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INDIAN CEMENTINDUSTRY
PREPARED BY: KANU.VIJ SUVASINI AGARWAL
INTRODUCTION
The Indian cement industry with a total capacity of
about 190 m tonnes in financial year-2008 is the second largest
market after China. Despite the fact that the Indian cement industry
has clocked production of more than 100 m tonnes for the last five
years, registering an average growth of nearly 9%, the per capita
consumption of around 150 kgs compares poorly with the world
average of over 260 kgs and more than 450 kgs in China. This, more
than anything underlines the tremendous scope for growth in the
Indian cement industry in the long term .Although consolidation has
taken place in the Indian cement industry with the top five players
controlling almost 50% of the capacity, the balance capacity still
remains pretty fragmented.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 region 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, the
demand supply parity has been restored to some extent in the
Southern region for the medium term. Considering the pace at which
infrastructural activity is taking place in different regions, the players
have lined up expansion plans accordingly.
Despite the growth of the Indian cement industry,
India’s per capita production of 115 kilograms per year lags the world
average of over 250 kgs and China’s production of more than 450 kgs
per person. Clearly there remains room for tremendous growth in the
industry in India. But if India is to reach its potential, the free hand of
the market must be left unfettered. For this to happen, the Indian
government must make sure that foreign companies that have a
history of price fixing and market collusion receive appropriate
regulation. If market shares get fixed, India will be the loser and the
gap between India and China will only grow in the race to become the
next economic superpower.
MAJOR PLAYER’S OF THE
INDUSTRY
This section provides the overview and financial information on
prominent players in the Indian cement sector, like
o Associated Cement Company Ltd. (ACC),
o Grasim Industries Ltd.,
o Ambuja Cements Ltd.,
o UltraTech Cement Ltd.,
o J.K. Cement Limited,
o Madras Cements Ltd.,
o Jaypee Group.
o Binani Cement Limited
o Prism Cement Limited
Ambuja Cements:-HSBC value Ambuja Cements at a target
2010e EV/EBITDA of 5.5x, which is at a discount to its historical
trading range of 7-10x and in line with its industry peers. “We value
Ambuja Cements in line with ACC, which we believe is its closest
comparable.
Our target price is Rs 50 and we have an Underweight rating on the
stock,”
Madras Cements: HSBC value Madras Cements at 4x
EV/EBITDA. HSBC is underweight on the stock with a target price of Rs
60.
India Cements:-With a worsening macro outlook and likely
oversupply in 2009, HSBC value India Cements at 4.5x 2010e
EV/EBITDA, which is at a discount to its historical trading range of 5.5x-
8.5x. HSBC gave the target price of Rs 80, with an Underweight rating
on the stock.
Shree Cements:-The stock has traded in a narrow EV/EBITDA band
of 4-6x in the last two years. A concentration of the company’s
operations in northern India could make it more vulnerable to potential
oversupply in 2009; “We therefore value it at the lower band of its
EV/EBITDA range, i.e.3.5x.
SCENARIO:DEMAND AND SUPPLY
Date Production (% change) Consumption (% change) Capacity utilisation (%) Excess supply(%)Jan-08 5.2 10.8 102.4 1.0 Feb-08 (0.9) 5.4 101.2 0.1 Mar-08 11.2 (0.3) 104.1 1.8 Apr-08 (8.3) 10.7 91.9 (1.1)May-08 (0.9) (9.8) 89.1 0.4 Jun-08 (1.5) 2.0 86.5 (0.2)Jul-08 (0.1) (1.3) 86.4 0.0 Aug-08 (10.2) (2.5) 77.3 (1.1)Sep-08 5.6 (9.5) 81.6 1.0 Oct-08 6.2 4.9 86.3 1.2 Nov-08 (2.9) 3.1 83.3 0.4 Dec-08 10.3 0.9 91.7 1.7 Jan-09 2.0 11.0 93.4 0.5
The table above highlights the fact that consumption of cement has
not taken back seat and industry is growing and has been operating
at the near equilibrium levels. Supply has fallen short only for last
monsoon which is usually a slack period for this industry. It is clearly
can be noted from the above data the production in Jan (08) 5.2% and
in Dec (08) production increased to 10.3 % and consumption in
Jan(08) 10.8% and in Dec(08) 0.9% and in Jan(09) increased to 11.0%
and the supplies in Jan(09) become 0.5% in excess which is a indicator
that cement industry has a significant growth over the year .
