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