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Knowledge Series 8

Fixed Forever!

It is the critical glue required to build up any economy.

Whether it’s for the new housing complex, the newest mall in

town, the expressway that stretches out ahead of you or the

sprawling mega factories, cement is an indispensable part of

rising India.

DhanBank PRU takes you on a whirlwind tour of the industry.

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Contents

Page No

1. Intro: Brick by brick 3

A) Industry cycle 4

2. Growth mode: The current scenario 5

A) Demand 5

B) Prices 5

C) Costs 6

D) Financial performance 6

3. What’s the stuff, really? 7

A) Types 7

B) Raw materials 7

C) Power 7

D) Freight 7

E) Taxation 7

4. Regulatory framework 8

A) Consolidation 8

5. Major players 9

A) ACC 9

B) Ambuja Cements 9

C) UltraTech Cements 9

6. Outlook 10

A) Consumption-driven growth to continue 10

B) Supply to match demand despite incremental capacity addition 10

7. SWOT analysis 11

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Brick By Brick

C ement is one of the most important inputs for the construction industry. Be it homes, commercial com-

plexes or infrastructural facilities like bridges, warehouses or office buildings, cement is an inseparable

part of their construction.

According to the Cement Manufacturer's Association, India is the world’s largest cement producer after China,

with a total annual capacity of 224 million tonnes (mt) as on April 30, 2010. The Indian cement industry has been

on a high growth trajectory for over a decade now. Demand is closely linked to growth of the construction sector.

The main drivers of consumption are:

Housing sector demand: It accounts for a large portion of

domestic demand. According to the 11th five year plan

(2007–2012), housing demand is estimated to increase from

over 24 million units in 2007 to over 26 million units at the

end of the Plan period. Growing urbanisation, an increasing

number of households and higher employment are the prime

drivers.

Rising pace of infrastructure development: Allocation and

government emphasis on development of dedicated freight

corridors, airport upgrades as well as greenfield projects,

besides ports, are driving consumption.

Industrial projects: Development of industrial clusters and

SEZs are bolstering demand.

Commercial construction, including retail, office space,

hotels, malls, hospitals and schools, are rising as the econ-

omy is developing. Growth and development of industries

also requires additional office space. Rising incomes are

driving the demand for malls and hotels.

Lakh tn

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Demand for cement is also seasonal in nature, with the monsoon months usually forming the slack period as con-

struction activity slows down. Cement consumption also witnesses a spurt during the run-up to big events such as

the forthcoming Delhi Commonwealth Games. Hosting such events requires adequate infrastructure and logistics,

which leads to a surge in demand for cement.

Cement is also a regional product in many ways. What that means is manufacturers in one region rarely sell in the

other regions. This is because cement is a bulk, low-value commodity and transporting it from one region to an-

other involves high costs.

Increase in demand has also been supported by a higher installed capacity and production on the supply side. This

was well reflected by the healthy performance of the sector, particularly between 2004 and 2010. In January 2010,

rating agency Fitch predicted that India will add about 50 million tonnes of cement-making capacity in 2010, tak-

ing the total to around 300 million tonnes. This is expected to result in a rise in the FY11 production levels.

Industry cycle: Besides the seasonal effects, the cement industry also is known to follow a structural cycle. In this

cycle, when the economy is growing demand for cement rises substantially. This is followed by capacity addition

by cement makers.

However, since the capacity addition process takes 2-3 years, the demand situation has the potential to change

drastically – either for the better or worse.

If demand slows down during this time, prices obviously fall and the industry takes a downturn. Those undertak-

ing capacity addition during this period are particularly hit the hardest since they have an interest outgo but re-

duced cash flows. This impacts their overall financial performance. When smaller players are unable to withstand

this downturn, it either leads their shutdown or to consolidation.

Ready Mix Concrete

T his is a type of concrete that is manufactured in a factory or

batching plant, according to a set recipe, and then delivered to

a work site, by truck mounted transit mixers. This results in a precise

mixture, allowing specialty concrete mixtures to be developed and

implemented on construction sites. The first ready-mix factory was

built in the 1930s, but the industry did not begin to expand signifi-

cantly until the 1960s, and it has continued to grow since then.