SUPPLIE’S ESTIMATE’S HISTORICAL : DEMAND SUPPLY MODEL
Historical cement demand supply model(m tonnes)Year-end installed capacity FY04 FY05 FY06 FY07 FY08 FY09Actual effective capacity 144 152 158 166 199 222(-) Mothballed capacity 144 152 158 166 180 207Effective installed capacity 8.5 8.2 8.5 8.3 5.7 4.9Domestic consumption 136 143 150 158 174 202Export (cement + clinker) 114 121 136 149 164 178Domestic consumption + 9 10.1 9.2 8.9 6 6.1exportSurplus / deficit) 123 131 145 158 170 184% surplus (wrt effective 13 12 5 0 4 18capacity)Actual utilisation 10% 9% 3% 0% 2% 9%Average prices 86% 88% 95% 99% 97% 91%Change in average price 141 153 163 206 231 239
Capacity growth 3% 8% 6% 27% 12% 4%Domestic demand growth 5% 6% 4% 6% 10% 16%
5.80% 6.40% 12.00% 9.90% 10.10% 8%
Historically, the sustainable capacity utilisation in the cement industry has been
80-85%. This implies FY09 and FY10 are unlikely to be years of overcapacityin the traditional sense.
FACTOR’S RESPONSIBLE FOR THE GROWTH OF THE SECTOR
Technological change
Continuous technological upgrading and assimilation of latest
technology has been going on in the cement industry. Presently, 93
per cent of the total capacity in the industry is based on modern and
environment-friendly dry process technology and only 7 per cent of the
capacity is based on old wet and semi-dry process technology. There is
tremendous scope for waste heat recovery in cement plants and
thereby reduction in emission level.
New Investments
Shree Cements will invest almost US$ 244.12 million this year, of
which half will be invested towards setting up two grinding units
at Rajasthan and Uttarakhand to augment its capacity. The other
half will be towards the two power plants in Bangur.
ACC Ltd will spend US$ 575 million on capacity expansion in
2009 and 2010. ACC is expanding capacity by a third to 30 MT by
2010.
Binani Cement has signed a memorandum of understanding with
the Gujarat government to set up a 2.5 MTPA greenfield cement
plant in Gujarat at a cost of US$ 169.40 million. Binani Cement
has also initiated talks with a few foreign institutional investors
(FIIs) to raise US$ 307.99 million for its new projects.
Bheema Cements Ltd is planning to invest US$ 116.42 million in
setting up a new manufacturing line of 1.5 MT capacity at its
plant in Andhra Pradesh.
Mergers and Acquistions (M&As)
A growing and robust economy was noteworthy in terms of the total
number of mergers and acquisitions (M&A) in India 2007, with the
cement sector contributing to 7 per cent to the total deal value.
Holcim strengthened its position in India by increasing its holding
in Ambuja Cement from 22 per cent to 56 per cent through
various open market transactions with an open offer for a total
investment of US$ 1.8 billion. Moreover, it also increased its
stake in ACC Cement with US$ 486 million, being the single
largest acquirer in the cement sector.
Leading foreign funds like Fidelity, ABN Amro, HSBC, Nomura
Asset Management Fund and Emerging Market Fund have
together bought around 7.5 per cent in India's third-largest
cement firm, India Cements (ICL), for US$ 124.91 million.
Cimpor, the Portugese cement maker, paid US$ 68.10 million for
Grasim Industries' 53.63 per cent stake in Shree Digvijay
Cement.
