RESEARCH EUREKA RESEARCH www.eurekasecurities.com ANALYST Samudrajit Gohain [email protected]097488 60335 / 91-33-3918 0386 - 87 Asbestos cement Industry Characteristics High entry barrier due to environmental norms High brand consciousness, limiting growth for new and unbranded players More than 50% of raw material is imported, hence forex movement impact margins Inability to pass on raw material price hike High operating leverage,freig ht cost 10% oftopline Cycle is 3-4 years duration Mostly rural centric Asbestos industry in transition: On an uptrend after 4 years of lethargic growth Key characteristic s of asbestos cement industry: Introduction: Indian asbestos industry is more than 60 years old with established players like Visaka Industries, Hyderabad industries, Everest Industries in existence since 1950-60.The industry caters mostly to the roofing demand in the income bracket of Rs4000-5000 per month per family . With an installed capacity of 5 mt at the end of FY10, the industry size is about Rs40bn. Although there are about 17 players, the top 4 companies control about 65-67% market share in asbestos cement industry. More than 70% of asbestos cement demand is met from rural areas, making it unable to pass on raw material costs. The industry is characterize d by a cycle of 3-4 years. U nlike in the past, recently there has been more subdued capacity addition among the top 4 manufacturers, making pricing regime more stable and a continuous uptrend since FY09.The companies use white asbestos (chrysolite) which is environmentally friendly without any known harmful effects. Even advanced countries like USA and Canada has been using this variety ofasbestos. Hence despite occasional sound bites about environmental effects, its growth has been consistent across the globe. The last case against asbestos use in India was disposed off way back in 1995. Source: Eureka Research, industry 15th December, 2010 INDIAN ASBESTOS INDUSTRY
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Huge emerging demand for asbestos cement sheets as rural income grows
The housing shortage in rural India by end of CY2009 was 14.6 million units. Out of this, 11.4 million units on account of replacement and additional 3.2 million units are new units (Source:NABRD).Every year this number is increasing by 3-4%.
Out of the existing rural houses, around 54% still live in so called 'Kuccha' houses with roof made of clay tiles, thatch, wood,
plastic, tarpaulin etc. Rest 46% live in so called 'Pucca' houses. But even then this 'Pucca' house category can be clearly
subdivided into 4 distinct categories like fiber cement with metal roofing, bricks, stone and RCC.
Source: Everest Industries annual report, 2009-10
Among Pucca houses, less than half are made with RCC slabs. The rest are made with ready to use roofing products like fiber
cement roofing and metal roofing. Some roofs are also made with bricks and stone though their number is fast declining.
Although there was price differential between metal roofing like GI sheets and fiber cement sheets in the past, now they
have become quite comparable. Moreover compared to GI sheets, durability and strength of fiber cement sheets is much
better. Hence compared to 4-5% growth of asbestos cement industry in the past, we are likely to see 9-10% growth in coming
days.
The migration from a Kuccha house to a Pucca house is mostly gradual. Hence it is unlikely that a Kuccha house owner will
directly migrate to an RCC roof. Rather he is very likely to use GI or fiber cement roofing. As lakhs of poor Indians experiencean economic upliftment, we are likely to see a huge market potential in fiber cement industry in coming days.
Descending order of seasonal demand growth for asbestos cement sheet (from left to right)
EUREKA RESEARCH 3
INDIAN ASBESTOS INDUSTRY
15th December, 2010
www.eurekasecurities.com
The cost of a Pucca roof using fiber cement roofing
However the price of imported wood pulp is highly volatile as can
be seen from above graph. Apart from being a key raw material
for paper industry, its landed cost is impacted by rupee
movement. Hence all Indian fiber cement manufactures buy it on
spot basis only. Going forward, landed cost of wood pulp is likely
to remain firm.
(D) Fly ash:
The landed cost of fly ash is around Rs800/ton. Though fly ash is available free at the thermal stations, it is labour cost for
loading and unloading apart from transportation cost which makes it dear. The fly ash is procured as and when required.
There is increasing awareness among corporate and urban population about 'Green Housing' concept. Hence environment
friendly V-boards and V-panels are replacing plywood for interior ceilings, partitions etc. They have longer life compared to
plywood and they are fire and termite resistant. They enable occupants to stay more than two hour without any discomfortin the vicinity of a fire hazard in the building. The V-panels and V-boards offer resistance to moisture and termite as well
unlike plywood.
