Cement, as a commodity, ranks second in volume among the top industrial products manufactured in the world.
So it’s no surprise that India, the second most populated country in the world is also the second-largest manufacturer of cement.
According to the Cement Manufacturers Association, India boasts a total installed capacity of 540 m tonnes. The top five players control half the country's production.
In today’s article, we compare and contrast two of the top cement players, UltraTech Cement and ACC. The idea is to study their past, to eliminate risks, and profit from their future.
Background
ACC: ACC is one of the oldest cement companies in India with a rich history. It was bought by the world leader in cement, the Swiss based Holcim group in 2004.
It has a a total installed capacity of 30m tonnes and an annual production of m tonnes. ACC enjoys a market share of 10% in India.
UltraTech Cement: Over the past decade, UltraTech Cement has grown organically and inorganically. It has nearly doubled its capacity to a whopping 100m tonnes.
The company has a market share of 25%.
The Aditya Birla group cement giant grew aggressively after absorbing Grasim's cement business in 2010. This created the largest cement company in India.
ACC and UltraTech Cement both operate cement plants across all regions in India. Now this bodes well for a cement company. The logic behind this is simple. Transporting cement beyond a distance is not economical. This makes the business fairly regional.
Exposure to a single market makes a company vulnerable to the price fluctuations in that region. But ACC and UltraTech, unlike their smaller peers, operate plants in multiple regions.
So, if the market in one part of the country doesn't perform well, the profits from other markets help mitigate it.
Capacity and Production
Construction activity across the country is the primary driver for any increase in cement demand. Not only does it include housing projects in the urban and rural areas (accounting for 65% of the total cement demand) but infrastructure activities like construction of roads, bridges, highways, metros etc. (balance 35%) as well.
Revenue growth
UltraTech's 5-year compounded annual growth (CAGR) in revenue is three times that of ACC. This drive comes on the back of massive capacity expansion combined with heavy demand from housing and infrastructure projects across the country.
Profitability
A cement company's profitability is best reflected in its earnings before interest depreciation tax per tonne (EBIDTA per tonne). Simply put, it is the profit from core operations (before interest and depreciation) a company makes on every tonne of cement it sells.
A higher level of profitability is usually a result of two things; either the company operates in highly profitable regions or it keeps a tight lid on its costs.
While UltraTech and ACC enjoy captive resources for raw materials and power supply, ACC operating costs have always been higher. The primary reason is its aged plant and machinery. These often need unexpected maintenance. This affects the company’s operating profit.
Conversely, UltraTech's plant and machinery is relatively new, giving it a leg up. Apart from this, both companies are equally efficient in keeping a lid on their costs.
Even though ACC operates plants across the country, a large part of its cement plants is in the Southern region of India. Due to excess cement capacity in Southern India, the supply-demand dynamics there have usually been unfavourable for cement producers.
For ACC, this southern exposure in conjunction with the erratic cost structure has affected the company’s profitability.
Dividend
Dividend is the income an investor can make from stocks, other than the appreciation in the value of the share.
Owing to the capital intensive nature of the business, cement companies are not dividend paymasters. This is reflected in the five-year average dividend yield for ACC Cement and UltraTech Cement: 0.6% and 0.5% respectively.
This ratio measures the level of debt a company takes on to finance its operations or expansion, against the level of equity that is available.
Generally, a favourable debt-to-equity ratio is less than 1.0, while a risky debt-to-equity ratio is higher than 2.0.
While ACC enjoys a debt-free status, UltraTech has borrowed money to fund its massive expansion in the past decade. But considering it has been less than 1 and has been falling, it does not raise a red flag.
Return on capital employed (ROCE)
Return on capital employed is one of the most meaningful indicators of a company's profitability and efficiency.
it’s an excellent tool for analysing returns of a capital intensive industry like cement. It tells you the money a company generates on the total capital it has invested (shareholders equity plus borrowed money).
The 5-year average for ACC is higher than that of UltraTech. While this usually means that ACC is generating more returns by employing its capital efficiently, in this case, it might be different.
UltraTech's new capacity addition is yet to generate adequate profits, affecting its return on capital employed currently. But over the next few years, as the new capacity turns profitable and reduces borrowed money, this number must increase.
Valuation
The most common and effective ratios for comparative analysis and valuation are the Price to Earnings (PE) and Price to book (PB) value ratio.
The PE ratio uses the company's earnings to determine the value a shareholder assigns to one rupee of earnings. The PB ratio uses a company's book value to determine the same.
The PE and PB ratios for ACC is at 20.4 and 3.2, respectively. For the last 10 years, the average is 25.9 and 2.9 respectively.
For UltraTech Cement, the PE and PB stood at 31.5 and 4.6, respectively. The ten-year average is 32.4 and 3.8 respectively.
Both companies are trading at a premium to their 10 year averages, indicating the stocks are overpriced at the moment.
Sustainability efforts
Climate change is among the most pressing issues facing humanity today. Governments world-over are grappling with this issue, forcing companies to become more environmentally friendly. A critical step in this direction for companies is to reduce their carbon emissions.
Carbon emission in cement companies is measured in terms of kilos per tonne of cementitious material. Both ACC and UltraTech stand at 493 kilos per tonne and 462 kilos per tonne of cementitious material. Most carbon emissions associated with cement occur during production which is resolved with the use of alternate components such as fly ash and slag.
Drawing energy from renewable sources is another helpful step towards sustainability. UltraTech's 13% of the energy requirement is met through renewable energy capacity, while ACC's 4% of the energy requirement is met through renewable energy capacity.
UltraTech is 3.9 times water positive, which means they return 3.9 times the amount of water they consume, to the community. ACC is 1.1 times at present and aim to be 5 times by 2030.
Bright Prospects
Despite being the second-largest cement producer in the world, India's cement consumption stands at 235 kg per capita.
This number is lower than the global average of over 500 kg per capita. So there is still a lot of scope for growth going ahead.
The cement industry has undergone massive capacity expansion in the past decade while demand for cement remains dormant. Historically, the ratio of cement demand growth to GDP growth has been around 1.2x. But due to a slowdown in infrastructure projects, the ratio has been much lower than the past average.
Despite this supply overhang, the margins have not fallen significantly. This is due to the consolidation in the industry. The top 5 players control nearly 50% of the market. At a regional level, this number is significantly higher.
However, with the increase in small & mid-sized cement players, the industry leaders are likely to lose their bargaining power.
Equitymaster's view
We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster for her view on cement companies. Here's what she had to say...
Although cement companies have been a big beneficiary of the sharp recovery in realty sector, cost pressures have kept their margins tepid for a while.
With cost pressures easing off, the cement companies could see some margin upside in next few quarters.
Plus, cement companies in India remain strong beneficiaries of the megatrends in infrastructure and corporate capex.
ACC or UltraTech: Which is better?
ACC has been working with Ambuja Cement, its parent company, to optimise its production capacity and benefit from operational and financial synergies. But it still remains to be seen how beneficial these measures will be.
Registering robust revenue and production growth along with higher operating margins, UltraTech has been functioning far more efficiently for years now.
After a massive expansion UltraTech Cement is better positioned to capitalise on the rising demand than its peers.
But with the recent run-up in the stock prices across the cement sector, both companies seem overvalued.
Before you choose a stock to invest, take a look at each of the company's fundamentals and valuations. They help in deciding which company is better for investment.
Still confused which is better?
Use our feature-rich comparison tool which draws a detailed comparison between any two companies. This tool also includes a graphical analysis making it easy for you to see trends!
Since stocks from the cement sector interest you, check out Equitymaster's powerful Indian stock screener tool to find the top cement companies in India.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
