Profitability Analysis of Cement Companies: A Comparative Study

INTRODUCTION

The Indian cement industry is the second largest market after China. It had a total cement production capacity of about 425 million tonnes (MT) as of September 2017. Cement is a cyclical commodity with a high correlation with GDP15. India is second largest in cement consumption.

15 Cement Sector Analysis Report. It can accessed at https://www.equitymaster.com/research-it/sector-info/cement/Cement-Sector-Analysis-Report.asp#pr

Source: Cement (Report), India Brand Equity Foundation, 2018 Indian cement industry comprise of large number of companies. Indian cement industry stood up on ninety companies which spread all over of India. The industry is dominated by few large players.

India's 460-million tonne cement industry, the world's second-largest, is likely to continue facing tough times in 2018-19 too. Hit by a gross mismatch in supply and demand for nearly a decade now, leading to poor capacity utilisation of less than 70 per cent, the sector's growth has remained stunted with a lower digit growth trajectory16. Figure 2 shows top 10 cement companies which contribute more than 50% of total production of cement in India. In this research, we only include the top three cement companies for the research. These companies are UltraTech cement Ltd., Shree cement Ltd. and Ambuja cement Ltd.

Source: data compile from money control

Banerjee (2015) conducted a research on profitability trend in cement industry in India. She measures the profitability of cement companies through gross profits as percentage of gross value added. She used the time series data of cement prices for the analysis. Sumathi and Jothi (2016) explore profitability scenario of the cement industry and compare the financial performance of UtraTech and Orissa Cement. They explore the relationship between firm efficiency and working operation of a cement company. They found that short term solvency of UtraTech and Orissa Cement is not satisfactory and it matter of concern for the both firms. The company should work toward improve the solvency of company.

16 Article published in Newspaper Business Standard on January 3, 2018 and same can be accessed https://www.business-standard.com/article/companies/no-cheer-for-cement-makers-in-fy19-rising-costs-to-hit-profitability-icra-118010300876_1.html

cement companies UltraTech, Shree Cement and Ambuja Cement. This research study cover the five year data from 2012-2016. Study reveals that Ambuja cement liquidity position is better than its rivals. This research indicates Shree cement earn more return on capital employed compare to UltraTech and Ambuja Cement.

After the extensive review of literature and find the gape in existing literature, researchers framed the following objective: 1. To analysis the profitability of cement industry during the period of study. 2. To compare the profitability of sampled cement companies during the period of study.

H1: There is no significance difference between PBIT margins of all sampled cement companies during the period of study. H2: There is no significance difference between net profit margins of all sampled cement companies during the period of study. H3: There is no significance difference between return on capital employed of all sampled cement companies during the period of study. H4: There is no significance difference between return on assets of all sampled cement companies during the period of study.

METHODOLOGY

This research study check and compare the profitability of Indian cement industry. We framed the exploratory and descriptive research design to answer the research questions. Indian cement industry is very large in number of companies; total number of cement companies in India is ninety which comprises of state-run, public and private players17. This study draws a sample of three cement companies as basis on market capitalization. These companies are UltraTech cement Ltd., Shree cement Ltd. and Ambuja cement Ltd. This research study has cover five years data from 2013-14 to 2017-18. Profit before

17 Cement information system, Department of Industrial Policy & Promotion, Government of India, Ministry of Commerce and Industry. http://eaindustry.nic.in/cement/report2.asp

industry. Data related to ratios is collected and compiled from annual reports of relevant cement companies, high impact factor journals and authentic websites. Normality of data set is checked by mostly preferred Shapiro–Wilk test with the help of SPSS and the null-hypothesis of this test is that the population is normally distributed (Wikipedia). Shapiro–Wilk test confirms the normality of data set. To compare the profitability of sampled cement companies, parametric one-way anova (ANOVA) statistic is used through SPSS 16.0 version.

RESULTS AND DISCUSSION

Annexure 1 shows the data related to ratios of profitability for UltraTech cement Ltd., Shree cement Ltd. and Ambuja cement Ltd. from from 2013-14 to 2017-18. The profitability of companies is measure by PBIT margin, net profit margin, return on capital employed and return on assets ratios. Annexure 2 shows the results of tests of normality for the data set related to UltraTech cement Ltd., Shree cement Ltd. and Ambuja cement Ltd. We test the null hypothesis population is normally distributed and p-value is compared with level of significance (α=.05). It inferred from the annexure 2 that p-value is more than level of significance (α=.05) for all variables and it assumed that sample data is normally distributed. It is most important properties of parametric test that population should be normally distributed. Therefore, we can use one-way anova test for comparing three samples of cement companies on different profitability parameters.

