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Holtec Consulting, India
INDIAN CEMENT INDUSTRY: KEY CHALLENGES AND WAY-OUT
Jagdeep Verma
2019
India Cement Industry: Overview
Past 10 yrs Cement
demand growth of
6% pa (10%-3%)
Economic growth:
GDP growth of 6.5%
in 2017-18
Effective Cement
Capacity of
~440 mio tpa
Few cement
companies in distress
Low
profitability
PCC
India: ~250 kgs
World: ~550 kgsINDIA
Second largest
cement market
Demand: ~340 mio t
Overcapacity in
short-medium term
Paucity of
limestone??
Increasing
production costs
Scarce energy
resources
Overcapacity
Around 80 mio tpa capacity expected to be added over next 5 years
Consumption is envisaged to grow
at 8-9% pa against expected ~3% pa
growth in capacity additions
In mio t
Capacity Surplus is however likely
to continue in future, as more
capacity is likely beyond 2022
Capacity
Utilization
of 70-75% Capacity
Utilization
of >90%
342371
403437
474512
439460
489513 521 521
97 89 87 7647
9
0
100
200
300
400
500
600
FY19 FY20 FY21 FY22 FY23 FY24
Demand Effective Capacity Surplus/ (Deficit)
42
4 9
13
7
11 -
10
20
30
40
50
Un
it C
os
t o
f
Pro
du
cti
on
Pa
ck
ing
Ma
np
ow
er
&
OH
Fue
l
Po
we
r
Ra
w
Ma
teri
als
32
3 6
9
5
9 -
5
10
15
20
25
30
35
Un
it C
os
t o
f
Pro
du
cti
on
Pa
ck
ing
Ma
np
ow
er
&
OH
Fue
l
Po
we
r
Ra
w
Ma
teri
als
Increasing Operating Cost
2018Unit operating
costs of cement
expected to
increase by 30-
35% over next 5
years
USD /t of cement
2024 USD /t of cement
Energy cost makes
for ~45 % of total
production cost
Challenges for Fuel✓ Prevalent fuel is coal and petcoke
both Indian and imported
✓ Most of the coal deposits are in
Eastern belt and petcoke sources
are few
✓ Indian Cement industry uses >25%
imported coal
✓ Usage of imported coal expected to
increase, especially in coastal
regions
✓ Currently, Fuel cost is approx. USD
0.02/ kCal. It has increased at a
average of ~3% p.a. over past 5 years
✓ Increased emphasis on alternate
clean fuel. Present thermal
substitution is approx. 1-2%Petcoke sources
Coal sources
Cement Plants
(IU/ GU)/
Bina Refinery
Assam
Refinery
Singareni
coalfields
Bokaro-Raniganj
coalfields
Indian/
Imports
(USD/ Kcal)
0.02/
0.02
0.02/
0.02
0.01/
0.03
Singrauli-Talcher
coalfields
0.02/
0.02
Petcoke
Coal
Coal
Coal
Jamnagar
Refinery
Coal
0.02/
0.02
13.9 14.9
10.6
13.0 13.8
10.1 11.1 11.6 12.4 11.9
10.4
-
5.0
10.0
15.0
20.0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
EBIT
DA
pe
r t
of
ce
me
nt
Falling Profitability
Profitability peaked in 2009 Profitability falling/ stagnant
since 2013
Inadequate ROCE
Decrease in profitability can primarily be attributed to increased energy costs and freight
Uncertain Financial Future
Year Acquirer TargetCapacity
(mio t)EV/ t (USD)
Value
(USD mio)
2014 Dalmia Jaypee (Bokaro)-GU 2.1 90 190
2014 Shree Cement Jaypee (Panipat)-GU 1.5 40 60
2016 UltraTech Jaypee 22.5 110 2,470
2017 Dalmia Murli Agro 2.5 - -
2018 Dalmia Kalyanpur 1.0 50 50
2018 UltraTech Binani 9.5 120 1,150
Total 39.1 3,930
Some recent acquisitions, which were offshoot of financial crisis faced by some cement
companies, are as under:
Around 20 mio tpa additional cement capacity is believed to be in similar distress position
Apart from these acquisitions in past 5 years (since 2014), around 45-50 mio tpa
cement capacity has exchanged hands for strategic reasons for an enterprise value
of USD 4,800 mio.
