A Concrete Growth - Shree Cement In Cementing the growth

About two decades prior, the Bangurs- Promoters of Shree Cement were having a tough time running a two cement plant. This was in 2000-2002 after the market had experienced a four-year drop. Having to deal with excess capacity, their company was hardly making any money. To compound its problems, it had borrowed money at 19.6 percent to fund expansion. The circumstance deteriorated to such a degree that Bangur resorted to sell the plants and pay off the lenders. They decided to look for a prospective buyer. They found one in a French cement Major Vicat, who was looking for a presence in India. The papers were to be signed on the next day but at the last moment the deal didn't go through.  Post that was a history of events with an amazing show of efficiency and management integrity due to which Shree cement is one of the leading manufactures of cement having a key presence in North India with 40 MTPA. So let's understand the dynamics of the cement industry.

India is the second-biggest manufacturer of cement on the planet. It is no big surprise that India's cement industry is a vital part of its economy, offering work to more than a million people, straightforwardly or by its implications. Since the time it was deregulated in 1982, the Indian cement industry has pulled in huge investments, both from Indian as well as foreign investors.

India has a great deal of potential for improvement in the infrastructure and construction sector, and the cement segment is relied upon to profit by it generally. For example,in a portion of the ongoing activities, the advancement of 98 smart cities is relied upon to give a significant lift to the segment. 

Supported by reasonable Government foreign policies, a few outside players, Like, Lafarge-Holcim, Heidelberg Cement, and Vicat have put investment into the nation in the ongoing past. A critical factor that guides the development of this part is the prepared accessibility of crude materials for cementing, for example, limestone and coal.

Market Size 

Cement production reached 334.48 million tonnes (MT) in FY20. The cement production capacity is estimated to touch 550 MT by 2020. A few companies dominate the Indian cement industry. The top 20 cement companies account for almost 70 percent of the total cement production in the country. A total of 210 large cement plants account for a cumulative installed capacity of over 410 MT, with 350 small plants accounting for the rest. Of these 210 large cement plants, 77 are in Andhra Pradesh, Rajasthan, and Tamil Nadu. Sale of Cement in India stood at Rs 58,407 crore.

Road Ahead

The eastern states of India are probably going to be the newer markets for cement organizations and could add to their bottom line later. In the following ten years, India could turn into the fundamental exporter of clinker and gray cement to the Middle East, Africa, and other developing nations. Cement plants close to ports, for example, the plants in Gujarat and Visakhapatnam, will have an additional preferred position for trade and will strategically be very much equipped to confront solid rivalry from cement plants in the inside of the nation. Because of the expanding request in different segments, such as housing, commercial, and industrial construction, the cement industry is expected to reach 550-600 million tonnes per annum (MTPA) by 2025.

(Data Source: Media Reports, Press releases, Union Budget 2019-20, Edelweiss Securities Ltd)

(Source: https://bit.ly/2Cmg8ZY)

Cement - 

Cement is sold to two kinds of customers.

Retail Customer – Trade Segment – which Higher Margins

Non-Retail (Infra) Customer – Non-Trade Segment – Has Lower Margins

As cement is a commodity-based product- Cement is push market industry, whoever can push their product with the lowest cost will succeed in selling it. It's a commodity because layman don't differentiate between different brands. The influencer in the purchase decision is a mason and the dealer (Shopkeeper). Taking an instance- A person needs cement, so he visits nearby cement dealers that are available. It's essential for a manufacturer that he can succeed in pushing its product on the shelf of the dealer (so as to ship on time) and incentivize the dealer enough ( discounts and commission) so that he sells your product.

In the cement industry, price is determined by demand and supply like any other industry; It's dynamic pricing market. Unlike other Cement is a bulky item, weights a lot, consume a lot of space, and involves labor-intensive work. Hence transporting the cement for longer distances makes higher freight and handling costs and lower the profit margins to the makers. Therefore the manufacturer must keep his production unit as close as possible to the end customer.

Cement is made by warming limestone (calcium carbonate) with little amounts of different materials to 1450°C in an oven. The resultant hard material which is recovered after heating limestone and chemicals is called 'Clinker.' 

Clinker looks like small lumps. 

These small lumps are further crushed with small amounts of gypsum into a powdery form, which gives the final product as – 'OPC Cement.'

