Cement industry in India - On strong foundation

Cement industry in India - On strong foundation
Published: 12 September 2006

Riding on increased activity in real estate and boom in infrastructure

development, the Indian cement industry is on a roll.


The Indian cement industry, which is ranked second in the world in terms of

production, is fragmented, with the top five players accounting for nearly

50 per cent of the installed capacity of about 160 million tonnes and with

small, regional players holding the balance.


The Indian cement industry is 70 years old. Some of the latest installations

are the best in the world. Unlike in the past, today the best technology is

available for mini cement plants too.


The recent boom in the housing and construction industry has worked wonders

for cement manufacturing companies as they registered an average growth of

95 per cent in their net profits for the quarter ended March 31, 2006,

according to a study conducted by Industry body, Assocham. Owing to a strong

demand in northern and western regions, major cement companies witnessed a

32 per cent surge in their sales volume.


"Housing boom and an increased focus on infrastructure development like

national highways and state highways have led to increased demand for

cement," Assocham President Anil K Agarwal said.


The cement industry is expected to grow at 10 percent per annum according to

the annual report of the Department of Industrial Policy and Promotion

(DIPP). The report reveals that this growth trend is being driven mainly by

the expansion of existing plants and using more fly ash in the production of

cement.


With a strong GDP growth and supply-demand equation working in the

industry’s favor, the net profit of the top 10 cement companies more than

doubled during the quarter ended June 30, 2006. Thanks to a 21 percent jump

in average sales realizations and double-digit growth in volumes, the net

sales of the sample companies grew 34 percent y-o-y. The industry increased

its installed capacity by six million tonnes to 160 millions in 2005-06.

According to industry observers, the total capacity expansion announced by

manufacturers is about 32 million tonnes and most of the addition is

expected to happen over the next two years.


Demand supply


From an oversupply situation not so long ago, India now witnessing a

scenario where demand growth is outstripping supply. The present scenario of

cement industry is excellent in terms of demand. Analysts say: "Now the

demand-supply situation is more or less in equilibrium and prices could move

up further as the demand growth will be much faster than the supply growth."


Domestic consumption with 11 per cent increase and exports keeping up with

the last year levels, the Indian cement industry is expected to cross 150

million tonnes in dispatches, including domestic consumption. Mini cement

plants everywhere are operating at 100 per cent capacity utilization. The

margins are improving in line with others.


Industry observers feel that housing, which accounts for 55-60 per cent of

the demand, remains the consistent driving force behind sector growth.

Besides, demand from infrastructure projects and industrial/commercial

ventures account for 20 per cent each. An incremental demand of two million

tonnes is expected per year from infrastructure projects in the country.


Several companies are announcing expansion plans. Up to 2008, about 21.5

million tonnes capacity is expected to be added by expansions. This year’s

domestic demand will be 140 million tonnes. Now that the GDP is expected to

grow to 8 per cent, growth in the cement consumption is also expected to

remain above 12 per cent per year. This means, we need an additional 50

million tonnes for the next three years. So, it clearly shows that the

proposed expansions will not impact the margins.


Supply for cement is expected to remain tight which, in turn, will push up

prices of cement.


The pricing factor


The competition in the market was intense with players resorting to frequent

price cuts in the past in order to gain market share, due to large number of

players in the industry and very little brand differentiation. However, this

scenario has been absent since the last few quarters as the demand-supply

equation continues to improve.


The prices are expected to remain at current levels over the next 12 months

because of the strong demand. It has to be noted that, a part of the present

rise in cement prices is seasonal. The prices generally tend to remain on

high from October to May when construction activity is at its peak and

soften to some extent with the onset of monsoon to remain subdued till

September. Better profit margins will induce manufacturers to expand

capacities at a faster pace.


The better price realization being enjoyed by industry majors is not only on

account of the supply-demand gap that has emerged, but also because of the

modernization and cost-cutting measures adopted by the players in the

industry. Over the past few years, cement majors have introduced a number of

innovative cost-cutting measures, including restructuring, consolidation,

technological upgradation and energy-saving devices.


Electricity and coal account for as much as 60-70% of the manufacturing cost

of the domestic cement sector, with electricity alone accounting for 40% of

the cost. Although the country has coal reserves of 80 billion tonnes,

certain bottlenecks in production management have restricted supply. The

cement industry had entered into a fuel supply agreement, which expired in

November 2004, with coal producers like Coal India and Singareni. Coal

companies catered to 80% of demand by the cement firms.


The industry chamber urged that, the government should make attempts to

allocate coal blocks to cement companies. 70 % of coal is utilized by

thermal power, with steel and cement using only 16 and 5% respectively.


While power costs are likely to come down from the previous quarters, coal

prices are stabilizing which is good news for cement companies. Also lower

interest rates and tax incentives are helping. Analysts anticipate some cost

pressures due to rising power cost. But they add that the big players would

be able to tackle the same with focus on captive power, which remains a

better option to grid power as long as coal prices are reasonable. Even as

energy costs remain a cause of concern, the changing demand-supply dynamics

will drive cement prices higher benefiting the industry across the board.


Cement, being a bulk commodity, is a freight intensive industry and

transporting cement over long distances can prove to be uneconomical. This

has resulted in cement being largely a regional play with the industry

divided into five main regions viz. north, south, west, east and the central

region. While the southern region is excess is capacity owing to the

availability of limestone, the western and northern region are the most

lucrative markets on account of higher income levels.


The export


The cement industry has also been witnessing a spurt in exports. India

exported about 8.13 million tonnes of cement and clinker between

April-January 2004-05.The export figures for cement were 3.31 million tonnes

and 4.82 million tonnes for clinker in the same period.


Rising cement prices are now a global trend. Market participants argue that

cement prices have been on the rise in West Asia and South-East Asia, making

it increasingly difficult for companies to source cheap cement. Industry

experts say that there are many enquiries for cement with reasonable prices.

About 36 states in the US are facing shortage of cement and their

construction activity has slowed down. To overcome the problem, the US has

relaxed the import duty on cement recently.


Concrete growth ahead


According to industry sources several big and small cement companies are

actively considering expansion plans in anticipation of further growth in

demand for cement. A phase of acquisitions and mergers among the existing

players is also not being ruled out in the immediate future. But

consolidation is expected in the sector at a slow pace, but not big ticket

acquisitions. Some plants that are shut down or are in bad hands may find

takers in big players, something that is being talked about for quite some

time. But most attractive capacities have been already bought, according to

analysts. Moreover, valuations are high at present and M&A activity may slow

down due to sellers quoting very high prices.


According to analysts, cement industry in India is poised for strong growth

going forward, driven by continued investments in the housing and

infrastructure sectors. So, going forward, the outlook for the industry

continues to look positive, though the upside may reduce due to increasing

base. Analysts expect that the 9% growth rate will be maintained y-o-y for

FY2006-07 also. Market analysts feel that the sector will maintain a growth

of around 10% compounded annual growth rate (CAGR) for the next five years.

Analysts say "The booming housing and infrastructure sectors have driven the

growth in cement sector. Improved volumes, coupled with the rising prices,

have resulted in improved margins. On the back of continued investment in

the housing and infrastructure the industry is expected to grow by 11% for

the next one or two years."


The only sources of worry for the industry are rising expenses -

particularly fuel and power - and freight costs. You can expect the sector

stocks to surge ahead on the bourses. The companies to watch out for will be

Ultratech Cement, Grasim, Shree Cement and India Cement.