RCC Cements Ltd Management Discussions.
According to the World Bank, global GDP is projected to grow at 2.9 per cent in 2019, lower than the 3 per cent growth achieved in 2018. World Bank expects global growth to slow down further to 2.8 per cent in 2020. The International Monetary Fund (IMF) global growth forecasts, although slightly better than that of World Bank, indicate a slowdown nonetheless. IMF expects global economy to grow by 3.3 per cent in 2019, which is the weakest since 2009, after an estimated growth of 3.6 per cent in 2018. IMF however predicts global growth to recover to 3.6 per cent in 2020. Global economic growth has been slowing down since the second quarter of 2018 and there are no immediate signs of a pickup. Growing trade tensions have contributed largely to this global slowdown.
The US economy registered strong growth in 2018, riding on the stimulus provided in terms of tax cuts. However, the positive effects of that stimulus seem to be fading and the US economy can slow down in the second half of 2019. The protectionist stance of the worlds biggest economy is causing trade friction. China, Europe, Japan, Mexico, India, and many others stand affected. Some of the affected nations have already started retaliating by imposing higher tariffs on goods exported by US. This, if continued, will have wider ramifications across the entire global supply chain. There has been a sharp downturn in growth in Europe as well. The 19-nation Euro Area is experiencing a contraction in domestic demand along with a steep drop in industrial production. Germany and France together account for almost half of the Euro Area economy. Germany is experiencing a protracted slump in manufacturing, while household spending in France has remained virtually stagnant.
The other major economy, Italy, is in a recession. In the UK, the uncertainty over Brexit continues to linger, but the possibility of a hard Brexit" seems to have been averted, with the European Union extending the deadline for UKs departure to 31st October, 2019. Japan experienced impressive growth in 2017, but thereafter there has been a deceleration in consumer spending, investment and export throughout 2018. With no improvement in the various macroeconomic parameters, growth is likely to remain muted in 2019. While the international crude prices have continued to firm up during the year under review, this is unlikely to continue. A global slowdown will adversely impact international commodity prices, especially crude and industrial metals. One positive development is the change in stance of the main central banks which had earlier started winding down the quantitative easing undertaken in the aftermath of the global financial crisis of 2008. The US Federal Reserve had started raising interest rates since 2015 which continued until last year, but its recent announcements indicate a switch to a more accommodative strategy.
India is the second largest producer of cement in the world. No wonder, Indias cement industry is a vital part of its economy, providing employment to more than a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, both from Indian as well as foreign investors.
India has a lot of potential for development in the infrastructure and construction sector and the cement sector is expected to largely benefit from it. Some of the recent major initiatives such as development of 98 smart cities are expected to provide a major boost to the sector.
Expecting such developments in the country and aided by suitable government foreign policies, several foreign players such as Lafarge-Holcim, Heidelberg Cement, and Vicat have invested in the country in the recent past. A significant factor which aids the growth of this sector is the ready availability of the raw materials for making cement, such as limestone and coal.
Presently, the biggest demand drivers of cement are these housing and real estate sectors, accounting for about sixty-five per cent (65%) of the total consumption in India. Some of the other leading consumers of cement include public infrastructure at twenty per cent and industrial development at fifteen per cent.
Indias overall cement production capacity was nearly four hundred and sixty million tonnes as of 2017-18. Its consumption is expected to grow by five per cent in the financial year of 2019 supported by pick-up in the housing segment and higher infrastructure spending. Currently, the industry is planning to produce three hundred megatons in order to meet its domestic demand and five megatons for exports requirement.
The Indian cement industry is currently dominated by certain companies. The top twenty cement organizations account for almost seventy per cent of the total cement production of the country. With four hundred small plants accounting for the rest, a total of two hundred large cement plants account for a cumulative installed capacity of over four hundred million tonnes. Out of these two hundred large cement plants, seventy-seven are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu.
OVERVIEW OF INDIAN CEMENT INDUSTRY
Presence of s mall & mid-size cement players across regions is increasing, which helps to diminish market concentration of industry leaders. A large number of foreign players have also entered the market owing to the profit margins, constant demand & right valuation.
