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Cementing Concrete Roads

Date: 16th February 2015

Study of opportunity and feasibility for cement companies

Opportunities for cement companies in concretization of roads


Transport minister Nitin Gadkari recently stated that all new road projects of the Centre will use concrete. With no more than 2% concrete roads in India and
about 54% in the form of bitumen roads, we believe that this plan, if implemented, could bring huge opportunity for cement manufacturers in the country.
First opportunity comes through upgradation of bitumen roads to concrete roads and second through building new cement roads. Both the opportunities
could generate huge additional demand for cement.
With characteristics such as longer durability and lesser maintenance cost, concrete roads score hugely over bitumen roads.
Benefits of concrete road vis--vis bitumen road
Concrete Road
(INR 350 per bag)

Characteristics
Initial Cost (INR Lakh per km)

Concrete Road
(INR 120 per bag)
250

Service Life

Bitumen Road
205

206

30 years

30 years

10-15 years

Lower due to long lasting


smoothness

Lower due to long lasting


smoothness

Higher since road needs frequent


resurfacing

Raw Material

Local

Local

Obtained from Imported crude

Environmental friendliness

High

High

Low

Saved

Saved

Reduced

Reduced

No effect

Can be used

Can be used

No

Vehicle Operating cost

Fossil Fuel
GHG gas emissions
Fly Ash disposal

Source: Parliamentary Standing Committee Report, PMGSY, IRC and Industry


Note: At ~INR 120 per cement bag, the initial cost of concrete road would see significant reduction vis--vis bitumen road
Some of the successful concrete highways in India

Marine Drive Mumbai (8 Lane)

Mumbai Pune Expressway (6 Lane)

`
Udaipur Road (4 Lane)

Chennai Road (2 Lane)

(Source: Industry)

Institutional Research

Cementing Concrete Roads


Theme

India has 4.9mn kilometers (Ministry of Road & Transport, GOI) of road network, the second largest in the world. Of this road network national
highways comprise only about 1.9% but carry over 40% of total road traffic. Nearly 21% of total road network has only a single lane pavement and at
least one in every 3 kms of this total road network is in need of immediate attention.

Indias Road network


Road classification

Surfaced Roads

Total Kms

National Highways
State Highways
Other PWD roads
Rural roads
Urban roads
Project roads
Total

76,818
164,360
1,022,287
2,838,220
464,294
299,415
4,865,394

WBM

B & CC

Unidentified

0
1,661
84,114
194,871
44,987
29,579
355,212

76,818
161,289
829,987
734,918
294,144
63,020
2,160,176

NA
NA
NA
183,202
NA
NA
183,202

Total Surfaced
76,818
162,950
914,101
1,112,991
339,131
92,598
2,698,589

Unsurfaced
0
1,410
108,186
1,725,229
125,163
206,817
2,166,805

(Source: MORTH Annual Report)


Note: WBM is Water-bound Macadam and B & CC means Bitumen and Cement-Concrete Roads

The NDA government has expressed its desire to upscale current road conditions by converting bitumen roads into concrete roads. Assuming 2% of
total highways and 0.2% of district and rural roads (which amount to about 95% of the total road network), in India are converted into concrete roads,
an incremental cement demand of 21 mn tons per annum could get created. In addition if incremental NHDP roads (~2,000kms of annual new road
target of 6,300kms) are built by using concrete then an additional annual demand of 6-9 mn tons of cement would get generated. Together this will
amount to a total of 27 mn to 30 mn tons of incremental cement demand.

Opportunity of 18-26 mn tpa for cement if all new 6,300 kms roads built by using concrete
(1:3:6 Concrete Mix)
National
Highways (kms)

Incr.
cement
demand
(mn tons)

Incremental
Capacity
Utilisation
cement

(1:2:4 Concrete Mix)

for

Incr.
cement
demand
(mn tons)

Incremental
Capacity
Utilisation
cement

50% (1:2:4), 50% (1:3:6)

for

Incr.
cement
demand
(mn tons)