CRH Plc, the world's second biggest maker and distributor of
building materials, acquired a 50 per cent stake in My Home
Industries Ltd for almost US$ 372.64 million.
Vicat SA, a French cement maker acquired a 6.67 per cent stake
in Hyderabad-based Sagar Cement for US$ 14.35 million.
Government Initiatives
Government initiatives in the infrastructure sector, coupled with the
housing sector boom and urban development, continue being the main
drivers of growth for the Indian cement industry.
Increased infrastructure spending has been a key focus area
over the last five years indicating good times ahead for cement
manufacturers.
The government has increased budgetary allocation for roads
under National Highways Development Project (NHDP).
Appointing a coal regulator is looked upon as a positive move as
it will facilitate timely and proper allocation of coal (a key raw
material) blocks to the core sectors, cement being one of them.
Keeping in mind the global meltdown which is impacting the cement
companies in India, the government reimposed the counter-veiling
duty (CVD) and special CVD on imported cement in January. This is
likely to provide a level playing field to domestic companies.
FORECAST MODEL :FY(09) TO FY(12)
Table 3: Forecast cement demand supply model(m tonnes) FY09 FY10E FY11E FY12EYear-end installed capacity 224 250 287 300Actual effective capacity 207 231 257 283(-) Mothballed capacity 4.9 4.9 4.9 4.9Effective installed capacity 202 226 252 278Domestic consumption 178 187 205 226Export (cement + clinker) 6.1 5 8 9Domestic consumption + export 184 192 213 235Surplus / (deficit) 18 35 38 43% surplus (wrt effective capacity) 9% 15% 15% 15%Actual utilisation 91% 85% 85% 85%Average prices 239 240 240 240Change in average price 3% 0% 0% 0%Capacity growth 16% 12% 11% 10%Domestic demand growth 8% 5% 10% 10%
The above model is a forcast model for the growing cement sector from FY09 to FY12 the contributing factor’s taken to consideration are
o Export o Domestic Consumptiono Average Prices o Capacity Growth ando Domestic Demand Growth
The above all factor’s are increasing in a considerable rate indicating a positive sign towards the growth of the sector.
BIG PLAYER’S : CEMENT SECTOR
From the above chart we can see that
o ACC contibuted 11.8% to the sector o L&T 11.3%o Grasim 9.6%o Gujrat Ambuja 7.6% o India Cement 6.9%o Madras 3.3% And other’s 49.5% to the sector . So, ACC being the sector leader contributing a major part of supplies.
ACC : THE MARKET LEADER
ACC Limited is India’s foremost manufacturer of cement with a countrywide
network of factories and marketing offices. Established in 1936, ACC has
been a pioneer and trend-setter in cement and concrete technology. ACC’s
brand name is synonymous with cement and enjoys a high level of equity in
the Indian market. Among the first companies in India to include commitment
to environment protection as a corporate objective, ACC has won several
prizes and accolades for environment friendly measures taken at its plants
and mines.
The manufacturing cost per tonne of ACC Ltd, India’s largest cement
manufacturer by capacity, is the highest in the Indian cement industry,
say analysts.
ACC’s manufacturing cost is Rs1,529 per tonne against the industry
average of Rs1,056 per tonne.
India, the second largest cement market in the world, has a total
installed capacity of 170 million tonnes per annum (mtpa), according
to a report on the sector by domestic brokerage Karvy Stock Broking
Ltd that was released last week.
Demand for cement in the country stood at 154.9mtpa for the year
ended March.
Birla Corp. Ltd has the second highest manufacturing cost, Rs1,339 per
tonne, followed by UltraTech Cement Ltd, at Rs1,240 per tonne.
The ACC share closed on Monday on the Bombay Stock Exchange at
Rs1,285.95, gaining 2.83% on a day when the benchmark Sensex rose
639.63 points or 3.47%.