India has joined hands with Switzerland to reduce energy consumption & develop newer methods in the country for more efficient cement production, which would help India meet its rising demand for cement in the infrastructure sector Companies are trying to develop a niche market for RMC (Ready Mix Concrete).
During FY19, the cement industry achieved the highest double-digit volume growth led by improved realizations in H2FY19. Also, capacity utilizations have improved which contributed to the growth journey. As of FY18, the total installed capacity was 465 million ton. During this period, the industry had approximately 70 per cent utilization, giving better scope for growth without considering new addition and capex.
The industry has registered high demand from mainly South India where the companies like Ramco Cements and Sagar Cements have major exposure.
Looking at the price of cement, in February 2019, the cement companies have gone for a price hike by Rs 12-16 per bag. The major price hike was taken in the Southern region and the lowest price hike was taken in Central and North region. The companies have also enjoyed a contraction in their production cost from H2FY19.
Going ahead, looking at the current price hikes and cost rationalization measures paying off, coupled with governments initiatives like affordable housing and boost for infrastructure activities would drive the demand for cement.
It covers around 8.9% of the total world share. It had a total cement production capacity of about 455 million tons (MT) as of November 2018. Cement is a cyclical commodity with a high correlation with GDP.
Cement demand is expected to reach 550-600 Million Tonnes Per Annum (MTPA) by 2025 supported by pick-up in the housing segment and higher infrastructure spending. The industry is currently producing 280 MT for meetings its domestic demand and 5 MT for exports requirement.
Moreover, the per capita consumption of cement in India still remains substantially low at less than 200 kg when compared with the world average which stands at about 500 kg. In case of China, it is over 1,000 kg per head. This underlines the tremendous scope for growth in the Indian cement industry in the long term.
Cement, being a bulk commodity, is a freight intensive industry and transporting it 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. The Southern region of India has the highest installed capacity, accounting for about one-third of the countrys total installed cement capacity.
In November 2018, Ultratech Cement received approval for its purchase of Binani Cement for a consideration of Rs 7,950 crore (US$ 1.10 billion).
In October 2018, India Cements entered into a share purchase agreement worth Rs 182.89 crore (US$ 26.06 million) for acquisition of Springway Mining. The acquisition will help the company to enter the Uttar Pradesh market and other markets in North India.
Supported by high level of activity going on in real estate and high government spending on smart cities and urban infrastructure. Capacity addition of 20 million tonnes per annum (MTPA) is expected in FY19- FY21. The outlook for domestic cement sector is stable for October 2018 to March 2019 as overall demand conditions remain steady
The cement industry in India has been attracting several top-notch cement companies worldwide, which reflects the fact that this industry holds huge potential for investment. Also, due to the boom in the housing sector world-wide and the increased activity of the development of infrastructure, the demand for cement is set to increase globally. Thus, the investors having nothing to lose and are all set to benefit from investing in Indias cement industry.
The company is aiming to increase its production capacity to 6 MTPA by 2018-19 and market share to 10 per cent by 2019. In October 2018, the company files draft papers for a US$ 135 million Initial Public Offer (IPO). The company is setting up its Kalinganagar manufacturing plant and expects operations to start by April 2019. It also acquired the Bhabua manufacturing plant in September 2018.
The company has undertaken two greenfield projects in West Bengal and Odisha to increase its presence in eastern India. These projects will attract an investment of US$ 78 million and will be commissioned by late 2018.
As of March 2018, the company is going to invest Rs 1,391 crore (US$ 214.86 million) for setting up a 1.7 MTPA greenfield clinker plant in Rajasthan which is expected to be operational by second half of 2020. A majority of land is already in possession of the company and the rest is in advanced stages of acquisition
During 2017-18, Ultratech commissioned a greenfield clinker plant with a capacity of 2.5 MTPA and a cement grinding facility with 1.75 MTPA capacity in Dhar, Madhya Pradesh. The company is expecting to complete a 1.75 MTPA cement grinding facility and a 13 MW waste heat recovery system by September 2018 at the same location. The company is planning to build a US$ 287 million plant in Rajasthan. The plant will have a capacity of 3.5 million tonnes per annum and is expected to commence operations by June 2020. The company has received approval for a US$ 9.04 million opencast limestone mine project in Gujarat. The project has a capacity of 2.07 MTPA* of limestone which will be used to support a proposed cement plant in Bhavnagar district.
