India: Cement industry set to take a big hit

India: Cement industry set to take a big hit
Published: 25 November 2008

India’s cement industry, which rode on a building boom to become the world’s second largest cement manufacturer after China with an installed capacity of more than 200Mt, is all set to take big hits.

A sharp slowdown in real estate as well as capital-starved infrastructure sectors coupled with a broad economic downturn will see the industry face considerable pressure on profitability just as new capacity starts kicking in, say industry watchers.

India’s cement industry has 132 large plants and 365 small plants with a cumulative installed capacity of 204mt at the end of August.

The main Indian manufacturers in terms of capacity are ACC Ltd, UltraTech Cement Ltd, Ambuja Cements Ltd, Grasim Industries Ltd, Binani Cement Ltd, India Cements Ltd and JK Cement Ltd. In addition, several international cement manufacturers such as France’s Lafarge, Switzerland’s Holcim Ltd, Italy’s Italcementi and Germany’s HeidelbergCement AG now hold at least a quarter of the total Indian cement manufacturing capacity.

The industry’s capacity utilization for second quarter ended September has declined to 82%, a four-year low, largely because 31mt of capacity was added in the past year, according to Jinesh Gandhi, an analyst with Motilal Oswal Securities Ltd.
If the industry sticks to its announced expansion, he sees some 120mt of capacity coming online over two-three years in addition to several companies modernizing their plans.

Gandhi predicts capacity utilization for the year ending March will be at around 87% down from an optimum level of around 95% in the year-ago quarter ended March. He also estimates capacity utilization to fall sharply to 74% in 2009-10. “We believe that cement prices would come under pressure from second quarter of next fiscal, as the full impact of new capacity additions are felt,” said Gandhi. Companies are starting to flag this issue.

UltraTech Cement, while announcing September quarter results on 18 October, said, “The likely commissioning of around 90Mt capacity in a phased manner over the next three years could lead to a surplus scenario by 2009 resulting in pressure on earnings, sales realization and margins. All these pose a challenge to the cement industry.”

Emkay Global Financial Services Ltd, another Mumbai-based equity research firm, which covers nine Indian cement companies that together control 65% of the industry’s installed capacity, maintains a “negative” view on the sector after reviewing their performance through September. The companies under Emkay’s coverage include ACC, Ambuja Cements, Grasim Industries, UltraTech, India Cements, Madras Cements Ltd, Shree Cement Ltd, JK Cement and Orient Paper and Industries Ltd.