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The Indian cement industry with a total capacity of about 200 m tonnes (MT) in FY09 is the second largest market after China. Although consolidation has taken place in the Indian cement industry with the top five players controlling almost 60% of the capacity, the balance capacity still remains pretty fragmented.
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Despite the fact that the Indian cement industry has clocked production of more than 100 MT for the last five years, registering a growth of nearly 9% to 10%, the per capita consumption of around 134 kgs compares poorly with the world average of over 263 kgs, and more than 950 kgs in China. This, more than anything, underlines the tremendous scope for growth in the Indian cement industry in the long term.
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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 always had excess capacity in the past owing to abundant availability of limestone, the western and northern regions are the most lucrative markets on account of higher income levels. However, with capacity addition taking place at a slower rate as compared to growth in demand, recently the demand supply parity had also been restored to some extent in the Southern region. Considering the pace at which infrastructural activity is taking place in different regions, the players have lined up expansion plans accordingly.
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Given the high potential for growth, quite a few foreign transnationals have been eyeing the Indian markets and are planning to acquire domestic companies. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim has acquired stake in domestic companies Ambuja Cements and ACC and has increased its stake gradually to gain full control. After acquiring stake in big companies, transnationals eyed median capacity producers. Italcementi acquired 100% stake in Zuari Cement and 95% stake in Shree Vishnu. Cimpor, the Portugese cement manufacturer, acquired Grasim’s stake (53.63%) in Shree Dig Vijay. However, it must be noted that the transnationals will find the going tough since cement is a game of volumes and with the median capacity of fragmented players, the transnationals will have to acquire capacities piecemeal and this route is fraught with a lot of uncertainties. The global players put together account of quarter share of the domestic market. Further, turning around few of the companies at a time when the cycle is at its peak would be a difficult task. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, an another wave of consolidation would not come as a surprise.
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| Supply |
The demand-supply situation is tightly balanced with the latter being marginally higher than the former.
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| Demand |
Housing sector acts as the principal growth driver for cement. However, in recent times, industrial and infrastructure sector have also emerged as demand drivers for cement.
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| Barriers to entry |
High capital costs and long gestation periods. Access to limestone reserves (principal raw material for the manufacture of cement) also acts as a significant entry barrier.
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| Bargaining power of suppliers |
Licensing of coal and limestone reserves, supply of power from the state grid and availability of railways for transport are all controlled by a single entity, which is the government. However, nowadays producers are relying more on captive power, but the shortage of coal and volatile fuel prices remain a concern.
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| Bargaining power of customers |
Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. However, things are changing and few brands have started commanding a premium on account of better quality perception.
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| Competition |
Due to large number of players in the industry and very little brand differentiation to speak of, the competition is intense with players resorting to expanding reach and achieving pan India presence. |
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During FY09, the industry maintained volume growth of around 10% YoY. The industry added nearly 30 MT in FY09 over the previous year taking the total capacity to nearly 212 MTPA. India owing to its locational advantage has been catering to the cement requirements of the Middle East and the South East Asian nations. However, the exports were curtailed in FY09 in order to satisfy the domestic demand and contain inflation. While demand growth stood at 10% YoY, average industry cement realisations (average of price per bag of cement) were higher by about 5% YoY. The growth in realisations slowed down as additional capacities coming on stream eased the supply pressures.
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The overheated real estate sector has cooled off now. Considering the financial turmoil witnessed globally, financial institutions have tightened their credit norms. This cautious stance has led to a credit crunch and the same has impacted upcoming projects. On account of general economic slowdown and these issues, the demand for cement has moderated. However, stimulus packages announced by the government and agricultural income gave a fillip to the demand for the commodity.
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The industry volumes and realisations were higher during FY09 that boosted topline growth. However, cost of operation did also witnessed northward movement that exerted pressure on margins. The cement industry on an average maintains two months inventory of fuel and such costs. The crude prices have only started cooling off November 2008 onwards, the benefit of which should start flowing in starting quarter ended March 2009 onwards. Smooth supply of state grid power is another problem. To ensure smooth functioning of plants and lower costs, industry has opted to set up captive power plants based on coal. This has resulted in increase in demand for coal. But coal linkages for the industry are poor. Recently the ratio has dropped below 50%. So the players either have to purchase it from open market or import it. This has increased cost of operation. The industry had lined up huge capex plans with that depreciation costs have moved up. All of this dented profitability.
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The industry is likely to maintain its growth momentum and continue growing at around 8% to 9% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main drivers of growth for the industry.
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In the recent past, demand has surpassed supply, resulting in healthy cement prices across the country. However, this scenario is likely to reverse as the industry has lined up huge capacity expansion plans. With the growth in the sector and waning demand supply gap, cement producers have lined up capacity expansion plans either by brownfield or greenfiled expansion route. The fresh capacities announced till date will add up 60 MT to the existing capacity (200 MT), and are expected to go on stream by FY10. As the capacities become operational, which has started taking place, supply may once again outstrip demand putting downward pressure on margins. Having said that, temporary relief may be provided if there are delays in any of the proposed expansion plans.
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While infrastructure spending has been a boon, there was also a strong cushion from the steady growth of the construction sector (read housing). However, recently the demand has slowed down as real estate and construction activities in the urban areas have taken a back seat with economic slowdown. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 60%-70% of the country’s cement. If this support wanes, it would impact the growth in consumption of cement, leading to demand supply mismatch. Also, the hike in prices of coal and petroleum products could impact cement companies’ margins.
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In the budget, while the government refrained from cutting lowering the burden of taxes and duties on cement, it imposed customs duty of 7.5% on RMC cement. Imposition of 7.5% customs duty on concrete batching plants is likely to negatively impact the ready mix concrete manufacturers. However, it won’t have a severe impact as RMC constitutes not more than 5% of total cement consumption. The government has increased budgetary allocation for roads under NHDP. Further, with more incentives being spelled out for the infrastructure and housing sector, cement manufacturers will continue to benefit.
The budget measures such as increasing excise duties have proved to be futile and in the future too, we believe that it is the market dynamics that will determine these variables.
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Good agricultural income has supported demand for the commodity despite slowdown in real estate sector. Going forward, we believe the government’s initiatives in the infrastructure and housing sectors are likely to be the main drivers of growth for the industry in the long run.
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