The company will invest Rs 15 billion (US$ 213.74 million) to set up a 3.15 MTPA green field cement plant in Andhra Pradesh. With this investment, the company will become the largest cement manufacturer in Andhra Pradesh.
ACC will upgrade and expand its Jamul unit in Chattisgarh& its grinding unit in Jharkhand. This will increase ACCs capacity to 38 MTPA from 30 MTPA in a phased manner by 2016 & 55 MTPA in 2020..
Heidelberg Cement, a Germany-based cement manufacturer has commissioned Phase-I of its Jhansi grinding unit. The company has undertaken an investment worth US$ 259.4 million for expanding its capacity to 2.9 MT.
As of November 2018, the company plans to invest Rs 25 billion (US$ 356.23 million) to set up manufacturing plants in Rajgangpur and Cuttack in Odisha. It is the preferred bidder for one block of Limestone (Kesla II) in Raipur, with reserves of 215 million tonnes. The deal is expected to generate cumulative revenues worth US$ 1.76 billion for the state government.
JK Cement is planning to invest Rs 1,700 crore (US$ 235.6 million) by 2020 to increase its production capacity to 15 million tonnes from 10 million tonnes at current, and also entering into new markets like Gujarat and Uttar Pradesh. The company is aiming to further increase its production capacity to reach 18 MTPA by 2022.
The Union Budget has allocated Rs 139 billion (US$ 1.93 billion) for Urban Rejuvenation Mission: AMRUT and Smart Cities Mission. Governments infrastructure push combined with housing for all, Smart Cities Mission and Swachh Bharat Abhiyan is going to boost cement demand in the country.
In Union Budget 2019-20, the Government of India has extended benefits under Section 80 - IBA of the Income Tax Act till March 31, 2019 to promote affordable housing in India. Housing and real estate sectors accounts for nearly 65 per cent of the total cement consumption in India.The Government of India has decided to adopt cement instead of bitumen for the construction of all new road projects on the grounds that cement is more durable & cheaper to maintain than bitumen in the long run
An outlay of Rs 68.53 crore (US$ 949.83 million) has been allotted under Pradhan MantriAwasYojana Gramin in Union Budget 2019-20.
As of October 2018, the Government of India has auctioned 23 limestone blocks and 42 more limestone blocks are expected to be auctioned by March 2019.
GROWTH DRIVERS AND OPPORTUNITIES
Indias cement demand is expected to rise 8 per cent in FY20, according to rating agency ICRA. The demand for cement in India can be attributed to three main sectors viz Housing and Real Estate, Public Infrastructure and Industrial Development. The factors that will lead to increase in demand from these sectors include:
Housing and Real Estate
Government initiatives like Housing for all to push demand in the sector.
Real Estate market in India is expected to reach US$ 1 trillion by 2023 from US$ 120 billion in 2017.
Strong growth in rural housing and low-cost housing to amplify demand.
Public Infrastructure Strong focus of Government of India
Projects like Dedicated Freight Corridors and ports under development.
Metro rail projects already underway in most major cities.
Government of Indias push with Smart Cities Mission and AMRUT.
SWOT ANALYSIS OF CEMENT INDUSTRY
Second largest in the world in terms of capacity: In India there are approximately 200 large and 300 mini plants with installed capacity of 360 million tonnes. There is a low cost of production due to the easy availability of raw materials and cheap labour. Cement is, literally, the building block of the construction industry. Almost every building constructed relies on cement for its foundation. The cement business is a $10 billion industry, measured by annual cement shipments. There is also a strong reputation behind the cement industry. Cement is a solid material and consumers rarely have complaints about the product. Regional distribution plants have also made cement widely available to any type of buyer.
Effect of global recession on real estate: The real estate prices are stabilizing and facing steady slowdown especially in metros. There are approximately twenty thousand completed flats without occupancy in Ahmedabad. There has been drastic reduction in property prices due to reduced demand and increased supply.
Demand-Supply gap, overcapacity: The capacity additions distort the demand-supply equilibrium in the industry thereby affecting profitability.
Increasing cost of production due to increase in coal prices.
High Interest rates on housing: The re-pricing of the interest rates in the last four years from 7% to 12% has resulted in the slowdown in residential property market.