The V-boards industry is large and fragmented. Boards made of different materials like wood, plywood, gypsum, calcium
silicate and fiber cement have been introduced in the market within the last decade. Current industry size for wood based
products is Rs4200Cr per annum, followed by Gypsum boards (Rs500Cr per annum), fiber cement boards (Rs200Cr) and last
calcium silicate (Rs50Cr) per annum. (Source: Everest Industries)
From asbestos cement sheets to V-boards and V-panels: Urban centric and corporate products
Industry dynamics of V-boards and V-panels: quite different for boards/panels and asbestos sheets
Comparison among asbestos cement sheets, V-boards and V-panels
The V-boards and V-panels industry is growing at a CAGR of about %10 in last 4 years as per different industry estimates. Asindustrial capex cycle picks up in next few years, it is highly likely that we are likely to witness a CAGR growth of 11-12% in next
4-5 years.
Source: industry, Eureka Research
As the following table shows, compared to asbestos cement sheets, V-boards and V-panels can bring several additional
advantages for the traditional asbestos cement manufacturers. Apart from ability to pass on raw material price hike, they
offer excellent diversification opportunities .Hence going forward it is highly likely that contribution of boards and panels will
increase their contribution to revenue from less than 3% in coming days. As these companies already enjoy strong brand
name, selling this urban and corporate centric product is not going to be difficult at all. In contrast apart from margins, they
are likely to improve working capital cycle considerably.
Realisation and capex required per ton for asbestos cement sheet, V-boards and V-panels
In terms of V-boards capacity, Visaka Industries is ahead of its nearest rival as on today. But it is Everest Industries which is theleader in non asbestos panels. On the other hand, though Hyderabad Industries does not manufacture boards, they
manufacture Aerocon panels which is made from asbestos fiber, OPC and fly ash apart from other additives.
We believe that export potential and domestic market growth of non asbestos based boards and panels will be higher
compared to asbestos based boards or panels.
Moreover, capex requirement of boards and panels is quite high compared to that of asbestos cement sheet. Realisation per
ton and gross margin per ton of boards and panels are considerably high compared to pure asbestos cement sheets.
Thus we believe that overall sales growth of top three asbestos cement players is likely to go up in coming years apart from
improvement in margin as well as comparatively higher sales growth. Thus diversification into boards and panels has proved
The company was one of the first in the asbestos cement industry to take note of considerable demand and growth of non
asbestos products catering to urban and corporate requirements. The company started V boards segment in FY09 and it sold
about 10,000tons at an average realization of more than Rs9000/ton. The company has started supplying these V boards to
Middle East and Australia where there is considerable demand for this product.
The company is looking for about 7500-9000 tons of V board's production every month since Q3FY11. On the other hand, it
has started commercial sale of V panels only from Q1FY11.This panel is also becoming fast popular among corporate as it is
very good substitute for plywood. The panels generally come at a size of 1.8 square meter dimension. The pricing of V panels
at the consumer end is per panel. But at the company's end, we measure it by tonnage.
For example, if the company produces 400 panels of 1.8 square meter and 32 kg weight for 29 days in a month, the monthlytonnage will be (400*1.8*32*29/1000) 668.16.
In FY11E, the boards and panel division is likely to contribute Rs25Cr to the top line and another Rs40Cr in FY12E.The
operating margin for FY11E for boards and panels will be about 11-12% which is likely to go up to 17-18% in FY12E as volumes
Company enjoys a very comfortable working capital cycle
The asbestos cement business has a very comfortable debtor days of 30-40 days.The debtor days cycle is improving fromabout 45 days to less than 30 days in recent days. The finshed goods inventory period is 45 days. This is because, the company
has to cure asbestos cement sheets for 15 days after manufacturing.Except asbestos fiber, which is an imported product,
most other raw materials are procured as and when required.Asbestos fiber is stored for a period from 3-6 months
depending upon inward ship freight condition. Thus overall inventory days has been hovering around 60 days so far. But as V
boards and V panels production and sales pick up in coming days, overall inventory days are likely to come down further as all
the raw materials required for V boards and panels are locally produced.
