Analysis of Cement Industry

Comprehensive Pack

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Table of Contents

• Industry Structure :3
• Trends in Blending : 10
• Analysis of Demand : 16
• Industry Characteristics : 28
• Analysis of Costs and Profitability : 35
• Future Outlook
• Region-wise Demand : 59
• Capacity Additions : 74
• Operating Rates (Capacity Utilization) : 87
• Overall Outlook : 94

2
Industry Structure

3
Industry structure
Total installed cement capacity in India stood at 370-375 million
tonnes, as of March 2014.
Region-wise installed capacity (2013-14)

Source: Industry 4
 Industry structure
Region-wise installed capacity (2013-14)

• The domestic manufacturers can broadly be bucketed into pan-

India, regional and standalone players.
• Pan-India players are large players like Holcim Group companies -
ACC and Ambuja, and Aditya Birla Group company - UltraTech
Cement (including Samruddhi Cement).
• Players whose presence is restricted to one or two regions are
categorised as regional players.
• Key players included in this segment are Jaiprakash Associates
(North and Central), Lafarge (concentrated in the East), India
Cement (South), Shree Cements (North), Binani Cement (North),
Kesoram Industries (South), Chettinad Cement (South), Dalmia
Cement (South) and Madras Cement (South). 5
 Industry structure
Region-wise installed capacity (2013-14)
• Players like Panyam Cement, Penna Cement, etc are operational in
few states within a region.
• Owing to their largely local reach, these players are classified as
standalone players.

6
 Consolidation in cement industry
• The Indian cement industry is highly fragmented with a presence of
few large players and several small players.
• However, the top two players - Holcim Group and Aditya Birla
Group - account for around 35 per cent of the total market share.
• Over the past decade many large mergers and acquisitions have
taken place in the Indian cement industry.
• Some have been in the form of global companies acquiring domestic
players, whereas others have been domestic companies looking to
consolidate their market position.
• With cement demand having weakened in the last two years,
consolidation in the domestic market was more prevalent.
• Since demand growth is likely to pick up only gradually from
7
current levels, further consolidation in the industry is likely.
Key mergers and acquisitions in cement industry

8
Cement plants sold/ acquired in 2013-14

n.a.: Not available

9
Trends in Blending

10
 PPC cement leads overall cement consumption
• Over the years, the proportion of blended cement, mainly
Pozzolona Portland Cement (PPC), has been rising.
• Manufacturers blend cement to control costs and improve profitability.
• Blending reduces the proportion of limestone required per tonne of
cement.
• (Limestone is a scarce resource in India and has royalty charges
attached to it).
• By blending fly ash or slag with Ordinary Portland Cement (OPC),
cement producers can lower power, fuel and raw material costs,
thereby improving operating margins.
• The production of slag cement remains limited to the eastern and
central regions on account of transportation constraints.
• In addition, proximity of a steel plant is important for supply of slag.11
 PPC cement leads overall cement consumption
Blending to continue to rise

• Blending ratio was estimated to have been at 1.31 times in 2013-

14, an improvement over 2012-13.
• Cement industry's blending ratio to increase to 1.36 by 2016-17.
• The blending ratio would increase primarily due to higher
acceptance and applications of blended cement - mainly PPC.
• Many of the PWD manuals have also been amended to prescribe
PPC cement instead of OPC.
• As a result of increased blending, the demand for fly-ash is expected
to rise.
• Availability of limestone for cement plants would not be an issue.

12
PPC cement leads overall cement consumption
Blending to continue to rise

• Thermal power plants are present across regions and the upcoming
plants are also likely to be geographically well distributed.

13
Blending ratio

Source: Industry 14
Blending ratio
• BIS standard for PPC cement allows fly ash to account for 10-25 per
cent of the cement mass, while the BIS standard for slag cement
(PBFSC) allows slag to comprise 25-65 per cent of the cement mass.

15
Analysis of Demand

16
 Demand dynamics closely related to construction sector

• Demand for cement is closely related to growth in the construction

sector.
• Over the past 5 years, from 2008-09 to 2013-14, demand for
cement has grown at a moderate CAGR of around 5 per cent, largely
led by construction of infrastructure and industrial projects, coupled
with modest demand from the housing sector and commercial
construction.

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 Demand drivers
• Demand for cement stems either from new construction work or
repair of existing structures.
• Further, demand can be classified into four segments, namely
housing (55-60 per cent), infrastructure (20-25 per cent), commercial
construction (5-10 per cent) and industrial segments (10-15 per cent).

