Jk Cement Research Report

Indian Institute of Management, Bangalore PGP Program experimental condition 1, 2012 clams Report for JK cementums Group 2 Section 1 Business verbal description JK cementums is one of the largest cementumumumum manufacturers in Northern India and the eighth largest boilersuit India with net cement sales of 2545 crores in 2011-12. Itsmain overlapsinclude colorise and ovalbumin cement. It produced 53. 2 hundred thousand tons of grey cement and 3. 77 lakh tons of washrag cement in the fiscal category 201112. Grey cement produced consists of medium Portland cementum (OPC) and Portland Pozzolana cementum (PPC). Their cement products atomic number 18 marketed under the brand names J.K. cementum and Sarv alteraktiman for OPC products, J. K. Super for PPC products and J. K. White and Camel for white cement products. JK Wall putty and JK Water proof ar its white cement found value-added products. caparison (74%), bag (17%), commercial & institutional empyrean (13%) and industrial sphere (6%) ar the study customers of the cement diligence Refer send off 1. Housing constitutes a major chunk of the occupy and whence country-bred and urban lodging projects are a key imaging generator. fall upon stock statistics and revenue/ win data is included in the appendix Refer Tables 1& 2Section 2 grocery store Profile, Competition, Strategy, Risks A. frustrateket Profile The take aim for cement mainly depends on the level of development and the rate of yield of the economy. The major demand number one woods for the cement sector in India are housing, infrastructure and commercial construction. These are key components of the verdants GDP and hence, the add up growth of the cement constancy is around 1. 2 quantify the GDP growth. Signifi foundationt impetus to both campestral and urban housing as per capita income increases in a major driver of the diligence.With the increase in national infrastructure investment, the industry is poised to go ballistic further in spite of the worldwide sparing recession. The housing sector contributes around 64% of the come in cement demand. It overly accounts for 80% of the total real estate developments in the country. Housing demand is judge to be robust backed by various measures pick out in the reckon like continued interest subvention up to 15 lacs, license from service tax for funky monetary value housing construction, and increase in investment-linked deduction of dandy expenditure on low-cost housing from degree Celsius% to 150%.There has been a major push by the government in infrastructure development with the intended investment being US$ 1 trillion in the 12th phoebe bird grade plan expi ration (2012-17), against an investment of US$ 514 billion in the eleventh five year plan stream. Massive investment in infrastructure would provide upgrade to Indian cementum industry. India is the mho largest producer and consumer of cement in the world, score for 7 -8% of the total global production with an installed condenser of over 300 Mtpa at the end of 2011-12. Indias cement industry per affect watered break down in 1 011-12, on back of robust demand revival in the second half of the financial year. The industry grew by 6. 4 per cent in 2011-12 as against less than 5 per cent in 2010-11. amount of money cement sales were 223. 02 MT compared with 209. 5 MT in FY11. For 2012-13, CRISIL Research estimates cement demand to increase 7-8 per cent yoy (Crisil). In the near term, demand could be a little weak because of the lower GDP growth. Given that a large part of the demand comes from the housing sector, last interest grade are non conducive to the urban real estate demand. However, in the long term, the industry is expected to grow at an average of 1. times the GDP growth rate. growing rates of 8-9% can be targeted for the five year period given the increase in investment in infrastructure projects and change magnitude rural demand . Although India is one of the largest cement markets in the world, per capita intake of cement is still low as compared to the world average as come up as that of other large countries such as china and US. The Indian