To read blogs from various authors download the finbloggers application
Cement as a sector is influenced by a variety of factors.
Some of the factors influence Cement demands are
Rain
Power & Fuel
Freight
Infra Demand and Cycle - Phase of growth in Economy
Raw Material - Limestone reserves
I am confident that you will all concur with me. "The cement industry is cyclical." The factors mentioned above negatively or positively impacts cement companies balance sheet and you will not get to see a lineraity in their margins.
When buying a Cyclical business, the greatest time to buy is when it is experiencing headwind, and the best moment to sell is when it is facing tailwind.
Cement is currently suffering a number of headwinds, the most significant of which are increases in raw material, power, and freight costs, all of which are affecting their profits. On the supply side, I don't believe there will be any problems because we are in the boom phase of the infrastructure cycle, But, before we go any further, let's take a look at what Indian cement companies did when there was a demand issue, from 2017 to 2020.
On Debt side most of the cement companies reduced their debt
Ultratech cement
Shree cement
JK Cement
Dalmia Cement
Heidelberg cement
The pattern is clear: when there was a shortage of demand, most businesses became debt-free.
ROCE increased during this period
Heidelberg cement
Ultratech cement
J K Cements
In short companies became more efficient - “When going gets tough the tough gets going“
During this time Inefficient players either shut down their shops or were acquired by a more efficient player. During 2017 there were total 14 deals in cement sector - mainly merger and acquisitions.
Trend is clear during tough time companies reduced their debt, became more efficient.
Cement companies profit largely depends on the below key factor
Raw material,
Power
Freight
Price hikes
Companies have little influence over limestone and coal, two of the most crucial materials in cement manufacture, but they do have control over their electricity costs. They will be more efficient if they can generate electricity from renewable resources.
So let’s see how Cement companies are fulfilling their energy needs but before that here is count of “renewable“ word in annual report 2021-22 of various companies.
What company has to say about renewable
Heidelberg Cement
Ultratech cement
Shree Cement
Companies in this sector ticking all the boxes
Making themself debt free → Check
Reducing input cost → Check
Demand Side issue resolved → Check
Price Hike → Check
Now let see how the price hike is going
April 2022
Due to rising raw material prices, cement companies may not have a very good results in the following quarters, in my opinion. This may provide us with the option to acquire high-quality businesses at a low cost.
Companies in the sector ticking all boxes if raw material cost comes down in future or if companies takes multiple price hikes This could be the sector we can keep on radar.