A growing number of Indian companies from other industries are scrambling to set up cement plants, lured by high margins or for environmental reasons, but government price controls could prove a dampener, experts said.
New entrants include state-run Steel Authority of India Ltd. , founders of JSW Steels Ltd. , detergent maker Nirma Ltd. and diversified Emami Group.
Media reports have also said the founders of two-wheeler maker Hero Honda Motors Ltd. are planning to set up a cement plant.
"There is only one trigger for us and that is high margins," Mohan Goenka, director of Emami Group, told Reuters.
The group, which has interests in paper making and real estate and in cosmetics through flagship Emami Ltd. , is setting up a 4-million-tonne plant in central India. Goenka said cement offered margins of 20-25 percent.
He said business risk was low as demand was expected to continue growing over the next few years.
However, the federal government, concerned about high inflation, last month got cement companies to agree to a moratorium on price increases for a year, even if costs of inputs such as power and transport were to go up.
The government also removed duties to help imports and control local prices. With these measures, "the sector attractiveness is gone," said Manish Balwani, an analyst with Emkay Shares and Stock Brokers.
Meanwhile, existing players don’t seem to mind the new entrants. "The new capacites won’t come on stream before three years," and won’t affect his company’s position, N. Srinivasan, managing director, India Cements Ltd. , said.
Cement despatches rose an annual 5.9 percent in March, while retail prices jumped by a fourth during January-March on the back of increased construction activity for roads, malls and houses.
Cement demand is expected to be driven in the coming years by infrastructure expansion in India, where the benefits of rapid economic growth have been limited by poor amenities.
India has about 50 cement makers operating 365 plants with a capacity to make 165Mt a year. Producers have announced plans to add another 100 million tonnes by 2009/10.