Ready-mix concrete is sometimes preferred over on-site concrete

mixing because of the precision of the mixture and reduced work site

confusion. However, using a pre-determined concrete mixture re-

duces flexibility, both in the supply chain and in the actual compo-

nents of the concrete.

The leading ready-mix concrete supplier worldwide is the Mexican

concrete company Cemex; its main competitor is France-based La-

farge. Ready mixed concrete or RMC is also referred as the customized concrete products for commercial

purpose. The RMC companies offer different kinds of concrete according to user's mix design or industrial

standard. Source: Wikipedia

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Growth Mode: The Current Scenario

Demand

Cement consumption has been rising (see

‘All Indian production & consumption

graph’) sharply over the past few years on

account of a spurt in affordable housing.

Demand for real estate, particularly in the

Tier II and III cities, has boosted cement

consumption. Payment of the sixth pay com-

mission arrears, rise in corporate wages and

salaries and government stimulus packages

resulted in a pick-up in housing demand.

Cement demand is witnessing moderation

with despatches growing at 6.6% during the

June 2010 quarter, compared to the 12.3%

growth seen in the corresponding year-ago

quarter. Poor demand growth in the southern

region resulted in this lacklustre perform-

ance.

Prices

Prices of cement have been highly volatile in the southern, central and western regions of the country due to sub-

stantial capacity addition and slower demand growth. In the north prices were less volatile because of sustained

high demand due to the infrastructure development for the upcoming Commonwealth Games. The east was largely

insulated from the capacity addition and, hence, saw stable prices. Interestingly, prices in the east are at a premium

because there is only one large player (Lafarge) and it is largely uneconomic for manufacturers from other regions

to sell cement in the east.

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Costs

High international coal prices are likely to hit cement companies’ performance in the June 2010 quarter. Slow de-

mand growth will hold companies from raising prices, thereby, putting pressure on profitability. Total coal con-

sumed by the cement industry in 2008-09 (latest available with CMA) stood at 27.43mt, of which 6.97mt was im-

ported.

Financial Performance

The industry recorded poor profit performance during Q4 FY10. The industry’s sales growth slid sharply to 6%

YoY.

Although cement companies raised prices during January-March 2010, these were still ruling low on a YoY basis.

In spite of higher sales in volume terms (up 9.2%), the lower price per bag of cement (down 3%) has pulled down

the growth rate of sales in value terms. Poor sales performance and rising production costs took a toll on industry

profits, which dipped 18.2%.

Financial Performance Of Cement Industry (% YoY Growth)

Mar ’09 Jun ’09 Sep ’09 Dec ’09 Mar ’10

Net Sales 13.1 23 17.2 7.2 6

Raw materials, stores &

purchase of finished

goods

1.4 16.2 6.5 6.7 29.5

Salaries & Wages 3.7 14.7 16.3 3 18.6

Power & Fuel 16.8 4.7 -3.6 -11.4 3.9

Selling 6.5 -1.6 -5.6 -16.7 -4.8

Freight 13.1 17.7 21.4 15.8 18

Other 7.9 10.5 7.4 13.6 19.4

Depreciation 31.9 34.4 27.3 28.7 19.4

Interest 44 33.3 24.3 4.1 18.2

Tax -9 46.1 83.1 42.7 -18.4

PAT -0.2 29.3 66.3 3.1 -18.2

Source: CMIE

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What’s The Stuff, Really?

C ement is a mixture of limestone, clay, silica and gypsum. Production is highly energy-intensive and involves

the chemical combination of calcium carbonate (limestone), silica, alumina, iron ore and small amounts of

other materials. Cement is produced by burning limestone to produce clinker (an intermediate product) and the

clinker is blended with additives and then finely ground to produce different types of cement.

Types

Cement can be broadly classified as portland, blended and special varieties. However, most of the production con-

sists of ordinary portland cement (OPC), portland pozzolona cement (PPC) and portland slag cement. Special pur-

pose cements such as oilwell, high alumina cement, rapid hardening portland and others are manufactured depend-

ing on requirement.

Raw Materials

Limestone is one of the most important raw materials for cement production. It is available in adequate quantities

in Indian states, including Rajasthan, Himachal Pradesh and Madhya Pradesh.

Power

Being highly energy-intensive, the industry, on an average, requires 110 units of power to produce a tonne of ce-

ment. To overcome frequent power cuts and voltage fluctuations, most companies have set up captive power units.

