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| India Infoline Sector Reports | Wed, 14-Jan-2004 11:24:07 IST (GMT+5:30) | |
| Cement | ||
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Indian Cement Industry – Current Scenario Overcapacity Blues Since the stock market boom in 1994, there has been hectic activity in the cement industry in terms of capacity addition. After the boom, when cement prices began to scale new highs, investors rushed in to set up new capacities. In the period from 1993-94 to 1996-97, cement capacity increased by over 35%, with an annual addition of 8.3MT . The annual compounded growth in capacity at 10.54% outpaced the consumption growth of 8.8%. This resulted in capacity being created far in excess of requirement, especially in the northern region of India. The north was the worst affected as most of the cement capacity addition took place in the limestone rich Madhya Pradesh. Gujarat and Maharashtra also took the heat with large capacities being set up by Gujarat Ambuja and Larsen and Toubro. Both these states suffered not only because of excess capacities within the states, but more so due to the surpluses in neighbouring states. The flow of surplus cement from Madhya Pradesh and Rajasthan made matters worse in Maharashtra and Gujarat, respectively. Towards the end of the boom and bust cycle, cement prices fall taking down with it the cement companies’ profitability. The profitability of cement companies suffered and the scrips took a beating on the stock markets. But the good part is that the glut in the industry and the resulting crunch in profitability deterred many entrepreneurs from entering the sector. As it requires at least two years for a cement plant to commence production from the time orders for plant and machinery are placed and another six months to stabilise production, major capacity creation was restricted.
Highlights of Financial Year 2001 and 2002 The consolidation in the sector gained pace. Among the most visible was the deal between GACL and Tata Group whereby the latter would sell its 14.4% stake in ACC to GACL. Among the other companies that acquired capacities were Grasim and Lafarge. After a healthy performance in FY2000, the cement industry began on a very sombre note in FY01, owing to the drought conditions prevailing in parts of Gujarat, Rajasthan and Andhra Pradesh. The first two months of FY01 have affected cement producers in two ways. First, lower demand and second, still lower cement prices. After having witnessed a growth of over 15% in FY2000 (though prices continued to remain under pressure), cement demand has declined dramatically. In fact, cement despatches declined approximately 2% during this period (there was sharp decline in April, but May witnessed a recovery of sorts). This however, did not deter cement producers from increasing their production. On the contrary, the utilization rate of the industry touched 90%. During FY02, the cement industry witnessed a 9.6% growth. The annual production increased to 102.4mn tons from 93.61mn tons the previous year, a growth of 9.39%. The cement production in the month of March crossed the 10mn ton mark – the highest ever in a month. The annual despatches for the year was 102.38mn tons, an increase of 9.7% yoy (93.3mn tons in FY01). The price decline during the Q4FY02 led to sharp contraction in the profits of the cement companies, even though the volumes were higher. With the economy in a downturn, investment demand continued to remain low, resulting in sharp decline in the prices during the year. The major demand drivers of cement during the year were the reconstruction activity in the earthquake hit Gujarat, road development project announced by the National Highway Authority of India (NHAI), the Golden Quadrilateral highway connecting the four major metros.There will be nominal growth on account of regular housing and construction needs, low real estate prices plus good tax incentives will ensure healthy housing demand. There have been vital changes in the Indian Cement Industry, like technological upgradation in the pursuit of cost efficiency and drive for consolidation (as seen in the entry of multinationals such as Lafarage, Cemex etc). Moreover modernisation at the plants and improvement of plant processes have helped bring down manpower requirements. The reduction in import duties on cement and clinkers from 25% to 20% is not likely to affect the industry as the cement produced is at par with the international standards and the prices are lower than those prevailing in other international markets. With the demand-supply mismatch that will benefit prices and increasing consolidation that will improve the pricing environment, the cement sector offers some interesting investment opportunities. Among others, a pick-up in economic activity and investment in infrastructure is expected to further buoy demand for cement in coming years. The financial year 2003 has began with a positive note with production increasing by 11.1% in April’02 and 9.6% in May’02 compared with the corresponding period in FY02. The production was around 9.42mn tons and 9.86mn tons during these months. The despatches totalled to 9.58mn tons and 9.69mn tons in April’02 and May’02 respectively, as against 8.59mn tons and 9.01mn tons in the previous period. The western region has emerged as the biggest market for the sector, the demand drivers being the housing sector which includes construction and repairs
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