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Demand drivers
Segments influencing cement demand

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 Housing: Main driver of demand for cement
• The housing sector acts as the major demand driver for the cement
industry in India, accounting for around two-third of the overall
cement demand.
• The demand from the housing sector is influenced by three
factors viz - per capita income of the rural and urban
consumers, government outlay and access to finance.
• Before the economic slowdown of 2009-10, the urban housing market
witnessed a boom on the back of increase in income
levels, employment opportunities created by the information
technology (IT) sector and the growing number of nuclear families.
• Urban housing demand grew at a mere 1 per cent CAGR during the
last 5 years, mainly influenced by the slowdown in the last 1-2 years.
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 Housing: Main driver of demand for cement

• Similarly, demand for rural housing has witnessed a slowdown in

the past 1-2 years.
• Demand from rural housing in the last 5 years was driven by
government-supported schemes and increase in rural income.
• Robust rural wage growth drives construction of larger and more
pucca houses.
• In future, demand for pucca houses is expected to grow at a healthy
pace as the penetration of pucca houses in rural India remains low at
around 50-55 per cent as of 2012.

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 Infrastructure: Increasing government thrust on infrastructure
• Over the past 5 years, the infrastructure segment accounted for
nearly one-fifth of the total cement demand in India.
• Demand from the segment grew at a CAGR of 6 per cent during this
period.
• Over the next few years, increasing spend on urban infrastructure
projects and irrigation are likely to act as major drivers for cement
demand from the infrastructure segment.
• Besides, continuing investments in the power sector as well
as increased cement intensity in road projects are expected to propel
cement demand further.

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Infrastructure: Increasing government thrust on infrastructure
Infrastructure spending in India

Source: CMIE 23
Commercial construction - Development of office space to
drive growth
Commercial construction - Development of office space to drive
growth

• The commercial construction sector segment can be classified into

office space, malls and multiplexes, hotels and other civil structures
such as hospitals and educational institutes.
• Of these, demand from office space accounts for a considerable
portion of the overall commercial construction demand.
• Over the medium term, demand for cement from the commercial
construction segment is expected to be muted on the back of
significant construction in the past and weak demand for office and
retail spaces owing to the slow economic growth.

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 End-users
• The main buyers of cement are government, institutional buyers and
retail buyers.
• Government and institutional sales are usually in bulk and cost
lower than retail purchases.
Government
• The government obtains cement at very competitive prices due to its
purchase process.
• It buys cement through two routes: direct tenders, or through the
Director General of Supplies and Disposals (DGS&D).
• The DGS&D receives cement rates from various cement companies,
selects the vendor, and distributes it among government agencies
registered with the DGS&D.
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End-users
Government
• The government gets a significant portion of its total requirement
through the direct tendering process, and the remainder through
the DGS&D.

Institutional buyers
• Institutional buyers (other than the government) such as contractors
and developers buy cement from either cement companies or
wholesalers.
• The developers, contractors themselves decide on the variety and
brand of cement to be purchased.

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 End-users
Retail buyers

• Demand from retail buyers includes individuals procuring

cement for the housing segment.
• As they have low requirements, they buy from retailers.
• Consequently, retail buyers have lesser pricing flexibility than
institutional buyers, who make bulk purchases.
• In case of retail buyers, the mason typically decides the variety and
brand of cement to be purchased.

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Industry Characteristics

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 Seasonality of demand and cyclicality of the industry
• Demand declines during monsoons due to slowdown in construction
activity, consequently making demand for cement seasonal.
• Monsoons typically extend from June to September across India
(except in parts of Tamil Nadu and Kerala, where they last from
November to January).
• Consequently, demand is the lowest during the July-September
quarter and highest during the January-March quarter.
• In addition, the cement industry, like most capital-intensive
commodity industries, is cyclical in nature, especially with respect to
supply.
• Given the high gestation period of 24-30 months, there is a time lag
between the capacity build-up and cement demand (approximately
24-30 months). 29
Seasonality of demand and cyclicality of the industry
• Demand for cement is linked to economic growth.
• Hence, when the economy is strong, demand increases.
• As a result, the profitability of players increases, leading to capacity
additions by existing players and the entry of new players.
• However, since it takes around 2-3 years to build a cement plant, it
is likely that demand could either decrease or stagnate, or capacity
additions could exceed demand before completion of these
capacities.
• This could lead to decrease in cement prices with the industry
facing a downturn, and players reducing operating rates or shutting
their plants.

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 Supply
• Demand growth and level of consolidation in the region influences
supply in the cement industry.
• Capacity utilisation of cement depends on the demand for cement in
the market.
• We estimate capacity utilisation of the cement industry at around 69
per cent in 2013-14.
• Since cement is highly freight-intensive in nature, the industry faces
serious transportation constraints in terms of timely availability of
rail wagons.
• This has forced manufacturers to move progressively larger
quantities by road.