cement industry, thus, has a huge growth potential. Given the sharp shortage of housing, this segment has been a major growth driver for the cement industry.The demand for residential real estate has exactly change magnitude, fuelled by increasing urbanization, rising income levels, decreasing household size of its and easy approachability of home loans. absolute majority of the total shortage of 74 million units at the end of the 11th Five Year Plan (2007-2012), is expected to be generated by rural and below poverty line households. The government has launched various initiatives such as NREGS and Indira AwasYojana to improve rural income, which whitethorn increase demand for rural housing in the country. Increased infrastructure investments by the governmen t as mentioned previous is also likely to be a major growth area.Housing (74%), infrastructure (17%), commercial & institutional sector (13%) and industrial sector (6%) are the major customers of the cement industry. Housing constitutes a major chunk of the demand and hence rural and urban housing projects are a key resource generator. Overall industry margins and change in sales trends are mentioned in tables at the end. Refer to Table 3 & 4. Please refer to Table 5 for a picture of the industry growth rate based on the Free Cash Flow model where the average P/B was computed with the go by 5 firms of the industry and unlike rates for cost of detonator were assumed.This shows that the cement industry is poised for growth for whatever cost of capital that may prevail. B. Competition Inter firm competition and rivalry in the industry is high. Large number of players, intermittent over condenser, marginal product differentiation, high storage cost and high exit barrier in form of si gnificant capital investment has led to high competition in the industry. Threat of modernistic entrants is limited since it involves high capital investment, broad dispersion network and oversupplied markets deter new entrants.However, given the high potential for growth, sooner a few foreign transnational companies have made acquisitions and increased their stake in domestic companies to gain full control. There are no good substitutes for cement popular in India. However, there are eco friendly substitutes for cement which include fly ash and slag. Fly ash is the by product when sear is burnt to make electric personnel and slag is created when producing iron in torment furnaces. char fly ash, blast furnace slag and other mineral admixtures can substitute for cement, aving energy and lessen cost. Bitumen in roads and engineering plastics in building are any(prenominal) element of competition. Currently, the top players UltraTech, ACC, Ambuja cements, Jaiprakash Associate s, India cementums and Shree cement, collectively control more than half of the cement market in the country. Overall, there are 40 players in the industry across the country. (Source ibef. org) The closest competitors for JK Cement are Shree Cements, Madras Cements, Birla Corporation and Binani Cement. The industry has a 4-firm concentration ratio of 58. 18%. 2 C. StrategyDespite challenges, JK Cement has increased revenues and sugar owing to high realisation and volumes in both grey cement and white cement business. The federation is in on its way to expanding its capacity in India to cater to the increase in cement demand. It has also alter its product portfolio by not only limiting itself to varieties of grey cement but also extending to white cement and other value added products. Besides, the party is also setting up a grey cum white cement plant at Fujairah in UAE to cater to GCC and African markets. The company is make efforts to cut operating expenses which in turn would increase the roe.Some of the efforts to reduce operating costs are Grey Cement Implementation of CII examine findings in phased manner to reduce power consumption. generalisation of VFDs in fans to execute power. Replacement of booster fans by high efficiency fans to save power. Installation of pfisterpump for combust firing in calciner. Replacement of Raw mill -1 cartridge extractor by high efficiency separator. Dynamic separator in Coal Mill. White Cement Covered clinker storage facility for grey and white clinker. Grinding plant for dolomite for putty product. Installation of new SG Fan & Driver. The company is also making efforts to increase its capacity.The company is revisiting the size of proposed expansion plan at Mangrol, Rajasthan from earlier envisaged 3. 