India is the second largest producer of cement in the world. The total installed capacity for large, mini and white cement plants was 395 million tons per annum (mtpa) in the year 2015. The total production was 303.96 mtpa in the same year. The total capacity utilisation taking into consideration the total capacity and total production is calculated to be around 76%. The Cement industry is riddled with excess capacity and relatively weak demand. This demand-supply mismatch is expected to reduce in the next three years as addition to new capacity slows down and growth picks up pace. As more capacity starts getting utilised the economies of scale will improve and bring down per unit cost of manufacturing.
The growth in the cement industry is directly linked to the growth in the GDP of the Indian economy. In the financial year 2014-15 (FY15), India’s cement industry grew by about 5.6% year-on-year (YoY) as compared to 3.1% YoY growth in the financial year 2013-14 (FY14). The growth was supported by pre-election spending and the delayed monsoon in the first half of the fiscal. During the second half, the demand was impacted by low government spending and less demand from real estate and construction projects as well as slow revival in infrastructure spending.
The volume growth was in the range of 5% to 6% in the year 2015 and is expected to be in the range of 6% to 7% in the year 2016. The housing sector is the biggest demand driver of cement, accounting for about two-thirds of the total consumption. The other major consumers of cement include infrastructure, commercial construction and industrial construction. Since the housing sector is witnessing depressed demand coupled with oversupply of space, growth for cement is not picking up as expected.
The infrastructure sector is likely to drive demand growth for the Cement industry as the BJP led NDA Government at the Centre has allocated Rs.2.21 trillion for the infrastructure sector which includes an outlay of Rs.970 billion for roads and highways. This push is expected to give rise to a requirement of 45 million tonnes of cement in the next three to four years. To meet the rise in demand, cement companies are expected to add 56 million tonnes (MT) capacity over the next three years. India’s per capita consumption for cement is approximately 195 kg compared to the World average of 520 kg indicating untapped potential for growth. India’s cement demand is expected to reach 550-600 mtpa by 2025.
Cement is manufactured through a closely controlled chemical combination of calcium, silicon, aluminum, iron and other ingredients. Common materials used to manufacture cement include limestone, shells, and chalk or marl combined with shale, clay, slate, blast furnace slag, silica sand, and iron ore. These ingredients, when heated at high temperatures form a rock-like substance that is ground into the fine powder which is commonly referred to as cement.
Cement, being a bulk commodity, the industry is a freight intensive, 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 – 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 country’s total installed cement capacity.
The entry barriers to cement industry include high capital costs and long gestation periods. Access to limestone reserves also acts as a significant entry barrier. Since cement is a high bulk and low value commodity, the growth of the cement industry has been around limestone and coal deposits. Proximity to limestone and coal deposits contributes considerably to lowering costs for the industry. Licensing of coal and limestone reserves, supply of power from the state grid is all controlled by the Government. Most of the Cement companies rely more on captive power for the need of electricity.
The efficiency of Cement manufacturing is typically measured in terms of EBITDA/ton which gives an idea of how much the company realises in while reducing operating costs. The EBITDA/ton for Indian cement companies currently lies in the range of Rs.500 to Rs.1000 where Rs.500 indicates the least efficient player and Rs.1000 indicates the most efficient player. The mode of logistics for the cement industry is typically dominated by roads followed by rail and sea in the descending order.
The valuations for Cement stocks have become rich after the announcement of big plans for infrastructure spending by the Government. Most of the stocks have delivered returns in the range of 20% to 25% after the announcement of the Union Budget 2016-17. The valuations are typically rich for players that are the most efficient and fastest in terms of growth. Companies in South India currently have lower utilisation rates as compared to those in North India. The Price to Earnings ratio lies in the range of 16 to 110 for cement stocks.
The Indian cement industry is dominated by a few players. The top 20 cement companies account for almost 70% of the total cement production of the country. A total of 188 large cement plants all together account for 97% of the total installed capacity in the country, with 365 small plants account for the rest. Of these large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. Companies that have a strong distribution network and retail presence tend to have better cement realisations. Competition is intense with Companies trying to expand reach to achieve a pan India presence. The major market share is controlled by a few large players in the industry.
While medium term challenges remain in the form of excess capacity, slowdown in rural demand and slow offtake of infrastructure projects, the long term drivers for cement demand remain intact. Higher government spending on infrastructure and housing, and rising per capita incomes will be the key growth drivers for the cement industry.
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