So generally following parts are necessary for making OPC cement:

Lime-stone – Natural Reserve, extracted or mined from Mines Heat – requires the warmth of 1450°C, undeniably acquired from coal or its variations. Gypsum – a mineral mandatory for giving the coupling nature to cement mixed with iron oxide.

In any case, with time, individuals made sense of that limestone can be substituted with different materials, specifically Flyash or Slag, which will, at present, give the solid however less significantly. The threshold limit of mixing Flyash is a maximum of 33%. For huge infra extends, the limestone segment of up to 95% is required, however for the daily homebuilding use, the lower segment limestone works sufficiently fine.

Thus, there are various varieties of cement depending on the composition of materials, namely

1. OPC (Ordinary Portland Cement), 

Clinker 95% and Gypsum 5%. Lowest Margin for the makers.

2. PPC (Portland Pozzolana Cement),

Clinker 65%, Gypsum 5%,  and Flyash 30%. Higher Margins relatively to OPC.

3. PSC (Portland Slag Cement),

Clinker 65%,  Gypsum 5%, and Slag 50%. Higher Margins relatively to OPC and PPC.

Flyash is a result of Thermal Power Production. Most power producers need to discard fly-debris, and one of the ways is by offering it to cement producers who can substitute it for limestone in the cement-making process. Similarly, slag is a by-product of the Steelmaking process and is often sold to cement makers as a substitute for lime in the cement-making process.

So If A Cement Bag of Rs. 350 is sold,

-Indirect Taxes levied by the government form almost Rs. 75/ bag – Not to mention there are other taxes collected during the manufacturing stage such as Entry Tax, Cement Cess, Royalty, etc

-Dealer Margins typically are around Rs. 40/Bag (Rs. 25 as discounts and Rs 15 as markup to the customer)

-Handling of Finished Goods costs almost Rs. 50/Bag

-Manufacturing Cost is roughly Rs. 155/Bag

-In the end, a manufacturer earns Rs. 30/Bag on a Cement Bag which has MRP of 350

Formula:

Profit =Sales – Govt Taxes – Discount – Freight – Manufacturing Cost 

Balance sheet! - 

Cement is a CAPEX Heavy Business!. The ROAs of a cement plant is near 1. So a Cement plant with 5000 Crores of Capex can regularly do a turnover of 5000 Crores in particular. Henceforth it is significant that not only exclusively does the organization set up a plant in the best market (which offers best costs) but also it ought to likewise guarantee that setting up the plant is least expensive. Further, since the Cost of Setting up a plant is high, it should either be possible by Taking debt or Through Internal Accruals. In the two cases, it is significant that organizations generate enough Free Cash Flows, or else; they will not be able to service the debt or set up additional new capacities in the future. The size and spread of an organization also matter since It permits an organization to negotiate better with suppliers. Progressively, an organization that is spread across India, would again lower the cargo expenses, and serve a higher market – along these lines, making a considerably greater brand. 

Analyze A Cement Company by-

1. Demand Scenario

2. Prices

3. EBITDA/Ton

Shree Cement -  Building Efficiency than Moats.

"You have to act and you can be an example. If your dedication is one percent less, it will be two percent less at the next level of leadership and it keeps on increasing at each level," Bangur.

Shree Cement Limited's principal products/services are cement and clinker. The company's manufacturing operations are spread over North and East India with presence across approximately six states. It has a cement production capacity of roughly 40.1 MTPA. The company has services in Rajasthan, Uttarakhand, Bihar, Haryana, Chhattisgarh and Uttar Pradesh. Shree is consistently winning the trust of customers. A diversified brand portfolio consisting of Roofon, Bangur Power, Shree Jung Rodhak, Bangur Cement, and Rockstrong has been designed to meet the requirements of a cross-section of customers. (Source: Annual Report) 

The Bangurs belong to an illustrious Marwari business family from Didwana in Rajasthan. In the 1950s and 1960s, they were among the top 10 business houses in India, with interests spanning jute mills, tea gardens, textiles, and shipping. Cement was not part of the core family business. In 1915, Bangur's grandfather went to Jamnagar, where the maharaja offered him land and other sops to set up a cement plant. Digvijay Cements was born. (It has been sold several times since and continues to do business till today).