But the cement industry heavily relies on weather. About two-thirds of cement production takes place between May and October. Cement producers often use the winter months to produce and stockpile cement, to meet demand. Another weakness is the cost of transport; the cost of transporting cement is high and this keeps cement from being profitable over long distances. In other words, shipping cement costs more than the profit from selling it.
Strong growth of economy in the long run: Indian economy has been one of the stars of global economics in the recent years Increase in infrastructure projects: Infrastructure accounts for 35% of cement consumption in India. And with increase in government focus on infrastructure spending, such as roads, highways and airports, the cement demand is likely to grow in future. Growing middle class: There has been increase in the purchasing power of emerging middle-class with rise in salaries and wages, which results in rising demand for better quality of life that further necessitates infrastructure development and hence increases the demand for cement.
Technological changes: The Cement industry has made tremendous strides in technological up gradation and assimilation of latest technology. At present ninety three per cent of the total capacity in the industry is based on modern and environment-friendly dry process technology and only seven per cent of the capacity is based on old wet and semi-dry process technology. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially and hence reduce the cost of production. Governments emphasis on the Infrastructure. Heavy demand of housing and other sectors in which Cement is to be treated as raw material Foreign direct Investment in the Retail and other Sector may surge demand of Cement in coming years.
Excess overcapacity can hurt margins, as well as prices.
The availability of power from the State Electricity Boards is another area of concern with acute shortages in power availability in Tamil Nadu and Andhra Pradesh. Availability of indigenous coal from the nationalized coal companies and the quality of supplies is another area of concern. This problem has however been mitigated to a large extent due to the coal linkages obtained during the last two years to cater to the requirements of the recent capacity expansions in Andhra Pradesh. The Industry imports 62 coal to meet its cement plants requirements thereby adequately addressing the quantity, quality and cost aspects. Mining rights obtained in Indonesia should fructify with infrastructure of roads and bridges under completion to ensure timely coal supplies. The ever-rising cost of energy in the form of petroleum products will also have its impact on the power and transportation costs.
INTERNAL CONTROL SYSTEM
Pursuant to the acquisition, the Management of the Company is in the process ensuring that systems and processes for ensuring that Internal Financial Controls (IFC) have been laid down in the Company and that such controls are adequate and operating effectively. Consequently, an IFC framework, to commensurate with the size, scale and complexity of the Companys operations is being developed. The systems, standard operating procedures and controls forming part of the IFC will be reviewed by the internal audit team whose findings and recommendations will be placed before the Audit Committee. The Internal Audit team will be responsible for regularly monitoring and evaluating the efficacy and adequacy of internal control systems in the Company and its compliance with systems, procedures and policies at all locations of the Company. The internal control systems and procedure are continuously monitored to enhance its effectiveness and to be commensurate with the scale and nature of its operations.. During the year the Audit Committee of the Board regularly met to discharge its functions. The Audit Committee reviews compliance to the Revenue Recognition of the Company. Internal audit activities are undertaken as per the Annual Audit Plan as approved by the Audit Committee and the committee reviews compliance with the plan. The Audit Committee regularly meets with the statutory auditors to review their observations on the financial reports.
Our Company believes that targets of the Company can only be reached with efforts from all its employees. Our Company recognizes that job satisfaction requires congenial work environment that promotes motivation among employees and therefore results in enhanced productivity, and innovation and also provide avenues for employee training and development to identify their potential and develop their careers in the Company. The Company values contribution of its employees and follows the principle of informing all its employees about its future growth strategies
Investors are cautioned that this discussion contains statements that involve risks and uncertainties. Words like anticipate, believe, estimate intend, will, expect and other similar expressions are intended to identify Forward Looking Statements. The company assumes no responsibility to amend, modify or revise any forward looking statements, on the basis of any subsequent developments, information or events. Actual results could differ materially from those expressed or implied. Important factors that could make the difference to the Companys operations include cyclical demand and pricing in the Companys principal markets, changes in Government Regulations, tax regimes, economic developments within India and other incidental factors.
|For and on behalf of the Board of|
|RCC Cements Limited|
|Place: New Delhi||Sunil Kumar|
|Dated: 30th August, 2019||Chairman|