5 million hemorrhoid to around 2. 5 Million Tons, on account of delay in allotment of new mining area to the Company. Viability study for 2. 5 Million Tons capacity plant is under preparation and a final decision will be taken during the course of the year. D. Risks Three nigh important risks 1. Sustained economic slowdown The growth of cement industry is directly proportional to GDP growth rate. Absence of decision making at Government level is affecting economic growth and may have adverse effect for the cement industry.If measures are not adopted against inflation, high interest rates, depreciating rupee, then it would impact the overall economic growth of the country resulting in dragging the sector down. 2. Unavailability of coal linkages Coal costs constitute 14-23% of cost of production of cement. The hike in coal prices is expected to hit the margins. Due to trim supply of coal linkers from Coal India over the historic period the company has to import coal at high(prenominal) costs from South Africa and In through with(p)sia. The depreciation of the rupee will also add to the increased cost of raw materials. 3.Adverse demand-supply mismatch In case, the additive c apacities get commissioned ahead of schedule, then a state of glut would rise, consequently prices may head downwards and the sector may grow a severe blow. Section 3 3 Trend psychoanalysis The demand for the cement mainly depends on the rate of growth of infrastructure, housing and commercial construction. In Indian context all these areas have been experiencing a significant growth as a result of constant growth in our GDP. As a result we can see that overall the total revenues for both the companies have been rising Refer to consider 2.JK Cement and Madras Cements fundamentally cater to northern and southern India respectively. In year 2011, there is a dip in the total revenues of Madras Cement. This was result of a more dandy fall in the capacity utilization observed in southern India due(p) to low demands because of political instability in Andhra Pradesh and minimal pick-up in demand in Tamil Nadu and Kerala post elections. The two industries exhibit equal trend as far as profit margins are concern Refer to Figure 4. So, an overall analysis of cement industry in this period is required.In 2008, the dip can be attributed to reduced demands due to global recession, which reduced capacity utilization thus reducing profits. In 2011, there was marginally unworthy off take in cement demand due to passive construction activity, which lead to excess supply and utilisation dangle to a 13-year low of 83. 9% for 2010-11. This has been coupled with rise in stimulant drug costs, especially prices of coal and petroleum products. As a result, both the top line and bottom line have been affected. Hence this year the capacity utilization increased and the demand dropped. Section 4 symmetry epitome Refer Table 6 . harvest-tide on righteousness Refer Fig. 5 ROE has been hovering around 17-20% end-to-end with some years seeing slight changes. Given that Index of industrial Production(IIP) grew only by around 2. 8%, it appears that JK and Madras have both make well. However, 2010-11 was a bad year for JK Cements. Their last operational Profit plummeted by 39% when compared to the previous year magic spell the same for Madras Cement was only around 27%. This was mainly on account of reduction in sales realisation and substantial increase in the prices of petcoke and fuel resulting in higher input costs (Annual Report 2010-11).This caused the ROE of JK to fall by almost 600% from the previous year. 2. Basic DuPont seat Analysis Refer Fig. 4,5 and 6 ROE = summation Turnover * Profit demoralizegin Asset Turnover of JK is consistently higher when compared with Madras Cements 42. 