Case: Hero Cements LTD (HCL) : Background

Case: Hero Cements Ltd (HCL)
Background
Hero Cements Ltd (HCL) was promoted in 1957 by the late Mr. Ram Kumar. Currently the
company is managed by his son Mr. Raj Kumar. HCL is the flagship company of the group
that has interests in cement and textiles. HCL commissioned its first cement plant in 1961 at
Kumar Nagar in Tamil Nadu with a capacity of 200 tonnes per day through the wet process
technology. Over the years, the plant switched from wet to dry process, and added capacities
in Andhra Pradesh and Tamil Nadu with captive power generation facilities and superior
technical features, resulting in lower power usage. HCL’s total installed capacity was 4.8 Mn
tpa.
The power generated at HCL’s Luxur two wind farms two units is uplinked to the Tamil
Nadu power grid and the revenue is adjusted by Tamil Nadu Electricity Board against
Kumar Nagar unit’s power consumption.
Market Presence
HCL is one of the largest cement manufacturers in south India with a market share of
approximately 11% of total despatches in the region. HCL markets its product through 3,500
stockists under the brand name, "Kumar Cement". The company caters mainly to markets in
the southern states of Tamil Nadu, Kerala and Andhra Pradesh. Traditionally, realisations
have been higher in the Tamil Nadu and Kerala markets as compared to rest of the country.
The main markets of the company are situated within a radius of around 350 kms and as a
result the company’s cement despatches by road was over 90% in 2018-19.
Sales Schedule
2018-19 2017-18 2016-17
Sales Volume (mn.MT) 2.71 2.68 2.64
Average Realisation (Rs per MT) 2153 1,840 1,914
Sales (Rs mn.) 5840.5 4935.7 5,060.1
Operating Efficiencies
HCL is one of the largest cement manufacturers in south India with plants in Tamil Nadu,
Andhra Pradesh and Karnataka (mini cement plant). The company produces blended
cement, portland pozzolona cement (PPC), at its Trichy plant. In 2017-18, blended cement
accounted for around 95% of this unit’s total cement production. The company plans to
increase it to 100% in the near term.
Capacity utilisation
In 2018-19, the Kumar Nagar plant operated at an utilisation level of 95%, lower than in the
previous two years. Capacity utilisation at the Jaynagar and Trichy plants was also lower
than the past years resulting in lower overall capacity utilisation at 81%.
2018-19 2017-18 2016-17

Installed Capacity (mn. MT) 3.25 2.75 2.75
Production (mn. MT) 2.65 2.73 2.58
Capacity Utilisation (%) 81.53 99.1 93.8
Following the substantial capacity expansion in 2018-19, the utilisation rate of HCL is
expected to decline. However, utilisation levels are expected to increase in 2020 - on account
of stabilisation of new facilities commissioned in 2019.
Trends in HCL’s Raw Material Costs
2018-19 2017-18 2016-17
MT Rs. mn. Rs./MT MT Rs. mn. Rs./MT MT Rs. mn. Rs./MT
Limestone 3032000 315.4 1040 325900 333.7 1024 316800 310.0 979
0 0
Pozzolanic 439000 114.9 2617 386000 90.8 2352 245000 57.0 2327
Materials
Gypsum 111490 48.1 4314 131680 59.9 4549 125170 58.5 4674
Bauxite 67471 37.0 5484 83292 39.9 4790 90943 44.3 4871
Clinker 15401 15.2 9869
Iron Ore 41061 21.4 5212 39894 20.5 5139 38287 18.9 4936
Magnesite 12879 4.5 3494 14339 4.7 3278 14254 5.0 3508
Trends in HCL’s Energy Costs

