Best bets in the cement sector

In a scenario of weak global & domestic cues, there are only few companies that have managed to keep their heads above the water. And such companies remain resilient because of their strong values, great fundamentals and various cost efficient measures adopted by them. We at DSIJ have zeroed in on one such company operating in a struggling sector.

Cement sector derives its growth from a growing economy. However in the last year, the cement sector has been struggling with various macro issues such as slowing demand and high input cost.

As per the Data released by the Cement Manufacturing Association, the demand has slowed down to 1.91 percent in the last seven months on a YoY basis. This was largely on account of monsoons and higher interest rate which has slowed down construction and infrastructure activity in the economy.

Moreover, higher input cost (coal, Power & fuel charges, and freight charges) has further impacted the margins of cement companies. In such a situation, investors can look at a company’s operating performance that will help them to refine their stock selection strategy within the sector. 

One yardstick that gives us some indication about the performance of cement companies is to look at their cost efficient ratios. We analysed the EBITDA/tonne ratio of major cement companies and compared them on a YoY basis.  

Looking at the above numbers, one can clearly see that Shree Cement is one of the better companies in terms of cost efficiency. Its EBITDA/tonne remains the highest at Rs 954. Ambuja Cement is the second most cost efficient company with a EBITDA/Tonne of Rs 928.

However, one also has to look at a company’s operating performance on a YoY basis, which determines efficiency of the various cost efficient measures adopted in last one year. Looking at these numbers, it is clear that most cement companies have seen costs go up in the last year. This has led to a decline in the EBITDA/tonne in FY11.

On the other hand, Ambuja Cement and Madras Cement remain the least impacted companies in the sector despite cost escalations.