46% higher in 2006-07 epoch this is 39. 87% in 2012. This is because JKs total fixed assets is lesser than Madras by almost 50% while sales of Madras Cements is higher only by around 2025% on an average . However, the low profit margin throughout has been causing the Return on Equity of JK to be lower than that of Madras Cements.The profit margin has been very low in all the years from with the worst hit being in 2011 reason explained in step 1. Also the Net financial cast has dinted the net profit due to expansion efforts coupled with the dim first moment in the industry. A ray of hope for JK would be to perform product differentiation with the white cement wall putty market it has done right by expanding the white cement units in overseas the demand for interior and decor is bound to increase in the near future. 4 3. Advanced DuPont Model Analysis with RNOA & Leverage Refer Fig. & 12 It can be seen that the operating(a) spread out of JK is going negative for 2010-11 & 2011-12 showing that their Financial Rate is on the rise which is due to debts from increased expansion plans. This, along with the increased leverage from high borrowing, has reduced the already low RNOA to yield a poor ROE value. In the same while, for Madras Cements the spread has been prescribed in fact, it has never gone negative for them, despite the ir large debt. Madras Cements has been affected only by the overall increase in costs in the cement industry and not by the leverage effect which JK has suffered from.The leverage effect has beaten(a) JK again in 2011-12 though their RNOA has increased by 177% from the previous year and long-term debt has actually reduced, the Interest Rates on loans have await to have gone up leading to a 117% increase in the NFR. Thus the negative operating spread has again caused JKs ROE to fall below the RNOA Madras Cements has remained stable in this period registering a higher ROE than RNOA due to the positive spread. Again, this shows that Operating Margin of JK is low when compared with the cost of capital. 4. Analysis of Turnover ratios Refer Fig. 9 & 0 Inventory Turnover and Debt Turnover of JK is well higher than that of Madras Cements leading to a better operating cycle. Low parentage holding and low receivables isa positive trend for JK Cements and it should continue this. 5. Ana lysis of liquid state and Long-term Solvency Refer Fig. 8,11 The contiguous Ratio of JK is consistently higher than Madras Cements for all the 5 years taken into consideration hence the liquidity position of JK is better than that of Madras Cements. The capital structure seems more of debt financing in the recent years owing to expansion plans.However increase in interest rates would make JK vulnerable to low margins which is already discussed in the advanced model. Section 5 Conclusion The cement industry is estimated to grow as can be seen from the CRISIL analysis quoted in section 1 housing and infrastructure demand are expected to increase hence JK is bound to do well The cost reducing efforts of JK and the product differentiation into white cement are expected to increase profit margins. The Asset Turnover values of JK are also higher than its competitor. Hence increase in ROE is expected in coming years.The reduced operating cycle of JK shows a positive trend vis-a-v is its competitor. P/B value of JK is 1. 18 while industry average (top 5 firms) is 2. 76 (refer to table on Growth of Cement Industry). Hence JK stock seems to be undervalued Refer Table 5 JK has declared 50% dividend for the current year and has consistently declared dividend for the past 5 years. However, the indispensable risks in the industry from global crises like the Euro crisis and flagging coal availability pose concerns for the successful implementation of plans.Further, the continuous expansion plans of JK leading to higher debt and hence higher interest rates (which can rise based on RBI measures to contain inflation) cause concern for the profit margins which can again reduce. The positives seem to be strong as JK is trying to stabilize its expansion plans. Hence an acute negative view point would not be correct. Hence we suggest a buy/hold later on doing the above analysis. 