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Supply
Cement supply

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 Cement industry - Regional in nature
• Cement is a high-volume and low-value commodity.
• Transporting cement beyond a distance makes it unviable for end-
users, thus making the cement industry largely regional in nature.
• Cement consumption varies region-wise because the demand-supply
balance, per capita income and level of industrial development differ
in each state and consequently, in each region.
• In 2013-14, the South accounted for the largest share of consumption
(around 25 per cent), followed by the West (around 21 per cent),
North (around 19 per cent), East (around 18 per cent) and the central
region (around 17 per cent).

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Cement industry - Regional in nature
Region-wise cement consumption

Source: Industry 34
Analysis of Costs and
Profitability

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Cost structure
• The four major costs associated with cement production are:
1. Power and fuel cost
2. Raw material cost
3. Selling expenses
4. Other expenses

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Cost structure

Source: Company Reports 37

Cost structure
1. Power and fuel
• The cement industry is power-intensive, with power and fuel cost
accounting for around 25-30 per cent of the total cost of sales of
cement players.
• Coal is used to fire the kiln as well as to generate power for
grinding the clinker.
• The power requirement of cement plants varies in accordance with
the heat treatment process used viz., dry process or wet process.
• While the wet process requires almost 1,300-1,600 kcal/kg of
clinker and 110-115 kwh of power to manufacture 1 tonne of
cement, the dry process requires 720-990 kcal/kg of clinker and 95-
110 kwh of power.
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Cost structure
1. Power and fuel
• Historically, a significant portion of the industry's power
requirement was met through grid power supplied by the state
electricity boards.
• However, over the past 5 years, cement companies are increasingly
opting for captive power plants in order to reduce their cost of
production and dependence on grid power.
• Since manufacturing cement is a continuous process, frequent
power cuts affect the operating efficiency of cement players, acting
as the main deterrent for dependence on grid power.
• This is evident from the fact that the percentage of total power
requirement met through captive power has risen from around 48
per cent in 2004-05 to almost 70-75 per cent in 2013-14. 39
 Cost structure
1. Power and fuel
• The Indian cement industry primarily uses fuels such as coal, pet
coke and lignite to fulfil its fuel requirement.
• The government allocates specific quotas for coal, on a sector-wise
basis.
• However, such receipts prove insufficient for the cement industry
leading the players to resort to the open market for meeting their
incremental fuel requirements.
• In our country, coal is primarily allocated to power and steel sectors;
the cement industry only gets about 3-4 per cent of the country's total
production.
• Therefore, in the last few years, players have been importing a
significant proportion of their coal requirement from other countries.
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Cost structure
2. Raw material

• Raw material cost accounts for around 20-25 per cent of the cost of
sales of cement players.
• Limestone accounts for a major share of this cost.
• Cement plants are generally located near limestone quarries as
limestone cannot be transported over long distances.
• Limestone is essentially found in 10 clusters viz., Satna, Gulbarga,
Chandrapur, Bilaspur, Chanderia, Nalgonda, Yerraguntla,
Saurashtra, Himachal Pradesh and Thiruchirapalli.
• Limestone availability is largely confined to its cluster regions.
Moreover, limestone is considerably bulky in nature.
• So, it does not make economical sense to transport it over long
distances. 41
Cost structure
2. Raw material

• Other raw materials used in the cement industry include fly ash,
slag, gypsum, etc.
• Gypsum is available as a natural product and is also derived from
sea water and chemical plants.
• It is mostly found in Rajasthan (which accounts for more than 80 per
cent) followed by Jammu & Kashmir (which accounts for around 15
per cent).
• A small portion of close to 5 per cent is found in states like Tamil
Nadu, Gujarat, Himachal Pradesh, Karnataka, Uttarakhand, Andhra
Pradesh and Madhya Pradesh.

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Cost structure
2. Raw material
• Gypsum from Rajasthan is dispatched to cement plants in India
spread across Rajasthan, Gujarat, Madhya Pradesh, West Bengal,
Uttar Pradesh, Bihar, Jharkhand, Chhattisgarh, Himachal Pradesh,
etc.
• In terms of proportion, gypsum would account for 4-5 per cent of a
tonne of cement.

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Cost structure
2. Raw material
• Fly ash is a fine, glass-like powder recovered from gases created by
coal-fired electric power generation.
• It primarily consists of silica, alumina and iron.
• As per the BIS standard for PPC cement, fly ash can account for 10-
25 per cent of the cement mass, while the BIS standard for slag
cement (PBFSC) allows slag to comprise 25-65 per cent of the
cement mass.
• About 32 per cent of fly ash is used in the cement industry.
• Slag is a by-product of the steel-making process, produced during
the separation of molten steel from impurities in steel-making
furnaces.
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Cost structure
2. Raw material

• It is used in cement manufacturing.

• The availability of slag in India is limited and is found mostly in
the East due to the concentration of steel plants in the region.
• Both fly-ash and slag are used as additives in the production of
blended cement.