Case 1: Low Capacity Utilization 1/2
SOLUTION: “SET UP GRINDING UNITS/ CEMENT TERMINALS IN ATTRACTIVE MARKETS”
• Cement plant facing problem of low capacity utilization
• Company’s vision was to expand capacity to maintain market
standing
• Constraint of limestone reserves; availability only at their
existing location in West Coast
Desired Outcome
• Capacity
Expansion
• Higher Capacity
UtilizationWhat
client
wants
How to
achieve it
Holtec’s Approach
Case Brief
• Explore various options available for
the company
• Evaluation of options to arrive at the
most suitable alternative for
expanding capacity and improving
realization
Case 1: Low Capacity Utilization 2/2
Option Formulation
ANALYSIS
Cash Flow Analysis
Competitive Advantage
Market Attractiveness Analysis
Financial Parameters and Sensitivities
Soft Factor Analysis
EVALUATION CRITERIA
Market coverage, Market
size, Blending Material
availability
Client’s
Brief
Raw Material, Technology,
Infrastructure, Estimated
Investment, Estimated
Operating Cost
IRR, NPV,
Payback,
DSCR
Recommendation & Results
• Options of setting up Cement
Terminals and Grinding Units in
attractive markets along the
Indian West Coast & Overseas
with clinker at existing location
• Reducing freight to market by
using sea freight
• Increase cement capacity by 2.7
mio tpa
• Increase in revenue by ~20%
due to better cap util &
realization for existing plant
• Estimated ROCE increased from
~ 3% to +10%
Methodology
Company is the making plans to
implement the recommendations
• Identify inefficiencies
• Recommend easy to
implement solutions
• Plant performance
monitoring & course
corrections
A cement company based in East India was struggling with
high cost of production vis-à-vis its peers located in the same
region. This adversely affected their profitability and
competitiveness in the market.
Desired Outcome
• Increased
efficiency
• Cost
OptimizationWhat
client
wants
How to
achieve it
Holtec’s Approach
Case Brief
Case 2: High Operating Cost1/3
SOLUTION: “PROCESS OPTIMIZATION” AND “ONLINE PLANT PERFORMANCE MONITORING”
Improved &
Sustainable
Performance
Case 2: High Operating Cost2/3
Methodology
PLANT/ PROCESS AUDIT
(Plant Technology, Equipment, Process,
Operations)
Identification of bottlenecks/ short comings
Recommendation & Action Plan for Optimizing
Operating Cost
Remote Monitoring of Plant Processes and
Operations through Online Plant Analytics
Process Optimization
Uses Online
Continuous Data
International
Experts
Continued Advisory
+ Action Tracking
Involvement
Focus on Operating
Performance +
Additional Focus on
Reliability
Skillsets from
Operations,
Equipment
Design, R&D
Implementation Support &
Monitoring (OPA)
Performance Enhancement using
Online Plant Analytics (OPA)
Case 2: High Operating Cost3/3
Recommendation & Results
• Solutions to reduce power consumption
• Recommendations to minimize clinker proportion in cement
• Suggestions to enhance productivity
• Action Plans for implementation of recommendations
• Plant monitoring using Online Plant Analytics (OPA). Plant connected
to Holtec Center in real-time to monitor, analyze and suggest course
correction
Plant achieved a reduction is specific power consumption by 2.7
kWh/ t of cement and Clinker factor reduced by 2%
Reduction in energy cost by 3%
• Market transparency
• Evaluation of market
situation covering
demand, supply,
competition, brand
positioning, etc
A company based in India was facing problem of low ex-
factory realisation from one its cement plants, despite
reasonable market presence. Other players in the same
region were earning a higher ex-factory realisation.
Desired Outcome
• Better
realization
• Higher cement
volumesWhat
client
wants
How to
achieve it
Holtec’s Approach
Case Brief
Case 3: Low Realization 1/2
SOLUTION: “TARGET ATTRACTIVE MARKETS WHERE MARKET ATTRACTIVENESS AND
COMPETITIVENESS IS HIGH”
Case 3: Low Realization 2/2
Recommendation & Results
• Price positioning was slightly
improved from Grade B to
Grade B+
• Change in dispatch pattern to
target more financially
attractive markets
• Improvement in sales volumes
by 6-7 %
• Decrease in logistics cost by
5%
Methodology
Company could
improve its ex-
factory revenue by
10-12%
SITUATION ANALYSIS (OF THE COMPANY)
(Target Market, Sales Volumes, Dispatch Pattern,
Realization, Brand Positioning, Distribution Channel, etc)
MARKET ANALYSIS
Demand-Supply, Market Characteristics,
Competitiveness, Logistics, Future Outlook, etc)
RECOMMENDATION
(Dispatch pattern, price positioning &
logistics)
SWOT
Analysis
Competitiveness,
Pricing, Brand
Positioning, Logistics
Strategies & Action Plans
• Valuation based on Asset
Replacement & DCF of
potential Future Earnings
• Identification of
operational bottlenecks
• Assistance in overseeing
the plant operation
A financial institution approached HOLTEC for assistance in
revival of a cement plant that was facing financial distress and
was being considered for sale/ acquisition. Operations were
unstable due to working capital constraint.