5 References Crisil. (n. d. ). Retrieved August 21, 2012, from Crisil meshing site crisi lresearch. com Dion sagacity. (n. d. ). Retrieved August 21, 2012, from Dion Insight Web site https//insight. ionglobal. in/Insight/Industry. asp? pageLink=IndProfile&Ind=151 equitymaster. com. (n. d. ). Retrieved August 21, 2012, from equitymaster. com http//www. equitymaster. com/research-it/sector-info/cement/Cement-Sector-AnalysisReport. asp Gupta, N. (n. d. ). Ernst & Young. Retrieved August 21, 2012, from Ernst & Young Web site http//www. ey. com/Publication/vwLUAssets/cementing_growth/$ commit/cementing_growth. pdf India Brand Equity Foundation. (n. d. ). Retrieved August 21, 2012, from India Brand Equity Foundation Web site http//www. ibef. org/industry/cement. aspx Jagdesh Sunku. 2006). Advantages of using fly ash as subsidiary cementing material (SCM) in fibre cement sheets. 10th Int. Inorganic Bonded fiber Composites Conference, (pp. 25-32). Sao Paulo. JK Cement Annual Report 2010-11 & 2011-12. JK Cement. moneycontrol. com. (n. d. ). PlanningCommision. (n. d. ) . Planning missionary station. Retrieved August 21, 2012, from Planning Commission Web site http//planningcommission. nic. in/plans/mta/11th_mta/chapterwise/chap14_invest. pdf 6 Appendix A air division Figure 1 Division of customers of cement industry into major sectors major Major customers of cement industryCommercial & Institutional 13% Industrial 6% theme Infrastructure 17% Housing 64% Figure 2 Total revenue for JK Cement & Madras Cements Ltd. (Revenue in crores)(Before 2005 financial financial statements for JK Cement wasnt prepared. It was then treated as a division under JK Groups for financial purposes) Total revenue 3,500. 00 3,000. 00 2,500. 00 2,000. 00 1,500. 00 JK Cement Madras Cements Ltd. 1,000. 00 500. 00 0. 00 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 7 Figure 3 dislodge in sales % change in sales 60 50 JK Cement Madras Cements Ltd. 40 30 20 10 0 -10 -20 2003 2004 005 2006 2007 2008 2009 2010 2011 2012 Figure 4 Profit Margin Profit margin 25. 0% JK Ceme nt Madras Cements Ltd. 20. 0% 15. 0% 10. 0% 5. 0% 0. 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Figure 5 Return on Equity ROE (%) 60 JK Cement 50 Madras Cements Ltd. 40 30 20 10 0 2007-08 2008-09 2009-10 2010-11 2011-12 8 Figure 6 Asset turnover Asset turnover (%) 110 JK Cement 100 Madras Cements Ltd. 90 80 70 60 50 40 2007-08 2008-09 2009-10 2010-11 2011-12 Figure 7 Return on Net Operating Assets RNOA (%) 40 JK Cement Madras Cements Ltd. 30 20 10 0 2007-08 2008-09 2009-10 2010-11 2011-12Figure 8 Debt Equity Ratio Debt Equity Ratio 2. 5 JK Cement Madras Cements Ltd. 2 1. 5 1 0. 5 0 2007-08 2008-09 2009-10 2010-11 2011-12 9 Figure 9 Spread Operating Spread 0. 5 JK Cement 0. 4 Madras Cements Ltd. 0. 3 0. 2 0. 1 0 -0. 1 2007-08 2008-09 2009-10 2010-11 2011-12 2010-11 2011-12 -0. 2 Figure 10 guardianship period Operating cycles/second (days) 120 JK Cement Madras Cements Ltd. 100 80 60 40 20 0 2007-08 2008-09 2009-10 Figure 11 Quick ratio Quick Ratio 2 JK Cement Madras Ceme nts Ltd. 1. 5 1 0. 5 0 2007-08 2008-09 2009-10 2010-11 2011-12 10 Figure 12 Net Financial Rate NFR 0. 18 JK Cement 0. 6 Madras Cements Ltd. 0. 14 0. 12 0. 1 0. 08 0. 06 0. 04 0. 02 0 2010-11 2011-12 11 Appendix B (Tables) Table 1 Key stock statistics Stock Report 24 July 2012 Symbol JKCEMENT (NSE) JKCEM (BSE) ISIN NUMBER INE823G01014 J K Cements Stock Price (closing) Investment Style 213. 30 (as of 20 July 2012) Large CAP Sector Cement Summary JK Cements is one of the largest cement manufacturers in Northern India it is the second largest white cement manufacturer by production capacity in India Key Stock Statistics 52 Wk feed 95. 80 to 219. 70 (BSE) 25. 36 8. 41 11,839 EPS (Twelve calendar month Trailing)P/E (Twelve Month Trailing) 10K investment 5 yrs ago Credit Rating Long Term Bank facilities Short Term Bank facilities Common shares outstg. 69927250 Market poll Yield (%) Dividend rate per share 1491. 55 Crores 2. 34 5 A+(CARE) A1+(CARE) Table 2 Earnings per Share Earnings P er Share of 10 each ( ) June Q1 September Q2 2011-12 7. 