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8/10/2019 Credence Capital Sector Analysis 08-14
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CREDENCE CAPITAL
SECTOR ANALYSIS AN APPROACH
Aug 9, 2014
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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?
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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
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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
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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%
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AGENDA
Market Landscaping
Drivers of Demand and Supply
Deepdive into revenue and costs
Key Success Factors External and Internal
Players Profiling
Way Forward
Key metric financial analysis
Sources
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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)
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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%)
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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
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Agenda
Market Landscaping
Drivers of Demand and Supply
Deepdive into revenue and costs
Key Success Factors External and Internal
Players Profiling
Way Forward
Key metric financial analysis
Sources
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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
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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
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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).
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AGENDA
Market Landscaping
Drivers of Demand and Supply
Deepdive into revenue and costs
Key Success Factors External and Internal
Players Profiling
Way Forward
Key metric financial analysis
Sources
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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
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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
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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
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AGENDA
Market Landscaping
Drivers of Demand and Supply
Deepdive into revenue and costs
Key Success Factors External and Internal
Players Profiling
Way Forward
Key metric financial analysis
Sources
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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