Consumption 2018-19 2017-18 2016-17
Power Consumption (kWh per MT) 81 82 83
Power Costs (Rs./kWh) 3.33 2.82 2.45
Coal Consumption (Kgs per MT) 115 117 128
Coal Costs (per MT of coal) 2359 1963 1,928
Power: The company has installed diesel generating capacity of around 55% of its total power
requirement. In addition, the company has a 33 MW wind energy capacity in Tamil Nadu.
The cost of purchased power declined by 2% from Rs. 3.83 per KWH in 2016-17 to Rs. 3.73 per
KWH in 2018-1. However, over the same period, the cost of captive generation increased by
over 30% from Rs. 2.24 per KWH to Rs. 2.99 per KWH. Over the last three years, captive
power accounted for approximately 55-60% of HCL’s total power requirements. In 2019-20
and 2020-21, the company is expected to source higher amount of grid power due to increase
in cement production capacity.
Power consumption per tonne of cement was 81 KWH in 2018-19, one of the lowest in the
industry.
Coal: HCL’s Jaynagar unit has the advantage of being located close to coalfields (Singareni
Collieries), the Kumar Nagar unit to Neyveli Lignite Corporation.
HCL’s Financial Performance

(Rs. million) Nine months Ending Year Ending
Dec-18 Dec-17 Mar-19 Mar-18
Net Sales 5,460.4 4,468.9 6,023.2 4,976.9
Other income 19.9 12.9 184.6 213.8
Total Expenses 4,096.1 3,189.5 4,448.6 3,646.7
PBDIT 1,384.2 1,292.3 1,759.1 1,544.0
Interest 593.8 469.9 672.1 624.4
Depreciation 461.6 400.7 527.3 463.7
PBT 328.8 421.7 559.7 456.0
Tax 50.0 59.8 116.4 52.5
Net Profit 278.8 361.9 443.3 403.5
Financial Estimates
Cement sales are expected to grow at a CAGR of around 27% in volume and around 29% in
value terms to Rs 9773 million by 2019-20 HCL’s cost of sales is expected to remain steady in
2019-20 and 20192-20.
The 2018-19 expansion of the HCL was largely debt funded. However, HCL’s gearing is
expected to decline in the next two years on account of higher internal accruals. HCL’s
Financial Investments increased in 2018-19 as compared to previous years. The company
invested in risk free and liquid government securities. HCL is expected to continue to plough
its surplus funds in investments in 2019-20 and 2020-21.
HCL raised its debt levels in 2018 to fund its expansion. The firm is expected to spend Rs 400
million as capital expenditure. HCL is expected to use a combination of debt and accruals for
debt repayment (total of around Rs. 1200 million in 2019-20 and 2020-21) and capex needs.
Management Strategies and Evaluation

HCL is the flagship company of the group, which has identified “cement” as its core business.
The promoters play an active part in the management of the company. The management of
HCL has been proactive in capitalising on the need for expanding capacities given the long
term stable outlook on the industry. The promoter’s commitment to retain control of HCL is
further reflected in the fact that the cash surpluses of group companies have been utilised to
mop up equity shares of HCL from the market thereby strengthening their hold on the
company. Further capacity expansion is not targeted in the medium term.
Annexure-I: Movement of HCL’s market share vis-à-vis competitors

Note: There has been an increased consolidation in the domestic cement industry over the
last decade and a half. There was capacity addition of 7 Mn tonnes in the southern markets in
2018-19. The pricing agreement between south based players also broken down in recent past,
leading to price wars
Players & Despatches 2019-20 % 2018-19 % 2016-17 %
000 tonnes 000 tonnes 000 tonnes
Hero Cements Ltd (HCL) 3,072 3% 2,599 3% 1,810 3%
Supreme Cements (SCL) 12,288 12% 10,478 11% 7,657 10%
Great Cements 10,183 10% 9,896 11% 4,594 6%
Western Cements (WCL) 9,816 10% 8,537 9% 3,063 4%
Real Cement 11,972 12% 11,057 12% 5,360 7%
Videshi Cements (VCL) 5,769 6% 6,846 7% 2,297 3%
Subtotal (a) 53,100 52% 49,413 53% 24,781 32%
Others (b) 49,325 48% 43,882 47% 51,789 68%
Total (a+b) 102,425 100% 93,295 100% 76,570 100%
Annexure-II: Brief Profile of HCL’s select competitors