14 0. 51 2010-11 4. 22 -2. 98 2009-10 10. 04 9. 35 declivityember Q3 6. 22 0. 26 6. 65 March Q4 11. 49 7. 66 6. 28 Year 25. 36 9. 16 32. 32 ? ? ? ? ? ? ? ? Table 3 Industry Margins OPM(%) GPM (%) NPM (%) Mar 12 21. 78 21. 49 9. 14 Dec 11 19. 65 18. 45 10. 13 Industry MarginsSep 11 15. 66 13. 6 5. 05 Jun 11 24. 41 22. 48 11. 76 Mar 11 22. 46 20. 9 11. 92 Dec 10 17. 18 15. 32 5. 84 12 Table 4 Industry sales Mar 12 Industry sales (in crores) % change Change in industry sales (quarter)(%) Dec 11 Sep 11 Jun 11 Mar 11 Dec 10 20841. 87 17953. 16 15649. 20 17017. 73 17388. 15 14201. 79 16. 09026 14. 72254 -8. 04179 -2. 1303 22. 43633 Table 5 Industry Growth Projections (for different values of r) using Free Cash Flow Model Company Name Ultratech Ambuja ACC Shree Cements Madras Cements India Cements JK Cement Average P/B ratio as on 26/08/2012 3. 66 3. 64 . 5 4. 55 2. 19 0. 68 1. 14 2. 765714286 ROE (from March 2012 BS) Cost of upper-case letter (%) Growth (%) 19. 02 15. 28 18. 42 10. 55 18. 78 7. 21 13. 75 14. 71571429 10 11 12 13 14 7. 329288 8. 895631 10. 46197 12. 02832 13. 59466 Table 6 Ratio Calculations Ratios Profit Margin (%) Asset Turnover (%) ROE (%) Return on Assets (%) Net Operating Profit Margin (%) Net Operating Asset Turnover (%) Return on Net Operating Assets (%) = NOPAT/Avg. Net Operating Assets JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras CementJK Cement 2011-12 8. 154156 12. 06512 77. 80004 55. 62438 17. 04343 20. 87036 6. 343937 6. 711146 10. 83703 15. 17511 139. 8798 83. 81691 15. 15882 2010-11 1. 654139 7. 964254 79. 85371 47. 82047 3. 49563 12. 67786 1. 320891 3. 808544 4. 320325 11. 0728 126. 2029 68. 65512 5. 452374 2009-10 10. 84236 12. 59667 88. 57764 56. 65368 22. 29768 25. 09332 9. 60391 7. 136478 12. 51604 16. 10394 160. 5309 81. 84813 20. 09211 2008-09 8. 421552 14. 40591 94. 35595 63 . 17162 16. 78291 32. 91344 7. 946235 9. 100446 10. 11265 17. 00776 212. 7993 93. 59998 21. 51965 2007-08 16. 62175 20. 30998 107. 4567 75. 2185 41. 51821 50. 27496 17. 86118 15. 31816 17. 88877 21. 64552 209. 9905 128. 6868 37. 5647 Madras Cement 12. 71931 7. 602044 13. 18078 15. 91926 27. 85493 13 Interest Coverage (%) Leverage Measure 1 Debt-Equity Ratio Current Ratio Quick Ratio Debt Turnover Debt Collection uttermost (days) Inventory Turnover Inventory Holding Period (days) Operating Cycle (days) NFO NFE NFR Op. Spread FLEV*Spread ROE = RNOA + FLEV*Spread (Advanced Dupont Analysis) JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras CementJK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement JK Cement Madras Cement 392. 0551 615. 875 1 2. 686571 3. 109805 0. 837413 1. 030999 1. 197299 0. 601965 0. 833253 0. 343679 35. 22924 16. 62681 10. 21879 21. 65177 5. 924257 5. 223089 60. 76712 68. 92473 70. 9859 90. 57651 401. 46 1719. 03 68. 278 101. 808 0. 170074 0. 059224 -0. 01849 0. 067969 -0. 01548 0. 070076 13. 61077 19. 72691 254. 5852 468. 6705 2. 646419 3. 328794 1. 150731 . 609198 1. 367937 0. 931981 0. 916991 0. 599238 33. 11155 15. 49891 10. 87234 23. 22745 7. 497843 4. 941565 48. 01381 72. 85141 58. 88615 96. 07886 802. 04 2307. 32 62. 958 81. 466 0. 078497 0. 035308 -0. 02397 0. 040713 -0. 02759 0. 065515 2. 693658 14. 15354 666. 585 579. 4166 2. 321729 3. 516204 0. 939762 1. 647142 1. 144753 1. 00381 0. 764784 0. 639154 30. 43733 22. 88671 11. 82758 15. 72965 8. 619538 5. 233222 41. 76558 68. 79127 53. 59316 84. 52092 705. 23 2034. 43 34. 363 98. 455 0. 048726 0. 048394 0. 152195 0. 083413 0. 143027 0. 137394 34. 39482 26. 92014 619. 7696 717. 6917 2. 112058 . 616684 0. 580401 1. 954809 1. 968687 0. 982285 1. 675142 0. 628742 30. 17987 33. 40915 11. 92848 10. 77549 10. 69177 6. 127751 33. 67075 58. 74912 45. 59923 69. 52461 -143. 99 2006. 67 28. 147 65. 807 -0. 19548 0. 032794 0. 410675 0. 126398 0. 238356 0. 247085 45. 35528 40. 62774 851. 7743 1451. 897 2. 324494 3. 28205 0. 626681 1. 714777 1. 762163 1. 019801 1. 467784 0. 702189 26. 72182 31. 59228 13. 47214 11. 39519 10. 49671 6. 782897 34. 29647 53. 07467 47. 76861 64. 46986 37. 91 1183. 64 20. 216 26. 782 0. 533263 0. 022627 -0. 15762 0. 255922 -0. 09877 0. 43885 27. 68721 71. 73993 14