Table 1 shows the sample statistic for the PBIT margin of the cement companies. Table 2 shows one-way anova test results. We test the null hypothesis H1 with help of one-way anova. Table 2 show the F-statistic and p-value are 0.351 and 0.711 respectively. We compare the p-value with level of significance (α=0.05) which is more than α=0.05, therefore, there have significant statistical evidence to accept null hypothesis H1 and reject alternate. It is inferred from table 2 that PBIT margin of all three cement companies is statistically same during the study period. All three sampled cement companies performing the same on this profitability parameter.

α=.05 H2: There is no significance difference between net profit margins of all sampled cement companies during the period of study. Table 3 shows the sample statistic for the Net margin of the cement companies. Table 4 shows one-way anova test results. We test the null hypothesis H2 with help of one-way anova. Table 4 shows the F-statistic and p-value which are 1.957 and 0.184 respectively. We compare the p-value with level of significance (α=0.05) which is more than α=0.05, therefore, there have significant statistical evidence to accept null hypothesis H2 and reject alternate. It is inferred from table 4 that net profit margins of all three cement companies is statistically same during the study period. All three sampled cement companies performing the same on this profitability parameter.

Table 5 shows the sample statistic for return on capital employed of the cement companies. Table 6 shows one-way anova test results. We test the null hypothesis H3 with help of one-way anova. Table 6 shows the F-statistic and p-value which are 2.292 and 0.144 respectively. We compare the p-value with level of significance (α=0.05) which is more than α=0.05, therefore, there have significant statistical evidence to accept null hypothesis H3 and reject alternate. It is inferred from table 6 that return on capital employed of all three cement companies is statistically same during the study period. All three sampled cement companies performing the same on this profitability parameter.

H4: There is no significance difference between return on assets of all sampled cement companies during the period of study. Table 7 shows the sample statistic for return on assets of the cement companies. Table 8 shows one-way anova test results. We test the null hypothesis H4 with help of one-way anova. Table 8 shows the F-statistic and p-value which are 3.215 and 0.076 respectively. We compare the p-value with level of significance (α=0.05) which is more than α=0.05, therefore, there have significant statistical evidence to accept null hypothesis H4 and reject alternate. It is inferred from analysis of data that return on capital employed of all three cement companies is statistically same during the study period. All three sampled cement companies performing the same on this profitability parameter. Table 7: Sample statistic for the return on assets of cement companies

Indian cement industry is facing the tough time from demand side and struggling to competitive in world mainly from China. But it is cheer movement for cement sector that India‘s real estate sector will touch $180 billion by 2020. In this study, we have compared the profitability performance of top three cement companies on different profitability parameters. Profitability performance of all three companies is same statically and it confirmed from analysis of data. It further concluded that Shree Ultra cement performing better to its rivals in term of different profitability parameters. Further, it is concluded from results of data that Ambuja cement is performing better than UltraTech cement on all profitability performance parameters.

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Foundation, I. B. (2018). Cement. New Delhi: Department of Commerce, Ministry of Commerce and Industry, Government of India. Hussain, A., & Sharma, P. (2017). Comparative financial analysis: (A case study of associated cement company v/s Jaypee cement company). International Journal of Commerce and Management Research, pp. 79-82. S, S. (2017). A Study on Comparative Financial Performance of the Select Cement Companies in India. Global Journal for Research Analysis, pp. 709-710. Sumathi, N. &. Jothi, K. (2016). A Study On Financial Performance Of Cement Companies In India With Reference to Ultratech Cement Limited and OCL India Limited - A Comparative Analysis. International Journal for Research in Applied Science & Engineering, pp. 147-150.

www.business-standard.com/article/companies/no-cheer-for-cement-makers-in-fy19-rising-costs-to-hit-profitability-icra-118010300876_1.html www.moneycontrol.com/stocks/marketinfo/marketcap/bse/cement-major.html Annexure 1: profitability ratios for the UltraTech cement Ltd., Shree cement Ltd. and Ambuja cement Ltd.

Annexure 2: Tests of normality results for the data set related to UltraTech cement Ltd., Shree cement Ltd. and Ambuja cement Ltd.

Senior Research Fellow, IMSAR, MD University, Rohtak