Supreme Cements Ltd (SCL)
SCL was India's second largest cement manufacturer with a market share of around 11.5% in
FY 2019. SCL’s major markets are in the states of Uttar Pradesh, Maharashtra, Punjab, West
Bengal and Bihar which together account for around 63% of total sales.
SCL’s has cement plants at Karnataka, Himachal Pradesh, Madhya Pradesh, Bihar,
Maharashtra, Rajasthan, Tamil Nadu and Andhra Pradesh, and a grinding unit in Uttar
Pradesh. SCL’s cement sales increased by 3.0% to 10.24 Mn tpa in FY 2019 from 9.95 Mn tpa
in FY 2018. Volume growth was lower in FY 2019 as compared to FY 2018 due to decline in
demand. However, average realisations increased by around 4% in FY 2019 as compared to
FY 2018 due to price co-ordination by producers.
Expansion plans and outlook
The company has no major expansion plans, save for incremental de-bottlenecking of
capacities, and setting up 3 power plants. The total project cost of around Rs. 2000 million is
to be funded out of debt and accruals. The company recently added substantial capacity at its
Karnataka plant that has commenced production.
Videshi Cements Ltd. (VCL)
Videshi Cements Ltd (VCL) was the largest cement manufacturer in the south, with a market
share of 21%, and an all India market share of 5.9%. The company’s plants are largely located
in Andhra Pradesh. The company sells nearly 98% of its production in the south, where
prices have been generally higher, as compared with those in the other regions. In FY 2019,
turnover increased by 5.2% over FY 2018, largely due to the 14% increase in sales realisation.
The increase in realisations also offset the impact of lower volumes (5.3 Mn tonnes) in FY
2018 compared to FY 2017 (5.9 Mn tonnes).
Expansion Plans & Outlook
In September 2019, VCL added nearly 1.6 million tonnes capacity through debottlenecking.
The company also plans to set up a 15 MW captive power plant by March 2020, at a cost of Rs
450 million.
Annexure III: Financial Comparison of Major Players in Indian Cement Industry
31/03/2019 31/03/2019 31/06/2019 31/03/2019
Parameters Unit HCL SCL WCL VCL
Net Sales Rs. Million 6,023.16 25,763.70 12,683.10 12,349.96
Operating Income Rs. Million 6,192.68 26,056.30 12,773.37 12,349.96
OPBDIT Rs. Million 1,775.17 3,621.20 4,668.96 3,150.17
PAT Rs. Million 443.31 474.80 1,863.47 414.18
Gross Block Rs. Million 12,150.82 28,150.30 21,772.94 16,734.17
Equity Share Capital Rs. Million 120.76 1,708.80 1,471.10 1,384.77
Tangible Networth Rs. Million 4,044.14 10,816.90 19,824.53 7,409.89
OPBDIT/Operating Income % 28.67% 13.90% 36.55% 25.51%
PAT/Operating Income % 7.16% 1.82% 14.59% 3.35%
PBIT / Total Debt + Networth) % 10.90% 8.08% 10.97% 9.37%
OPBDIT/Int & Fin Charges Times 2.64 2.13 3.19 1.57
Total Debt/Tangible Networth Times 1.79 1.53 0.60 2.47
Current Ratio Times 1.24 0.79 0.78 1.02
Gross Current Assets (related to Days 117 118 88 223
operations as days Op Income)

Case: Hero Cements LTD (HCL) : Background

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Case: Hero Cements Ltd (HCL)

2018-19 2017-18 2016-17

Trends in HCL’s Energy Costs

HCL’s Financial Performance

Management Strategies and Evaluation

Annexure-I: Movement of HCL’s market share vis-à-vis competitors

Annexure-II: Brief Profile of HCL’s select competitors

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