The Karvy report has an “underperformer” rating on ACC, based on the
rationale that “the cement price would decline and freight and coal
cost would increase, which would lead to de-rating of valuation”. The
price-earnings multiple of ACC stands at 19.52, higher that the industry
average of 14.86.
“ACC has the oldest plants,” says Sourav Mallik, associate director
(investment banking) at Kotak Mahindra Capital Co. Ltd, the
investment banking arm of Kotak Mahindra Bank Ltd. “Some plants are
inefficient and it is uneconomical to run them.”
ACC has 14 plants at 12 locations nationwide—
Madukkarai in Tamil Nadu,
Wadi (two) in Karnataka,
Chamda in Maharashtra,
Bargarh in Orissa,
Damodhar in West Bengal,
Sindri and Chaibasa in Jharkhand,
Jamul in Chhattisgarh,
Kymore in Madhya Pradesh,
Tikaria in Uttar Pradesh,
Lakheri in Rajasthan, and
Gagal (two) in Himachal Pradesh.
The company has a manufacturing capacity of around 21mtpa and
hopes to expand it to 27mtpa by 2009.
ACC : QUALITY PRODUCTION
Product Development has always been an important activity at ACC,
arising out of a focus on quality and process improvement. It has been
a constant partner, driving research, innovation and evaluation. In
1964, a centralized research facility - the Central Research Station
(CRS) was established in Thane.
The research complex now renamed as ACC Thane Complex,
spread over an area of 8000 sq m has modern labs with the latest
equipment and manned by highly qualified scientists and technologists
who carry out product development work in cement and allied fields.
ACC has effectively pledged its reputation as the market leader in the
quality of cement. Maintaining this lead calls for harnessing the
resources and expertise of the company - from applied research and
production to marketing.
Accordingly, all ACC factories are equipped with state-of-the-art
process control instrumentation and associated quality control and
testing laboratories. Trained engineers, chemists and technicians man
these. The Central Laboratory at ACC Thane Complex is used as a
reference laboratory for diagnosis and resolving specific trouble-
shooting cases.
As a result of this focus on quality, ACC cement specifications exceed
those set by BIS by a wide margin. Today, all ACC cement plants have
the ISO 9001 Quality Systems certification. This demonstrates our
tradition of providing reliable and consistent quality through the
application of modern technology, and justifies the preferences of a
nationwide customer base.
ACHEIVEMENT’S
2006 Subsidiary companies Damodhar Cement & Slag Limited, Bargarh Cement Limited and Tarmac (India) Limited merged with ACC
2006 ACC announces new Workplace policy for HIV/AIDS
2006 Change of name to ACC Limited with effect from September 1, 2006 from The Associated Cement Companies Limited.
2006 ACC receives Good Corporate Citizen Award 2005-06 from Bombay Chamber of Commerce and Industry
2006 New corporate brand identity and logo adopted from October 15, 2006
2006 ACC establishes Anti Retroviral Treatment Centre for HIV/AIDS patients at Wadi in Karnataka– the first ever such project by a private sector company in India.
2007 ACC partners with Christian Medical College for treatment of HIV/AIDS in Tamil Nadu
2007 Sumant Moolgaokar Technical Institute completes 50 years and reopens with new curriculum
2007 ACC commissions Wind energy farm in Tamilnadu.
2008 Ready mixed concrete business hived off to a new subsidiary called ACC Concrete Limited.
2008 ACC Cement Technology Institute formally inaugurated at Jamul on July 7.
2008 First Sustainable Development Report released on June 5.
2008 ACC wins CNBC-TV18 India Business Leader Award in the category India Corporate Citizen of the year 2008
Outlook of 2008
The Cement industry has continued its growth trajectory over the past
seven years. Domestic cement demand growth has surpassed the
economic growth rate of the country for the past couple of years. The
growth rate of cement demand over the past five years at 8.37 % was
higher than the rate of growth of supply at 4.84% as also the rate of
growth of capacity addition during the same period. Demand for
cement in the country is expected to continue its buoyant ride on the
back of robust economic growth and infrastructure development in the
country.