Desired Outcome
• Best possible
valuation
• Stabilization of
operationsWhat
client
wants
How to
achieve it
Holtec’s Approach
Case Brief
1/2
SOLUTION: “TECHNICAL & COMMERCIAL DUE DILIGENCE CUM VALUATION” AND
“ASSISTANCE IN OVERSEEING OPERATIONS”
Case 4: Distress Company
Case 4: Distress Company 2/2
Recommendation & Results
• Plant operation was stabilized by
prioritizing and channeling
limited working capital towards
items critical for smooth
operation of the plant
• Weak market position was
strengthened by ensuring regular
cement supply and resolving
apprehensions of distribution
network
Methodology
Plant operations stabilized
Capacity Utilization
increased from ~25 to +50%
Valuation of the company
improved
SITUATION ANALYSIS
(Plant technology, Operating parameters, markets)
Comment on contemporariness &
adequacy of technology & key
operating parameters.
Identification of Bottlenecks & minor
capex for smooth running of plant
Replacement Cost & Future Earnings Method
Estimation of
sales volumes &
realization and
comparison with
current situation
Valuation
Due Diligence
Assist in revival of plant operations
Deputation of Holtec Specialists
Case 5: Emphasis on Cleaner Energy
• Sources &
availability of
alternate fuels
• Techno-economic
feasibility
A cement company wanted to reduce its energy cost and was
interested in exploring possible usage of Alternate Fuel in their
plant for the same
Desired Outcome
• List of available
alternate fuels
• Technical and
commercial
viabilityWhat
client
wants
How to
achieve it
Holtec’s Approach
Case Brief
1/2
SOLUTION: “CREATE SYSTEMS FOR SOURCING & USING ALTERNATE FUEL”
2/2
Case 5: Emphasis on Cleaner Energy
Recommendation & Results
• Refuse Derived Fuel (RDF) and Crop
Waste recommended with
substitution of around 7%
• Liaison with municipal corporation
for Municipal Waste sourcing
• Creation of RDF/ WDF facilities
• Required changes in raw mix
• Modification required in the plant
• Investment required is USD 3.5
million
• Action plan for implementation
Methodology
Estimated saving in fuel cost of
2-3% (fuel cost is 30% of UCoP)
DATA COLLECTION
Sources of alternate fuels, landed cost of alternate
fuels, govt policies and statutes, data about plant
like technology, present fuel usage, raw mix, etc.
TECHNICAL FEASIBILITY
Covering Compatibility with raw materials (raw
mix), Clinker production, Heat Consumption,
Plant Operations, Product Quality
Recommend Fuel Mix and
Action Plan to Implement the same
ECONOMIC FEASIBILITY
Capex, Opex and assessment of financial viability
of using various fuel mix options and equipment
Conclusion• Over capacity: More capacity additions are likely in the future. Need to
strategically plan new plant locations (particularly grinding units) in
order to be in attractive markets and also ensure competitiveness is high
• Operating Cost: Companies are looking at lowering cost of production
through improved efficiencies and optimized processes
• Fuel: Stricter environmental norms, awareness on using alternate fuels
and scarcity of conventional fuel is making companies explore alternate
fuels
• Falling Profitability: Industry is looking for innovative ways to increase
profitability through new products, logistics cost reduction, split units,
etc
• Companies facing Financial Crisis: Lower profitability & debt burden is
forcing some companies towards financial distress. Higher plant
efficiency, effective deployment of available working capital and higher
sales revenue is one of the solutions to revival/ creating higher valuation
Contact Information
THANK YOU
Web : www.holtecnet.com
E-Mail : [email protected]
Address : HOLTEC CENTRE
A Block Sushant Lok,
Gurgaon 122001 - India
Telephone : +91 - 124 - 4047900