WHRS - A key cog in the flywheel - Thematic Report on Cement Sector - HDFC Securities

In this thematic, we analyse the Indian cement industry's environment friendly and structural cost reduction effort - Waste Heat Recovery System (WHRS). A WHRS part recycles kiln's exhaust heat to generate electricity at negligible op cost (hence attractive payback). This reduces fossil fuel consumption intensity and thus CO2 emissions! The Indian cement industry scaled up WHRS additions by 4x during FY13-20 to 652MW and another 40% addition by FY23 is underway. This helps the Indian cement industry to sustain its global leadership on energy efficiency and to lower its carbon footprint while boosting op margins. Companies in the north-central region are the major gainers as most of them have ~15% of their electricity needs being met through WHRS.

Indian cement industry - a global leader on energy efficiency map: Indian Cement industry currently has one of the lowest fuel and electricity consumption intensity globally. Even in terms of CO2 emission reduction, this industry met its energy intensive target for 2020 (5% reduction) in 2017 only. The industry achieved this through reduction in fuel /electricity consumption intensity, reduction in clinker consumption factor and increased replacement of clinker with waste products like fly-ash/slag.

Surge in WHRS installations in India: To further reduce fossil fuel consumption and CO2 emissions, under the government initiatives of Perform, Achieve and Trade (PAT) scheme, cement industry lapped on to Waste Heat Recovery System (WHRS) technology to generate electricity from waste heat from the kiln. During three PAT cycles starting FY13, WHRS capacity in India surged 4x to 652MW in FY20, thereby contributing to reduction in industry's fuel consumption intensity and CO2 emissions.

Margin booster and attractive pay-back period: This technology has a very attractive payback period of ~3 years, owing to large cost savings versus grid power. As against grid power cost of Rs 6-7/kWh, WHRS power costs ~Rs 0.7/kWh. An integrated WHRS can meet up to ~30-40% of the cement plant's power needs, and reduce opex by up to Rs 150/MT. Thus, WHRS installation boosts both operating margin and also bolsters overall return ratios. This drove industry wide surge in WHRS additions. WHRS capacity can potentially meet ~13% of industry's total power currently vs 3% until FY14. With another ~40% rise in WHRS addition over next three years, WHRS share in electricity requirement will increase to ~15% by FY23E.

North central regions are major beneficiaries: As per our detailed plantwise WHRS mapping for the industry, clinker plants in Rajasthan and MP account for ~50% of total WHRS capacities in India. Limestone in these regions has low moisture content, boosting WHRS' productivity. Shree Cement (29%), UltraTech (16%) and Penna (7%) together account for half of all WHRS capacity in India. Barring a few, all cement companies have some WHRS installed or are setting up one over next three years. Most of the companies in the north-central regions have WHRS accounting for ~15% of their electricity requirement thus bolstering their profitability and return ratios. As these regions also enjoy healthy pricing trends (high clinker utilisation), companies in these regions should continue to deliver industry leading margins (Refer our earlier note dated 5th March - Structural Tailwinds).

Source : Equity Bulls

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