Incremental
Capacity
Utilisation
cement

for

500
1500

1
4

0%
1%

2
6

1%
2%

2
5

0%
1%

2500

2%

10

3%

2%

3500
4500

10
13

3%
3%

14
18

4%
5%

12
16

3%
4%

5500

16

4%

22

6%

19

5%

6500
7500

19
22

5%
5%

26
30

7%
8%

23
26

6%
7%

8500

25

6%

34

9%

30

7%

9500
10500

28
30

7%
8%

38
43

10%
11%

33
37

8%
9%

(Source: Calculations based on ITDG South Asia Report, Industry Reports, Networth Research)

Note: Above calculations are based on requirement of cement for highways, with 1km: 45mtr length and width mix

Minister of Roads and Transport, Mr. Gadkari announced that the Mumbai-Goa National Highway (NH-17) would be converted into a four-lane concrete
road soon. Total stretch of NH-17 is 1,269 km upto Kochi in Kerala while distance between Mumbai-Goa is 621 km. Assuming that only Mumbai-Goa
portion converts to concrete road, it creates an opportunity of 1.8-2.5 mn tons for cement manufacturers.

We also tried to quantify the larger opportunity for cement players building on a hypothesis that even if 20% of Indias current road network (20% of
4.9 mn Km works out to about 1 mn km) convert to concrete over a long term horizon (20 to 30 years) then additional cement demand of 1,355 mn 1,622 mn tons, which is up to 4 times the current installed capacity & 6 times the current demand for cement of the country, would get generated.

Institutional Research

Cementing Concrete Roads

Upgradation and modernization of existing roads, another big opportunity for cement players
Road Classification

% Conversion
concrete (kms)

Existing roads (kms)

India's Highway network

Actual
Length
(kms)

to

Size of Opportunity
(mn tons)

241,178

2.00%

4,824

14

Major and other district roads

1,785,996

0.20%

3,572

Rural roads

2,838,220

0.20%

5,676

14,072

27

Total

4,865,394

(Source: MORTH Annual Report, Industry Reports, Networth Research)


Note: Calculation is based on 1:3:6 concrete mix

Cement industry sitting on a huge opportunity of concretization of roads

Best Concrete Mix


Road Category

Cement Requirement
per km (in tons)

Kms

Cement
Requirement
mn tons

in

Assumptions
Road Mix
(Length : Width)
1km:45m

Site Mix
National Highways

100,000

4,050

405

(1:2:4)

Urban roads

600,000

1,545

927

50% (1:2:4),
50% (1:3:6)

1km:20m

Rural roads

300,000

968

290

(1:3:6)

1km:15m

Total Requirement of cement

1,000,000

1,622

Regular Concrete Mix


Road Category

Cement
Requirement per km
(in tons)

Kms

Cement
Requirement
mn tons

in

Assumptions

National Highways
Urban roads

100,000
600,000

2,903
1,290

290
774

(1:3:6)
(1:3:6)

Road Mix
(Length : Width)
1km:45m
1km:20m

Rural roads

300,000

968

290

(1:3:6)

1km:15m

Site Mix

Total Requirement of cement

1,000,000

1,355

(Source: Calculations based on ITDG South Asia Report, Industry Reports, Networth Research)
Note: Calculation of cement for concrete roads is based on the quality of concrete mix and road length and width (number of lanes)
Risks to our theme

Slow implementation of concrete road projects

Historically, India maintained a very sluggish pace in terms of awarding as well as completing road projects. Various issues such as land acquisition,
environmental clearances, high cost and scarce funding, and viability of projects depressed the momentum of growth in road projects. During past two years,
NHDP has awarded only 12% in FY13 and 36% in FY14 of the targeted allocation of road projects to developers.
NHDP award of road projects
Particulars

Completion
FY13

Award
FY14

FY13

FY14

Target (kms)

3,000

2,500

9,500

4,028

Achievement (kms)

2,845

1,901

1,116

1,436

95%

76%

12%

36%

% achievement targeted
(Source: MORTH)

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Cementing Concrete Roads

Partial substitution of fly ash to cement

Fly ash could reduce the requirement of cement substantially in the road projects. According to International Journal of Emerging Technology and Advanced
Engineering, Fly ash can act as a fine aggregate and impart as a cementitious compound due to its pozzolanic activity. Rheological properties of fresh
concrete and the strength, finishes, porosity and durability of hardened concrete are all reported to be affected by addition of fly ash.
It has now become possible to obtain durable and high strength concrete with 50 % or more fly ash replacing the Portland cement, which is costly, and
energy extensive material. The availability of fly ash in India will increase from about 90mn tons in FY01 to about 180mn tons in FY14. Thus, sufficient
quantities of fly ash will be available to meet the projected needs of the proposed infrastructure programs.
High Volume Fly ash Concrete
Material for 1m3 of concrete

Quantities

OPC, kg

225

Processed Fly ash, kg

225

Total Cementitious Material, kg

450

Coarse Aggregates, kg

1392

Fine aggregates, kg

438

Water/cementitious ratio

0.4

Admixtures l

2.25

(Source: International Journal of Emerging Technology and Advanced Engineering)

More developments in asphalt concrete roads

Asphalt (bitumen) based roads industry is also evolving with newer developments in past few years with focus on improving strength of the roads. New
concepts such as stone matrix asphalt and warm mix asphalt are targeted to improve the life of asphalt pavements.

Falling bitumen prices

Bitumen prices declined by almost 10% to INR 36,600 per ton from the high of INR 40,460 per ton in October 2014 on account of falling crude prices.
Although, the government has indicated competitive bidding for cement supplies, which ensures lower prices for cement, we believe that falling bitumen
prices would continue to provide it a competitive positioning.
45000
40000
35000
30000
25000
20000
15000
10000
5000
0
Jun-01

Jun-05

Jun-09

Jun-13

Bitumen Prices INR per ton


(Source: Industry)

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Cementing Concrete Roads

Is it feasible to sell cement at INR 120 per bag?


Indian government indicated that one cement manufacturer has shown interest of supplying cement at around INR 120 per bag of 50 kgs (excluding freight
and taxes) for Mumbai-Goa expressway. This price is significantly lower compared to the current average price of INR 350/bag. Our study suggests that with
huge idle capacities and variable costs lower than bid price allow most of the cement companies to bid for these projects even at INR 120 per bag. Based on
our analysis of 17 cement companies, additional 1m tons of cement capacity if sweated by small cement companies would generate incremental PBT of 31%
while for large to medium sized companies PBT improvement ranges from ~0.8% to 9%. As per our calculations, JK Cements and Burnpur Cement would
face difficulty in bidding at this price because of their high variable costs.
Size based concretization model at 1mn tons of cement demand
INR mn

Incremental 1 mn ton for concrete


roads

Regular Cement Capacity

Installed Capacity
Cement Volume

LC
>20
mntpa

M-LC
<20>10
mntpa

122

60

MC
<10>5
mntpa

SC
<5
mntpa

LC
>20
mntpa

M-LC
<20>10
mntpa

122

60

34

MC
<10>5
mntpa

Total Capacities utilised

SC
<5
mntpa

LC
>20
mntpa

M-LC
<20>10
mntpa

122

60

34

MC
<10>5
mntpa

SC
<5
mntpa

34

86

39

26

87

40

27

70%

64%

77%

74%

1%

2%

3%

11%

71%

66%

80%

85%

Net Sales

406091

162179

105516

29247

2400

2400

2400

2400

408491

164579

107916

31647

Variable Cost

191430

74614

59330

14558

2236

1930

2272

2198

193666

76544

61601

16755

Freight

82097

35851

21648

5836

82097

35851

21648

5836

Fixed Cost

61589

24437

12284

5626

61589

24437

12284

5626

Total Cost

335116

134902

93263

26019

2236

1930

2272

2198

337352

136832

95534

28217

EBITDA

70975

27277

12254

3227

164

470

128

202

71139

27747

12382

3430

4359

7515

4354

461

4359

7515

4354

461

Depreciation
21163
14308
5472
2103
0
0
0
0
21163
14308
5472
PBT (excl Other
Income)
45453
5454
2428
664
164
470
128
202
45617
5924
2556
Incremental
Benefits
0%
9%
5%
LC Large Cement companies, M-LC Medium to Large Cement companies, MC Medium Cement companies, SC Small Cement companies
LC 3 companies, M-LC 4 companies, MC 5 companies, SC 5 companies
Many cement companies have variable costs less than INR 120 per bag

