 6% 0% 12.50% 0% 10%

Lafarge 0% 15% 0% 0% 0% 2%

Others 48% 61% 82% 58% 73% 65%


7/22

AGENDA

Market Landscaping




Players Profiling

Way Forward

Key metric financial analysis

Sources


8/22

Near term challenges for the industry with muted GDP growth, emergence of new players with

weakening pricing power coupled by threats of adverse logistics costs

1. GDP growth and cement demand to remain muted till FY15

Secular growth with

CAPEX cycle CAGR 9%

Fiscal stimulus boost

with CAGR 7.8%

Policy paralysis and lack of investment expenditure

growth to remain muted at CAGR 6% till FY 18

Fiscal deficit/GDP (%) target of 3% by FY17E requires revenue spending growth less than 5%

2. Industry consolidation peaking Emergence of

regional/new players

- Large part of FY13 capacity added by new/smaller players -

Wonder Cement , JSW Steel , Reliance, KJS Ahluwalia ,

Heildelberg

- Top 6 players account for 50% of total industry capacity in

2012 vs 61% in FY2009

3. Pricing power weakens amid muted demand and capacity surplus

Supply to outstrip

demand inspite of the

slowdown in capacity

additions

60

80 MT of capacity surplus toput pressure on cost reduction for

EBITDA/tonne expansion

225238

250266

287305

0

50

100

150

200

250

300

350

Cement Demand ( Million Tonnes)


9/22

Need to focus on key demand drivers to

capture real growth

Demand Drivers

Housing (65%) (Growth8-9%)

Infrastructure (20%)(Growth 10%)

Commercial space (15%)(Growth 8-9%)


10/22

Demand is seasonal in nature; need prior steps to

prevent declining demand

Demand decline in monsoon season since no construction activities are carried out in

monsoon

Demand is lowest in July Sept and highest in January March

Preservation of coal during monsoon key to ensure continuous supply


11/22

Agenda

Market Landscaping




Players Profiling

Way Forward


Sources


12/22

NEED TO FOCUS ON CUSTOMER PROPORTION TO

ENHANCE PROFITABILITY

Customer Profiling

Government (Lowestprofitability)

Institutional buyer(reasonably moderate

profitable)

Retail buyer (Mostprofitable)

Focus on creating brand to increase proportion of retail buyer to improve

overall profitability


13/22

SIGNIFICANT SHIFT TOWARDS PPC

Type of Cement

Proportion

2005

Proportion

2012

Gross margin

(Sales

Prod)

OPC 39% 32% 40%

PPC 52% 61% 65%

Slag 8% 7% 50%

Total 100 100 -

Industry is shifting towards PPC cement due to higher profitability and due

to its close substitutability nature for OPC cement


14/22

SKEWED COST STRUCTURE CALLS FOR FOCUSED

ATTENTION ON COST DRIVERS

Cost ofsales

RawMaterial (30%)

Lime

stone(25%)

Other

minerals (5%)

Energy(30%)

Electric

ity(15%)

Fuel(15%)

Transportation(25%)

Others(15%)

Coal mix

Mode of

Transport


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Macro-Economic Factors Affecting Cement Industry

GDP Growth

rate

Cement has 1.1 correlation with GDP growth rate

Construction activities drive the demand for cement

The entire market can be divided into 2 segments New construction

and Repair & Maintenance

Input

availability &

prices

Coal prices and its availability

Coal gate scam Resulted in import of coal from Australia at higher

prices

Regulation CIL Price hiking - Cartelization ruling by High Court - Competition

Commission of India

Interest Rates Demand for housing directly affects demand for cement

Currency Currency movements could adversely impact the costs of imports


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Bargaining Power -

Customers

Threat of New

Entrants

Threat of Substitute

Products

Bargaining Power -

Suppliers

Competitive Rivalry

Porters 5 Forces

Industry

Low

Commodity business,

Market is fragmented

and hence do not have

collective power

Moderate

Access to raw material,like lime stone and coal,

distribution network,

High initial capital costs

Low

No close substitute

available

High

Fragmented market, Lower

market share.

High

Raw material are licensed

and hence are not easily

available.

Porter Five Forces analysis indicates that this industry is very

competitive in terms of access to key raw materials and getting

products across to customers (distribution network).


17/22

AGENDA

Market Landscaping




Players Profiling

Way Forward


Sources


18/22

Way Forward

Modest

Growth

With moderate GDP growth rate of 4-5%, cement industry expected to grow not more than

6% instead of projected 10% growth overall

State 2010-11 2011-12 2012-13 3 year average

Bihar 15.0% 10.7% 14.5% 13.4%Chattisgarh 9.8% 8.1% 8.6% 8.8%

Gujrat 10.0% 8.5% 9.0% 9.2%

Jharkhand 15.9% 7.2% 7.8% 10.3%

MP 7.1% 11.8% 10.0% 9.7%

Maharashtra 10.2% 7.1% 7.1% 8.2%

UP 7.9% 6.5% 5.5% 6.6%

AP 9.7% 7.8% 5.0% 7.5%

Karnataka 10.2% 4.9% 6.2% 7.1%

TamilNadu 11.1% 7.4% 4.1% 7.6%

State-wise GDP High Growth expected in

Northern states

RegionFY13

Capacity

FY13

Cement

Dispatches

CAGR demand

5 years

FY18

demand

Surplus/

Deficit

South 118 68.2 5.20% 87.9 30.1

East 37.8 34.5 7% 48.4 -10.6

West 43.4 38.6 6.50% 52.9 -9.5

North 60.8 58.6 9.50% 92.3 -31.5


19/22

Way Forward

Entry ofSMEs

Prices and margins under pressureCoal gate scamResulted in import of coal from Australia

at higher prices

Alternate

Fuel Use of bio energy to reduce energy costs

Increased

sale of

PPC/Slag

Blended cement to be future profitable segment for cement

companies

Brand

Building a brand is absolutely essential in the currentmarket dynamics


20/22

MAPPING CSF AGAINST PLAYERS

Critical Success Factor UT ACC ACEM

Presence/Capacity in growing markets

Higher diesel cost and logistics expenses

Improvement in EBITDA / tonne & Capacity utilization

Higher coal cost due to INR depreciation & increase in coal

linkage cost

Branding efforts

Human Capital and Financial Resources

1

2

3

4

5

6


21/22

AGENDA

Market Landscaping




Players Profiling

Way Forward


Sources


22/22

SOURCES

ISI Emerging market insight

Crisil Research

India Brand Equity foundation

Brokerage reports(MOSL, IIFL, Edelweis)

Annual report of companies Other databasesCapitaline, BMI http://www.business-standard.com/stocks/company-overview/218-ambuja-

cem

http://www.moneycontrol.com/news/ambujacements/brokerage-reports-

AC18-6months-5.html#AC18
http://www.business-standard.com/stocks/company-overview/218-ambuja-cemhttp://www.business-standard.com/stocks/company-overview/218-ambuja-cemhttp://www.business-standard.com/stocks/company-overview/218-ambuja-cemhttp://www.moneycontrol.com/news/ambujacements/brokerage-reports-AC18-6months-5.htmlhttp://www.moneycontrol.com/news/ambujacements/brokerage-reports-AC18-6months-5.htmlhttp://www.moneycontrol.com/news/ambujacements/brokerage-reports-AC18-6months-5.htmlhttp://www.moneycontrol.com/news/ambujacements/brokerage-reports-AC18-6months-5.htmlhttp://www.business-standard.com/stocks/company-overview/218-ambuja-cem

credence capital sector analysis 08-14

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