Power from these plants cost lesser than that supplied by the grid because power tariffs for industrial use (from the

grid) are set quite high. But, at the same time, project cost for cement plants have escalated because of the need to

include a captive power plant.

However, the industry is now vulnerable to a rise in prices of coal -- used in captive plants. Also, coal to fire

plants must be imported as existing coal linkages are not enough to meet cement sector’s needs. Domestically

produced coal is 40% cheaper than the imported one, although the former’s quality is poorer.

Freight

Transportation of cement – mostly by rail and roads -- from plants (located near limestone reserves) to end users is

an expensive process. In order to control these costs, clinkers are set up close to limestone reserves while grinding

units are closer to consumption areas.

While rail is the preferred mode of transport when the distance between the manufacturing unit and market is

more, for relatively shorter distances road transport is preferred. In an interesting strategy, Gujarat Ambuja set up

its production units near the coast so that it could use the sea route to minimise transportation cost of bulk cement.

Taxation

The major taxes levied on cement are central excise duty and sales tax levied by the state governments. In addition

to this there is royalty and cess on limestone and coal.

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Regulatory Framework

T ill 1982, India’s cement industry was strictly regulated, with the government determining prices, produc-

tion capacity and distribution. The process of dismantling that regime was initiated in February 1982. By

1989 it was fully decontrolled. It was de-licensed in July 1991.

The partial decontrol of the cement industry in 1982 led to a spurt in production capacities. The 1989 move ush-

ered in market forces, which could now determine prices and guide production and distribution.

Until then, the industry was known for shortages. By the end of the mid-1990s supplies increased substantially as

smaller players with relatively smaller capacities entered the market and chronic shortage was replaced by plenti-

ful supplies. However, intense competition among manufacturers led to a fall in prices, rendering several smaller

and inefficient players uncompetitive. This triggered a wave of consolidation in the industry.

Consolidation

Being a high-volume, low-value commodity, transportation costs have a direct bearing on profit margins of ce-

ment companies. This makes cement a regional product. The Indian cement industry can be divided into five geo-

graphical zones -- north, south, east, west and central. The south zone is the largest market with the highest in-

stalled capacity, followed by the north.

The major industry players include ACC, UltraTech Cement, Grasim Industries, Ambuja Cements, India Cements

and Madras Cements.

On the basis the presence of companies across regions, the industry can be broadly classified into three categories:

1. National players: This involves companies with pan-India presence – the Holcim-controlled ACC and Am-

buja Cements, Grasim-controlled Century Textiles and UltraTech.

2. Regional players: These are confined to a particular region, where they are market leaders. Lafarge (east),

India Cements (south), Jaypee Group (north and central) and Shree Cement (north) are examples.

3. Local players: These are small players, typically restricting their operations to a state or, at the most, two

states. They increasingly run the risk of getting marginalised.

With the ACC-Ambuja combine and the Birla clan (comprising Grasim and Ultratech) collectively controlling

over 40% of the Indian market, a duopoly has emerged in the Indian cement sector.

Multinationals like Holcim, Lafarge and Italcementi entered the industry via acquisitions and JVs. Lafarge India

acquired Tata Iron & Steel’s cement division in 1998 and Raymond’s cement unit in 2000. In a major consolida-

tion deal in 2005, Swiss cement major, Holcim, in strategic partnership with Ambuja Cements, acquired a 35%

stake in ACC. Further, in January 2006, it entered Ambuja Cements by purchasing a 14.8% stake in it from its

promoters.

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Major Players

ACC

Formed in 1936 by the merger of 10 different companies, ACC (earlier called Associated Cement Companies) is

one of the oldest and largest Indian cement makers. In 2005, Swiss cement major Holcim and Gujarat Ambuja

picked up a 34.17% stake in ACC through Ambuja Cement India (ACIL) -- the holding company. ACC owns 16

factories and is the only company which has a pan-India presence. Cement being its primary business, the com-

pany also provides consultancy services, plant erection and management contracts.

Ambuja Cements

Gujarat Ambuja Cements was promoted as a JV in 1986 between Gujarat Industrial Investment Corporation and a

group of investors, including the Neotia family of Kolkata and Narotam Sekhsaria, who was also CEO. It has a

presence in most parts of the country, barring the south. In January 2006, Swiss giant Holcim picked up a 14.8%

stake in it from its promoters. The Holcim group increased its stake to 45.68% in the company in March 2008.