[Left] H. M. Bangur | Managing Director, [Middle] B. G. Bangur | chairman, [Right] Prashant Bangur | Jt. Managing Director

They kicked off the project in the late 1970s, yet it took 15 years to get finished. Hari Mohan's (H.M) -elder son and director, says defer were unavoidable back then. It took till 1985 to complete the plant, and the organization delivered out its first sack of cement in 1986. 

The cement showcase at that point was altogether different from what it is today. In an economy of shortages, it was conceivable to sell whatever was delivered. Payments were gathered before provisions were sent, a fortnight, or after a month. Most makers focused on quality, yet there were additional sub-standard cement cases, bringing about a structural breakdown.

This is a fascinating story of Ascent!

About two decades prior, the Bangurs were having a tough time running a two-mill cement plant in Rajasthan's Beawar locale. This was in 2000-2002 after the market had experienced a four-year drop. Having with excess capacity, their company was hardly making any money. To compound its problems, it had borrowed money (Debt) at 19 percent to fund expansion. The circumstance deteriorated Bangur felt to sell the plants and pay the lenders. Hari Mohan Bangur (H.M) got nervous and decided to look for a prospective buyer. They zeroed in on French cement major Vicat, looking for a presence in India and had valued the business at Rs 800 crore. 

 "The demand had dipped when we commissioned a new capacity in 1997. Things were so bad that more than 10 percent of revenue went as interest cost," says Bangur.

Also, Shree was happy to make a 50-50 arrangement. Vicat required a toe-hold in India while the Bangurs required assets to reimburse the banks. The price appeared to be correct, sets of lawyers had vetted the agreements. "Spirits were high that night," says Bangur. The papers were to be signed at 9 am the next day. But the 68-year-old is a born fighter who still plays volleyball every day during Kolkata's winters. "I knew there is nothing 50-50 in business. If I like the color red and they like yellow, whose word prevails?" he says. "Plus, in time, my stake would get diluted and I would be left with nothing." So Bangur went to his father Benu Gopal (BG), now 89 and chairman, and asked for one more chance to turn things around. How he saw it was that there were takers for the organization. Regardless of whether he was unable to make something happen, they could generally discover a purchaser two or three years down the line. Vicat even raised the price, yet his mind was made up.. "My life is over, it is for you to take this decision," Bangur recalls his father telling him. BG Bangur seems to have done well. A decade later, Shree Cement remains firmly in his hands with a 10-fold capacity increase. Meanwhile, Vicat has had to partner with Andhra Pradesh-based Sagar Cements that barely manages to churn out 5.75 million tonnes annually compared to Shree's 40.4 million tonnes. Shree Cement has seen its stock jump from Rs 45 ten years ago to Rs 22,000 today. Simply put: A rupee invested in Shree Cements in 2001 would have appreciated a 40.47 percent CAGR. 

What is it that makes Shree Cement a consistent performer? 

First of all, the market pivoted sharply after 2003-04. More importantly, Bangur, who studied chemical engineering at IIT-Bombay, had the option to utilize pioneering innovation in India. Add to that the total operational opportunity to his officials—he infrequently goes to his plants—and you begin to understand why Bangur has succeeded where others faltered.

He had disproved all the naysayers in 2009 when he charged a brownfield clinker plant in only 367 days. He was then informed that the usual time required to set up such a unit is 630 days. In one more year, he beat his record to set up a comparative unit in 330 days. As a leader, Bangur consistently needs to go the additional mile. For example, a plant may at first have an objective to produce 30 tons in 60 minutes. It might be discovered that on a specific day, it delivered 35 tonnes an hour for two hours. The plant at that point gets 35 tons as its new target. Again the process is repeated, and the next mark maybe 40 tonnes per hour. For another instance, The estimated time required for maintenance of a kiln is 12 days. "We see 12 days as 288 hours and then aim to complete the maintenance work in 250 hours. If measured in hours, it is sharper and you are better off," says Bangur.

During the 1990s, there was a change in outlook when Gujarat Ambuja turned into the primary cement organization to begin promoting. It was among the first to anticipate that the industry would move from deficiency to excess. Bangur says, "Even though we are in a commodity industry, what we sell is confidence." Following Gujarat Ambuja's model, the cement business comprehended that a huge promoting push was essential. The situating decides the value you charge, even though quality—across three classes, A, B, and C—scarcely fluctuates. Moreover, the low price is equated with inferior quality (Veblen effect).

