Cementing a position in the Nifty 50
In today’s newsletter, we will talk about how Shree Cement is about to make its way to the Nifty 50 index and why this matters.
The Story
Now if you’re not extremely familiar with Nifty 50, here’s a brief to get you up to speed.
We have about 6000 listed companies in this country. I say "about" because there are a lot of companies out there, so much so that most people can’t even keep a track of this stuff. Anyway, the point is if someone were to ask you what the stock market’s doing today, it wouldn’t be prudent for you to check each and every company listed out there. So we have a nifty little system to help you with this niggling problem.
The idea is to take the biggest, most influential companies from multiple industries and track their performance each day. And Nifty 50 happens to include 50 stocks that do this job. There’s also the Sensex 30. But no matter, which way you swing, you have to remember that they both do the same thing.
Anyway, considering Nifty 50 is sort of a benchmark, everybody wants to make it to the list. Unfortunately, when somebody does get in, an incumbent will have to make way.
And right now we have Shree Cement coming in, and Yes Bank going the opposite direction. Don’t ask why Yes Bank’s moving out. It’s a looong story. You can check out our previous issues here, here and here to make sense of that little tragedy.
But that’s not our focus today. Our focus is — Shree Cement, a cement manufacturing company from Rajasthan. Now obviously, since it’s made it into the coveted list, it’s safe to say that their financials are pretty robust. But that doesn’t tell you how it’s managed to pip every other cement company out there.
Well, to put it succinctly, it’s because these guys are Industry Cost leaders. And before I get to breaking down what Cost Leadership means, we need a crash course on how you make cement. And here’s a nice little guide to help you out.
“First you gather your limestone. Then you burn it. By burning it I don’t mean light it on fire which obviously isn’t going to happen. Burn it means to heat it like you mean it.”
So instead of lighting it up with a matchstick, big companies like Shree Cement heat their limestone in large ovens using fuel (like Pet Coke). And since they’ve got long-standing relationships with other petrochemical companies and can source this stuff for pennies on the block, they have a veritable cost advantage here. Hell, they even have their own power plants to supply cheap electricity. And that means our company can sell its cement for the same price as everyone else and still be better off because they’re making better margins.
So, in essence, a cost leader tries to build a sustainable advantage by optimising its operations. And boy have they built a sustainable advantage or what.
If you haven’t noticed, we have had a bit of a slump in the Real Estate/Infra Sector over the past 10 years or so. And since these lot happen to be primary consumers of cement you’d have expected Shree Cement to be under a bit of pressure.
In fact, most of their peers have had a terrible time dealing with this whole tragedy. For instance, cement manufacturers who resorted to reckless expansion on the back of cheap debt between 2000 and 2010. Yeah, they crumbled under the debt burden during the crisis. Meanwhile, Shree Cement managed to consolidate ground and emerge as one of the leading cement manufacturers in the country, thanks to the fact that they only expanded when they needed to. This is evidenced by the fact that their capacity utilizations have always stayed on point.
Point of Interest: Think of capacity utilization as that one metric that tells you whether a company's factories are running at full steam. When it's on point, you'll know for a fact the company's doing well and selling a lot of cement. When it's not, you know they're in for a rough ride. Got it? Okay... Moving on
In fact, market participants have been raving about Shree Cement for a while now. The stock price has more than doubled in the last 5 years. And it doesn’t look like they’re slowing down any time soon. So all in all, we have a company that’s managed to pop into Nifty 50 list by being prudent and cost-effective whilst managing to stay under the radar.
Who would've thought, eh?