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PREPARED BY: KANU.VIJ SUVASINI AGARWAL
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 46x 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 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09
(8.3) (0.9) (1.5) (0.1) (10.2) 5.6 6.2 (2.9) 10.3 2.0
10.7 (9.8) 2.0 (1.3) (2.5) (9.5) 4.9 3.1 0.9 11.0
91.9 89.1 86.5 86.4 77.3 81.6 86.3 83.3 91.7 93.4
(1.1) 0.4 (0.2) 0.0 (1.1) 1.0 1.2 0.4 1.7 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 .
HISTORICAL : DEMAND SUPPLY MODEL
Historical cement demand supply model (m tonnes) Year-end installed capacity FY04 FY05 FY06 FY07 FY08 FY09
Actual effective capacity (-) Mothballed capacity Effective installed capacity Domestic consumption Export (cement + clinker) Domestic consumption + export Surplus / deficit) % surplus (wrt effective capacity) Actual utilisation Average prices Change in average price Capacity growth Domestic demand growth
144 144 8.5 136 114 9 123 13 10% 86% 141 3% 5% 5.80%
152 152 8.2 143 121 10.1 131 12 9% 88% 153 8% 6% 6.40%
158 158 8.5 150 136 9.2 145 5 3% 95% 163 6% 4% 12.00%
166 166 8.3 158 149 8.9 158 0
199 180 5.7 174 164 6 170 4
222 207 4.9 202 178 6.1 184 18 9% 91% 239 4% 16% 8%
0% 2% 99% 97% 206 231 27% 12% 6% 10% 9.90% 10.10%
Historically, the sustainable capacity utilisation in the cement industry has been 80-85%. This implies FY09 and FY10 are unlikely to be years of overcapacity in the traditional sense.
FACTOR’S RESPONSIBLE FOR THE GROWTH OF THE SECTOR
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.
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 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 FY12E Year-end installed capacity 224 250 287 300 Actual effective capacity 207 231 257 283 (-) Mothballed capacity 4.9 4.9 4.9 4.9 Effective installed capacity 202 226 252 278 Domestic consumption 178 187 205 226 Export (cement + clinker) 6.1 5 8 9 Domestic consumption + export 184 192 213 235 Surplus / (deficit) 18 35 38 43
% surplus (wrt effective capacity) Actual utilisation Average prices Change in average price Capacity growth Domestic demand growth
9% 91% 239 3% 16% 8%
15% 85% 240 0% 12% 5%
15% 85% 240 0% 11% 10%
15% 85% 240 0% 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 o o o o Export Domestic Consumption Average Prices Capacity Growth and 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 priceearnings 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.
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.
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.
-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