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The Cement sector has seen one of the sharpest falls in ROE in the
period under review. From the cyclical highs of FY07-10, ROEs have
more than halved and the near-term outlook is not encouraging. The
sector’s ROE and EBITDA margin has largely reflected capacity
utilisation trends in the industry. Effective capacity utilisation for the
Indian cement industry peaked at 98% in FY07, and the industry
posted a high ROE in that year. ROE expansion was primarily driven
by expansion in EBITDA margin, which was high in high-utilisation
years and low in low-utilisation years. The one exception to this
pattern (when EBITDA margin did not reflect the change in capacity
utilisation) was FY10, when demand growth was sharply higher than
in the previous few years and new capacities were yet to stabilise
(particularly from new players).
The downtrend in ROE and EBITDA margin started in FY09 as
supplies started exceeding demand growth. The downtrend picked
up pace in FY11, when supplies from new producers’ capacities
started stabilising, leading to severe price competition and a general
reduction in the industry’s pricing power.
Major players’ financial leverage has reduced substantially over the
past few years, as companies have used the upturn to reduce debt.
On the other hand, the very high cash levels of some players are
depressing overall ROE, even though FY11 EBITDA margins are
similar to those in FY05. Ambuja Cements’s ROE dropped in FY11 as
cash in the balance sheet increased and EBITDA margin declined.
Some companies saw a sharp reduction in interest costs as
percentage of EBITDA, and that helped buoy ROEs.
The industry’s asset turnover peaked at 0.9 in FY07, which also
marked a peak in its utilisation rate. The lowest point for asset
turnover was FY11, when the utilisation was one of the lowest in the
past few years. We estimate the utilisation rate will fall further in
FY12, although cost-push-led prices will result in higher asset
turnover.
Ambuja Cements’s ROE in FY04 was 340bps higher compared to
ACC. We reckon the gap will shrink to 70bps in FY12, mainly because
of an improvement in operational efficiencies for ACC in the past few
years.
All the companies in our universe, except India Cements, have
tapped most of the low-hanging efficiency improvement tools. In the
last one decade, most companies have: 1) reduced power cost by
installing captive power plants and switching from wet and semi-dry
processes to dry processes; and 2) reduced per-tonne capex by
increasing fly-ash blending, increasing usage of pet-coke, and
installing split-grinding units near centres of consumption and fly-ash
production. As most companies have few tools left to improve
internal efficiency, any further improvement in ROE will hinge almost
on a cyclical recovery.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Cement sector has seen one of the sharpest falls in ROE in the
period under review. From the cyclical highs of FY07-10, ROEs have
more than halved and the near-term outlook is not encouraging. The
sector’s ROE and EBITDA margin has largely reflected capacity
utilisation trends in the industry. Effective capacity utilisation for the
Indian cement industry peaked at 98% in FY07, and the industry
posted a high ROE in that year. ROE expansion was primarily driven
by expansion in EBITDA margin, which was high in high-utilisation
years and low in low-utilisation years. The one exception to this
pattern (when EBITDA margin did not reflect the change in capacity
utilisation) was FY10, when demand growth was sharply higher than
in the previous few years and new capacities were yet to stabilise
(particularly from new players).
The downtrend in ROE and EBITDA margin started in FY09 as
supplies started exceeding demand growth. The downtrend picked
up pace in FY11, when supplies from new producers’ capacities
started stabilising, leading to severe price competition and a general
reduction in the industry’s pricing power.
Major players’ financial leverage has reduced substantially over the
past few years, as companies have used the upturn to reduce debt.
On the other hand, the very high cash levels of some players are
depressing overall ROE, even though FY11 EBITDA margins are
similar to those in FY05. Ambuja Cements’s ROE dropped in FY11 as
cash in the balance sheet increased and EBITDA margin declined.
Some companies saw a sharp reduction in interest costs as
percentage of EBITDA, and that helped buoy ROEs.
The industry’s asset turnover peaked at 0.9 in FY07, which also
marked a peak in its utilisation rate. The lowest point for asset
turnover was FY11, when the utilisation was one of the lowest in the
past few years. We estimate the utilisation rate will fall further in
FY12, although cost-push-led prices will result in higher asset
turnover.
Ambuja Cements’s ROE in FY04 was 340bps higher compared to
ACC. We reckon the gap will shrink to 70bps in FY12, mainly because
of an improvement in operational efficiencies for ACC in the past few
years.
All the companies in our universe, except India Cements, have
tapped most of the low-hanging efficiency improvement tools. In the
last one decade, most companies have: 1) reduced power cost by
installing captive power plants and switching from wet and semi-dry
processes to dry processes; and 2) reduced per-tonne capex by
increasing fly-ash blending, increasing usage of pet-coke, and
installing split-grinding units near centres of consumption and fly-ash
production. As most companies have few tools left to improve
internal efficiency, any further improvement in ROE will hinge almost
on a cyclical recovery.
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