The key drivers for cement demand are real estate sector,
infrastructure projects and industrial expansion projects.
Among these, real estate sector is the key driver and accounted for
almost 55% in FY 07.
During the period FY 03 – 07, capacity additions in the country (30.6
mn tonnes) were at a slower rate compared to demand growth leading
to higher average capacity utilization rates from 81.3% to 93.8%
during the same period. This has exerted pressure on average prices
which have increased from Rs. 156 per bag in FY 03 to Rs. 216 per bag
in FY 07. In December 2007, prices stood at Rs. 245 - Rs. 250 per bag.
Low capacity addition coupled with higher utilization rate also led to
increase in proportion of production of blended cements in product
mix. Blended cement accounted for 68% of product mix in FY 07 as
compared to 49% in FY 03.
Cement is a bulky commodity and cannot be easily transported over
long distances making it a regional market place, with the nation being
divided into five regions. Each region is characterised by its own
demand-supply dynamics. The Southern region dominated the cement
consumption at 44.5 mn tonnes in FY 07, accounting for about 30% of
total domestic cement consumption. During FY 03-07, Southern region
has witnessed highest CAGR of cement demand growth at 10.4%
followed by Northern and Eastern regions at 8.9% and 9%,
respectively.
Over the past five years, cost of cement production has grown at a
CAGR of 8.4%. Also, the producers have been able to pass on the hike
in cost to consumers on the back of increased demand. Average
realizations have increased from Rs. 1,880 per tonne in FY 03 to Rs.
3,133 per tonne in FY 07, at a CAGR of 13.6%, which has been
reflected in higher profit margins of the industry.
To reduce the cost of production, the industry has focused on captive
power generation. Proportion of cement production through captive
power route has increased over the years. Also, cement movement by
rail has increased over the years.
Market share of top five players in the industry has increased from
42% in FY 02 to 56% in FY 07. In FY 07, Holcim group captured a
leadership position with market share of 22.6% followed by Aditya
Vikram Birla group at 19.4%.
Domestic Cement industry is highly insulated from global cement
markets. Exports have been constant at about 6% of total cement
demand for past few years. With GoI intervention, making cement duty
free, cement is being imported from neighbouring countries. However,
due to logistics issues and lack of port handling capabilities, imports of
cement will remain negligible and do not pose a threat to domestic
industry.
Cement demand is expected to remain buoyant driven by boost in
construction sector in the country. As per estimates, investment of
USD 25 bn is required in urban housing, USD 450 bn will be required in
infrastructure related projects and industrial expansion projects would
witness investments of USD 88 over the next five years.
We estimate domestic cement demand to grow at a CAGR of
approximately 10% for the next 5 years. The current tight demand -
supply situation is expected to extend up to end of calendar year 2008
owing to delays in capacity expansion programmes by various
companies.
We expect prices to remain firm till the end of CY2008 due to tight
demand - supply situation and increase in input costs. Thereafter as
new capacities come in, we may witness a softening in prices in some
regions.
CONCLUSION
Cement production: too early to say worst is over
The shares of cement companies have been moving up again, on the back of
a decent rise in January dispatches for some companies. Industry data show
that cement production and despatches increased by 12.6% and 12.7% year-
on-year (y-o-y) in December, after growing by 9.8% and 12% y-o-y in
November.
The government’s numbers show that all-India growth in cement production
was 8.7% in November and 11.6% in December. The momentum is likely to
be kept up in January—the Aditya Birla group has said that cement
production and despatches are up 9.76% and 7.35%, respectively, ACC Ltd’s
production and despatches for January are up 12% and 12.5%, respectively.
The numbers have sparked some hope among analysts that demand for
cement has picked up. The reasons for the higher demand include pre-poll
spending and strong rural demand.