Huge improvement in operating and free cash flow since FY09.
Like all other companies producing asbestos cement sheets between FY05 to FY08, the company had negligible operating
cash flow compared to sales and negative free cash flow. Since then both the parameters are improving dramatically. The
initial capital requirement for both asbestos cement sheets and boards/panels is not very significant (Rs3000-3500/ton for
asbestos cement sheet and Rs10, 000/boards).All future expansion in next few years are likely to be funded by internal
accruals and debt. ByFY12E, the debt equity ratio is likely to be around 0.3. Hence company will have significant leeway for
The FY10 was a very good year for major asbestos manufacturers in terms of margin. During that year, the company clockedEBITDA margin of about 22%. This was contributed by benign raw material prices and significant demand uptick. Since then
raw material prices especially asbestos fiber, transportation cost and wood pulp cost have significantly gone up. For
example, asbestos fiber price has gone up from about Rs32000/ton from FY10 to more than Rs38000/ton recently. As
asbestos cement manufacturers can not equally pass on raw material price hike, going forward we are likely to witness more
sustainable 16-17% EBITDA margin.
But as margins for boards and panels are high compared to that of asbestos cement sheet, may be margins may improve
after FY12 if there is significant capacity addition in boards and panels division.
Likewise, ROCE and ROE are likely to hover around 20% in coming days. This was the range companies enjoyed till FY06-07 .
Hence we are very much confident that at least pre recession return ratios will be achieved by the company in coming days,
But still value wise, the contribution of its asbestos cement sheet is the highest. This is followed by AAC blocks, thermalinsulation products and panels.
The company is likely to maintain asbestos cement division's contribution to top line at about 86-87% in coming days. The
company is trying to cater to urban and corporate demand through AAC blocks and panels. On the other hand, thermal
insulation products cater to industrial demand. With pickup in demand from real estate and industrial capex, both these
The AAC blocks business has become competitive in recent times with indiscriminate setting of capacities by several small
players and aggressive marketing by them. But it is highly likely that at some point of time in future, quality consciousness
among customers will emerge and they will go for branded and reputed AAC block manufacturers like Hyderabad Industries.
Currently AAC blocks sold by Hyderabad Industries sell at a premium of 4-5% compared to other players.
Cement, power, petrochemical,fertiliser plants etc are typical users of this division. Due to their superior properties and high
quality, the company's products have good acceptance over its substitutes. Calcium silicate is commonly used as a safe
alternative to asbestos for high temperature insulation materials. Industrial grade piping and equipment insulation is often
fabricated from calcium silicate. Efforts are being made for developing new applications to expand the market size. Rawmaterials for this product include lime, calcium silicate and used glass. Power and fuel costs play a major role in the
production of this product. The company had increased the production capacity at its Dharuhera plant to 6,000 MT per
annum, from 3,500 MT per annum in FY09. In FY10, HIL has increased the capacity by another 2,500 MT taking the total
capacity to 8,500 MT as of 1 April 2010. The company is likely to end FY12E with an installed capacity of 9300 tons.This
product contributes about 4.7% to revenue. HIL has a 76% all India market share in this product. Other players include Mega
Insulation and Nuchem.
The company has been steadily increasing its capacity to cater to the growing demand from user industries.This division has
utilisation rate of around 90%. This division has high EBIT margin in the range of 30%.
The company is likely to post about 24% growth in top line in FY12E over FY11E. As the company enjoys high operating
leverage, the growth in bottom line during the same period is likely to be around 90%. The return ratios of the company are
well above 30%. Moreover due to presence of high margin thermal insulation products and brand premium in other
products, the company is likely to maintain about 21-222% margin at the EBITDA level.
Applying a P/E multiple of 4 to FY12E EPS of 183, we arrive at a price of Rs732. On the other hand, applying an EV/EBITDA of 2.5 to FY12E EBITDA of Rs. 236 Crore, we arrive at price of Rs821.Taking average of both, we arrive at a target price of Rs776.
DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, butwe do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute ourjudgement as of this date and are subject to change without notice. Eureka Researchwill not be responsible for the consequenceof reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID.