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Kamal Cement Ka 2x Kamaal 🪷

India has set its sight on achieving the developed-nation-status by 2047. And central to any country’s journey from developing to developed is its infrastructure - which is largely built using cement.

Look at China for instance, since it has already seen the journey that India has just about begun. From 1970 to 2020, China’s cement production increased by 100x, compared to a 3x rise in the rest of the world, and it saw a jump of >3x in per capita cement demand from 0.5 tons per person in 2000 to 1.7 tons per person in 2020.

Rapid infrastructure build-outs result in a direct increase in per capita cement consumption, resulting in exponential rise in cement demand.

Amid this industry-wide opportunity, a small company called Shree Digvijay Cement with just a 0.2% market share stands out as it is set to double its capacity, thereby growing faster than market, and perhaps even have it reflect in its stock price.

Shree Digvijay Cement, Who?

Shree Digvijay Cement manufactures and sells cement under the brand name of Kamal, particularly in Gujarat and in the western region of India.

The company’s plant is located in Jamnagar, and it has a capacity of making 1.5 million tonnes of cement per annum. Just for context, India’s current cement capacity stands at around 550 million tonnes, making Shree Digvijay Cement a tiny player.

Through the last decade, Shree Digvijay Cement has barely seen any capacity expansion - with production capacity hovering around the 1 million tonnes per annum mark. This comes in a backdrop when India’s cement capacity increased by nearly 60%.

A lot of the inertia around growth for Shree Digvijay Cement came because of multiple changes in ownership.

  1. The Bangur Family founded the company in 1944

  2. Aditya Birla Group bought over in 1998

  3. Portuguese cement maker Cimpor Cimentos bought a controlling stake in 2008 to enter the Indian markets

  4. In 2012 the Portuguese promoters transferred their stake to the leading Brazilian cement company Votorantim Cimentos

  5. In 2018 True North Fund (PE fund) acquired a 54% stake in the company

Marked Improvement in Operations

Since the time the company has been owned by True North Fund in 2018, there have been several changes to beat the inertia in Shree Digvijay Cement. Immediate changes in order to improve the current standing of the company included:

  1. Leadership change - To start with, the company appointed Anil Singhvi as the CEO, who was earlier heading Ambuja Cement

  2. Cost control - The company got its costs under control, and improved efficiencies, especially with the use of WHRS (Waste Heat Recovery Systems), tripling its capacity from 3MW in 2017

  3. Green initiatives - Further, the company increased its reliance on green energy to nearly 40% of the total energy consumed

  4. Efficiency improvement - During the pandemic, the company took advantage of reduced demand to undertake crucial repairs on its sole plant

  5. Higher utilisation - Post improvements, the plant started operating at a 100% capacity utilisation (from 80% earlier), further improving profitability as efficiencies kicked in

💡 This resulted in Shree Digvijay Cement being one of the most profitable players in the industry - making an EBITDA per tonne of Rs. 1,139 in FY24, which is nearly 20% higher than peers

Investing for Growth

Despite being a company with industry-leading profits, the stock trades at a significant discount (of 30-40%) to peers.

With cement stocks, valuation re-rating doesn’t materialise till the time the company doesn’t outperform on growth parameters. ACC and Ambuja Cement have been classic examples of this phenomena, in the past.

To enable growth, the next phase of changes in Shree Digvijay Cement have now kicked in:

  1. Acquiring limestone - The company has successfully secured limestone mines with deposits enough to last two decades at the current rate of production

  2. Securing deposits - It is also setting itself such that it can expand limestone deposits to as much as 50 million tonnes in the future

  3. Increasing capacity - The company already expanded its capacity to 1.5 MTPA in FY24, from 1.2 MTPA in FY23 using efficiency improvements and brownfield expansion

It is now on its way to further expanding its cement production capacity to 3 MTPA from 1.5 MTPA right now, by investing Rs 250 crore.

💡 Shree Digvijay Cement, as per its plans, can see 2x growth in capacity over the next year, compared to 8-10% growth for peers

Set for 2x Expansion

As per the current plans of Shree Digvijay Cement, production capacity is set to increase by 2x, and set to come online 3QFY25 onwards.

Effectively, the company will double its capacity over the next year, whereas the industry will perhaps see an increase in capacity of up to 10%, implying significantly higher growth for Shree Digvijay Cement relative to its peers.

Lucky for the company, India’s ever increasing demand for cement, the fact that it’s present in the West which is one of the fastest-growing and highest-consuming markets in India, and its relatively small scale compared to the industry should help ensure the new capacity gets absorbed in the market fast and smooth.

With profitability already better than industry, higher growth seems like the perfect recipe for Shree Digvijay Cement to start seeing a valuation upgrade.

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