A research report by broking firm Sharekhan.com says, “With the revival of
infrastructure and private house building activity, the cement industry has
given an impressive performance in the last two consecutive months. But
sustaining such growth is uncertain, as the real estate segment, which
consumes about 55% of the total cement produced, has still not revived due
to overall economic slowdown. However, we expect that the overall volume
growth in FY2009 will be certainly ahead of street expectations. Further,
cement companies are also expected to benefit from softening coal and
crude prices.”
There is, however, also a base effect at work here. According to analysts at
Morgan Stanley, the y-o-y growth in the three-month moving average of
cement dispatches was at a low of 4.9% in January 2008, which is why they
expect high growth of 11.4% in the three-month moving average of cement
despatches for January 2009. In February 2008, however, the three-month
moving average went up to 8%, which means that it’ll be difficult to show
high growth in February 2009.
But perhaps the biggest reason not to set too much store by the rebound in
cement despatches is the opinion of the cement producers themselves. The
Grasim management, for example, points out that although cement demand
can be expected to grow in line with the gross domestic product growth,
prices and margins will come under pressure in FY10 as more capacities
come on stream.
Cement sector to see M&As' by 2009-end'
Mumbai: The 207-million tonne Indian cement industry may witness M&A
activity again by the end of 2009, say industry watchers. However, this time,
valuations will be low and deals will be driven by a strategic desire to exit
rather than financial compulsion to restructure, they opine.
"Large players or MNCs will make acquisitions when new entrants and small
companies start feeling margin pressures." Apart from issues relating to
oversupply, small
companies may have made expansions at high costs and will have to spend
on brand building; hence, returns may not be up to their expectations and
they will look to be acquired,.
Experts believe companies like Reliance, Holcim and Lafarge are waiting for
an appropriate time to consolidate. It is also understood that Gujarat Sidhee,
Saurashtra Cement and Andhra Cement are waiting for a good valuation to
get acquired.
"Many sellers are not willing to sell at low valuations. Also, no cement
company is running into losses as yet, though they may have reported de-
growth in their top line and bottom line," said an investment banker on
condition of anonymity.
The cement industry witnessed 7 high valuation M&A deals in 2006, which
reduced to 2 in 2007. In 2008, however, the number of deals increased to 3;
two MNCs, CRH and Vicat, entered India by acquiring stakes in My Home
Industries ($462 mn) and Sagar Cement (Rs 70 crore) respectively. The third
deal in 2008 was in the RMC space, where Lafarge acquired L&T concrete’s
RMC business ($349 mn).
Valuations have dipped to $75-100 per tonne now, from the peak level of
$300 per tonne. Incidentally, French cement maker Vicat bought stake in
Sagar Cements for half the value of what a rival had paid a year earlier.
Among the large global players in the cement industry, Cemex is the only
company that is not present in India.
.
Key Findings
-Domestic demand for cement has been increasing at a fast pace in India and
it has surpassed the economic growth rate of the country.
-Cement consumption in India is forecasted to grow by over 22% by 2009-10 from 2007-08.
-Among the states, Maharashtra has the highest share in consumption at 12.18%, followed by Uttar Pradesh.
-In production terms, Andhra Pradesh is leading with 14.72% of total production followed by Rajasthan.
-Housing sector is expected to remain the largest cement consumer in coming years.
Indian Cement Industry Forecast to 2012
India is fast emerging on the world map as a strong economy and a global
power. The country is going through a phase of rapid development and
growth. All the vital industries and sectors of the country are registering
growth and thus, luring investors. And cement industry is one of them. To
throw light on the Indian cement industry, RNCOS has launched its report
'Indian Cement Industry Forecast to 2012' that gives an extensive research
and in-depth analysis of the cement industry in India. This report helps clients
to analyze the competitive dynamics and emerging opportunities critical to
the success of the cement industry in India. Based on this analysis, the report
gives a future forecast of the market that is intended as a rough guide to the
direction in which the market is likely to move
BIBLIOGRAPHY
GOOGLE.COM
WIKIPEDIA.COM
ACC.COM