2103

Capacity Utilisation

Interest

866
31%

Burnpur Cement
UltraTech Cem.
Orient Cement
J K Cements
Sanghi Inds.
Guj. Sidhee Cem.
JK Lakshmi Cem.
Shree Cement
Saurashtra Cem.
Heidelberg Cem.
Mangalam Cement
The Ramco Cement
India Cements
Ambuja Cem.
Chettinad Cement
Birla Corpn.
ACC
-50

-30

-10

10

30

50

Variable Costs (ex freight) INR per bag

70

90

110

130

150

Contribution INR per bag

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Cementing Concrete Roads


(Source: Company Reports, Networth Research)
Orient, Sanghi, Shree, and Mangalam Cement are best placed to explore opportunities in concretization
Burnpur Cement
UltraTech Cem.
Orient Cement
J K Cements
Sanghi Inds.
Guj. Sidhee Cem.
JK Lakshmi Cem.
Shree Cement
Saurashtra Cem.
Heidelberg Cem.
Mangalam Cement
The Ramco Cement
India Cements
Ambuja Cem.
Chettinad Cement
Birla Corpn.
ACC
-25%

-15%

-5%

5%

15%

25%

35%

Contribution margin at INR 120 per bag

(Source: Company Reports, Networth Research)


Huge idle capacities sufficient to tap the opportunity
60%
50%
40%
30%
20%
10%

Burnpur Cement

UltraTech Cem.

Orient Cement

J K Cements

Sanghi Inds.

Guj. Sidhee Cem.

JK Lakshmi Cem.

Shree Cement

Saurashtra Cem.

Heidelberg Cem.

Mangalam Cement

The Ramco Cement

India Cements

Ambuja Cem.

Chettinad Cement

Birla Corpn.

ACC

0%

Spare Capacity

(Source: Company Reports, Networth Research)

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Cementing Concrete Roads


Company wise capacity utilization and spare capacities
Company Name

Installed Capacity
(mn tons)

ACC
Birla Corpn.

Volume
(mn tons)

Capacity Utilisation

Spare Capacity

33

24

73%

27%

79%

21%

Chettinad Cement

12

51%

49%

Ambuja Cem.

28

21

75%

25%

India Cements

15

10

65%

35%

The Ramco Cement

16

55%

45%

Mangalam Cement

55%

45%

Heidelberg Cem.

67%

33%

Saurashtra Cem.

89%

11%

18

14

81%

19%

JK Lakshmi Cem.

85%

15%

Guj. Sidhee Cem.

97%

3%

Sanghi Inds.

79%

21%

J K Cements

71%

29%

Orient Cement

84%

16%

UltraTech Cem.

62

41

66%

34%

Burnpur Cement

53%

47%

Shree Cement

(Source: Company Reports, Networth Research)


Summarizing

At current market price of cement, i.e., INR 350 per bag, Government would require to spend ~INR 2.5Cr per km road, assuming length of 1km and
width of 7mtr. However, the cost for similar specifications of bitumen roads is INR 2.07Cr. If we assume that the cement companies bid at INR 120 per
bag, the same road would be constructed at a cost of INR 2.05Cr per km. Apart from initial cost, concrete roads have longer durability and therefore
lower life cycle cost compared to bitumen roads. We believe that competitive bidding by cement companies would reduce cost unattractiveness of
cemented roads vis--vis bitumen roads.

Government of India has decided to pay freight cost to cement companies. In our view, cement plants are mostly fragmented across different locations
in India and therefore offers inexpensive plant to site location transportation.

Currently, capacity utilization of cement companies is ~70%, leaving almost 100mn tons of idle capacities. With an incremental demand of ~7-8mn tons
per annum would help the companies to utilize their plants efficiently and benefit from operating leverage. As given earlier, our calculations suggest that
many cement companies have variable cost (excl. freight cost) lesser than INR 120 per bag. Therefore, we believe that bidding for cemented roads at
INR 120 per bag is earnings accretive for cement companies.

Considering all the benefits mentioned above, we believe that the cement at INR 120 per bag for concrete roads is a win-win deal for both, the
government and cement companies.

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Cementing Concrete Roads

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