Bangur thought of a three-brand strategy: Shree Ultra, Bangur, and Rock strong. While Shree Ultra and Bangur are in class B, Rockstrong is in classification C. All three take into account Delhi, Haryana, Rajasthan, and western Uttar Pradesh. To make the qualification understood, the organization keeps advertising and promoting capacities independently. Bangu admits that the lack of a national presence hurts him, as he is not able to embark on wide-scale advertising campaigns (his advertising spend at 1 percent of sales). "A marketing guru will tell you to advertise in cricket but that would have cost us 10 times more. We advertised in news channels and built successful brands by investing less," says Bangur.

Today, even with a Rs 78,000-crore market cap, Bangur is very clear that he has no plans to increase the share capital of the company, which stands at Rs 35 crore. He has also kept the dividend payout low at Rs 30 per share compared to earnings per share of Rs 424. The rest of the money is invested in expansion. "In a commodity business, we lack pricing power and so, to increase turnover, volumes must grow for which investments are needed,"- Bangur

Despite the difficulties, Bangur portrays his enterprising journey as "dream-like." He is somebody who needed to make various visits to Mumbai somewhere in the range of 1998 and 2002 to get an analyst keen on his organization.

The Bangurs arrived at a settlement to partition their organizations in 1991. For Hari Mohan, this was the initial phase in taking Shree Cements to the next level. He figured out how to gain some operational power. Be that as it may, the business was as yet shared between his dad and uncle, who were moderate about facing challenges. "Business is all about taking risks and after a certain point you need to back your gut," he says. By 2002, a subsequent settlement had occurred with his dad over took complete control of the organization. 

One of the first things that Bangur did by then was a point away at building a competitive advantage. This came as Petroleum coke. Reliance Industries (RIL) had recently begun their oil refineries in Jamnagar; a result of the refining procedure is bitumen, utilized as tar on roads. In 2002, RIL discovered that further refining produces oil coke, which was 40 percent less expensive than coal around then. Bangur saw that while nobody was utilizing this in India, it was generally used in plants in Europe. He sent a group of six architects to Germany. Within a half year, they had a reasonable comprehension of how to utilize petroleum coke in clinker plant heaters. It took them about a year to get the heaters working with petroleum coke. By 2003-04, the market had additionally started to pivot, and Bangur was able to pay off his bank loans. The organization got cash positive, and he needed a strategy to deploy the surplus funds.

Beawar in Rajasthan, with its plentiful limestone supplies, was a legitimate space to extend, and Bangur set out on a logical extension at the site. Today, the plant produces 40.4 MTPA million tons of cement from four units. Shree Cements has additionally set up 742 MW of electricity limit coordinated with the plants at Beawar and Ras in Rajasthan; some portion of the yield is sold to the grid in Rajasthan. Because of this massive expansion, revenue have raised from Rs 606 crore to Rs 12800 crore over the past decade. In a similar period, profit has taken off from Rs 6.7 crore to Rs 1,500 crore. In 2003, Vallabh Bhansali of Enam Financial Consultants chose to visit his plant and address the workers. His view was: The vision seems to aligned between the lowest employee and the chairman.

He intends to keep working for whatever length of time that his mind is nimble. What's more, how can he test that? Consistently, he takes the Common Aptitude Test (CAT), which is directed for entrance into the IIMs. "In business, we as a whole live on past greatness. Its absolutely impossible to tell in the event that we are fit enough for the future," he says. For whatever length of time that his percentile is over 90, he intends to proceed. Son Prashant likewise takes the test each year. Aside from two or three years, the father has consistently outscored son. Prashant Bangur, 34, has been with him in the business for a long time. A Calcutta University topper in BSc (Maths) and an Indian School of Business (ISB) graduate, he began as a Trainee and is currently a director. "I have found an equal in my son. He is a powerful link between me and my executives. He understands the technicalities better and translates them into the language which I understand," says Bangur.

Low Cost of Production is Indeed a very Powerfull Moat.

"Let noble thoughts come to us from all over the World."-  Rigveda

Disclaimer: This post is for educational purposes only, no way implies a stock recommendation or suggestion.

Data is Citation from many sources includes, Media Reports-Forbes, Press releases Annual Reports -2020, Union Budget 2019-20, Edelweiss Securities Ltd, Ibef,alphainvesco.

Vinay Dwarakanath