UltraTech Cement

UltraTech Cement is a subsidiary of Grasim Industries, the Aditya Birla Group flagship. The company was incor-

porated in 2000. Earlier it was a unit of the Larsen & Toubro group and was called L&T Cement. In what was

touted as one of the most important consolidation deals of the Indian cement industry, Grasim paid `2,200 crore to

buy a 51% stake in L&T Cement in 2003--04. L&T Cement was thus renamed UltraTech Cement and manage-

ment control was taken over by Grasim.

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Outlook

Consumption-Driven Growth To Continue

The cement industry has grown by around 9% in

the past two years and we expect the trend to con-

tinue, notwithstanding the slowdown which may

be transient and short-lived. Investment is likely

to continue with a targeted addition of 60,000

tonnes by 2012. The coming infrastructure thrust

will maintain this growth for the next 2-3 years.

Currently, however, cement realisations are under

pressure due to lower offtake. Also, rising coal

and freight costs, coupled with weakening cement

prices, are resulting in lower profit margins. The

current situation is on account of an increase in

production capacities and the seasonal slump.

Supply To Match Demand Despite

Incremental Capacity Addition

The planned investments are expected to result in

total cement capacities of up to 250mtpa. How-

ever, looking at the government of India’s thrust

on construction and infrastructure, demand is set

to increase by 60 million tones per annum over the

next five years, ensuring that the existing pressure

on realisations do not increase.

The government’s $350-billion layout for infra-

structure in the 11th five year plan (2007-12) au-

gurs well for the industry.

CEMENT CAPACITY AS ON 31 MARCH 2010

(in lakh tonnes)

Holcim 425.8

A C C. 241.6

Ambuja Cements 184.3

Birla Aditya Group 415.5

Grasim Industries 196.5

Ultratech Cement 219

Birla B.K. Group 158.1

Century Textiles & Inds 78

Kesoram Industries 60.1

Mangalam Cement 20

India Cements - India Cement Group 140.5

Jaiprakash Associates 122.3

Madras Cements - Ramco Group 98.9

Shree Cement 91

Dalmia Cement 85.8

Private Indian 79

Binani Cement 60.8

Birla Corporation - Birla M.P. Group 57.8

Chettinad Cement Corpn 56.5

Private Foreign 53.7

O C L India 53.5

J K Lakshmi Cement 44.8

J K Synthetics 40.5

Rain C I I Carbon 40

Central Govt. Commercial Enterprises -

Cement Corpn. Of India 38.5

Orient Paper & Inds. Ltd. - Birla C.K.

Group 34

My Home Inds. Ltd. - Nagarjuna Group 32

Sanghi Industries Ltd. 26

Zuari Industries Ltd. - Birla K.K. Group 22

Prism Cement Ltd. - Raheja Rajan Group 20

State Govt. - Commercial Enterprises 15.2

Saurashtra Cement Ltd. 15

Andhra Cements Ltd. - Goenka G.P. 14.2

Gujarat Sidhee Cement Ltd. 12

Kalyanpur Cements Ltd.- Jenson &

Nicholson Group 10

Others 28.6

All India Total 1,971.9*

*This excludes cement capacities of those manufacturers

who have not submitted their capacity break-ups to CMA.

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SWOT Analysis

Strength

Second largest in the world in terms of capacity

Bargaining power of suppliers is high as there are few large sellers

No substitutes for cement

Weakness

High dependence on imported coal

Erratic and expensive power supply from the grid forces cement companies to set up captive power plants,

which increases overall project cost

Opportunities

Cement demand increases as the economy grows

Thrust on infrastructure development by the Indian government and increase in government spending

Increase in demand for housing

The roads and highways ministry plans to invest $354 billion in road infrastructure by 2012. Housing and

infrastructure projects and the nascent trend of concrete roads will continue to accelerate consumption.

Concretisation of roads. Budgetary allocation for roads also hiked by 13% to $4.3 billion.

Threats

Imports from Pakistan

Regulatory tightening for quarrying of limestone over environmental issues.

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Note: The data for all graphs, unless mentioned otherwise, are sourced from the Cement Manufactures Association.

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