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Cost structure
3. Selling expenses
• Since cement is a low-value, high-volume commodity, freight costs
constitute a significant proportion, around 20-25 per cent, of the
total cost of sales.
• There are three major modes of transport used by the cement
industry i.e. road, rail and sea.
• Rail is the preferred mode of transport for long-distance
transportation owing to lower freight cost.
• However, the availability of wagons and the extent of last-mile
connectivity needs to be taken into consideration.
• Road transportation is beneficial for short distances and bulk
transportation as it minimises secondary handling and secondary
freight costs. 46
Cost structure
3. Selling expenses

• Presently, almost equal proportions of cement are dispatched by

rail and road.
• Transportation by sea is the cheapest mode.
• However, only coastal players can take advantage of this mode as
they can transport clinker and cement more economically within
the country and to other regions as well.
• Hence, a very small proportion of the cement is dispatched by the
sea route.
• In order to control freight costs, companies try to strategically locate
plants close to raw material sources and end-user segments by
opting for split location units.
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Cost structure
4. Other expenses
• Other expenses include employee cost, administration expenses,
repair and maintenance charges, etc.
• These account for around 15-20 per cent of the cost of sales.

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Players in the industry are classified into large, medium and small
players for financial analysis
Player classification
• Large players include: ACC Ltd, Ambuja Cements Ltd, Century
Textiles & Industries Ltd, India Cements Ltd, JK Cement Ltd, Ramco
Cements Ltd, Shree Cement Ltd, Ultratech Cement Ltd (account for
close to 47 per cent by capacity)
• Mid-sized players include: Birla Corporation Ltd, Heidelberg
Cement India Ltd, JK Lakshmi Cement Ltd, Mangalam Cement Ltd,
OCL India Ltd, Orient Cement, Sagar Cements Ltd (account for close
to 10 per cent by capacity)
• Small-sized players include: Anjani Portland Cement Ltd, Deccan
Cements Ltd, Gujarat Sidhee Cement Ltd, K C P Ltd, Kakatiya
Cement Sugar & Industries Ltd, Keerthi Industries Ltd, Saurashtra
Cement Ltd, Shiva Cement Ltd, Shree Digvijay Cement Co. Ltd
49
(account for close to 2 per cent by capacity)
Operating margins across player sizes

Source: Company Reports, Industry 50

Net margins across player sizes

Source: Company Reports, Industry 51

 Net margins across player sizes
• In contrast to the trend in operating and net margins, the RoCE of
small players was healthier than that of large players in 2012-13.
• However, over the years, the RoCE of small players has been subject
to higher volatility as compared to mid- and large-sized players.
• In 2013-14, losses and higher debt levels will result in a significant
erosion in returns for small players.
• Overall RoCE of the industry is estimated to decline by 300 bps in
2013-14.

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Return on capital employed (RoCE) across player sizes

Source: Company Reports, Industry 53

Margins to decline slightly in 2014-15
Scenario to improve in 2015-16
• Margin pressure to ease slightly in 2014-15, with operating margins
declining by around 30 bps y-o-y.
• This decline is lower than our earlier estimate of a 80-100 bps
decline projected in April 2014.
• The revision follows revisions in our in-house outlook on coal
prices (particularly imported coal and e-auction coal) and the hike
in railway freight rates announced in June 2014.
• The rise in input costs (especially freight and raw material costs) is
expected to continue to offset the increase in cement prices.
• Average pan-India cement prices to rise by 4 per cent while overall
cost is likely to increase by 4-5 per cent during the year.
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 Margins to decline slightly in 2014-15
Scenario to improve in 2015-16
• In 2015-16, we expect the scenario to improve for cement players,
with margins remaining flat or improve marginally y-o-y.
• Prices are expected to improve to around 5 per cent, while cost hikes
will be limited to nominal increases.
• During the year, the demand growth to pick up owing to more
definite policy actions by the central government leading to recovery
in infrastructure investments.

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 Hike in diesel prices raises freight cost
• Freight costs to increase by 5 per cent in 2014-15 owing to rise in
diesel prices.
• In 2015-16 as well, we expect freight costs to increase by 5 per cent.
• While diesel prices are not expected to rise during the year, road
transporters are likely to pass-on other cost increases, which largely
they would have been unable to pass on in 2013-14 and 2014-15 when
demand was muted.
• Although the railways is a more economical mode of transport for
cement players, the share of rail transport has declined over the years
due to constraints in the availability of wagons.
• In addition, cement transport by rail requires loading-unloading
facility as it does not provide last-mile connectivity.
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 Hike in diesel prices raises freight cost
• Currently, majority of cement dispatches take place by rail, but the
share of road transport is expected to continue to edge higher.
• Further, due to overcapacity in the industry, players will need to
foray into new markets.
• Consequently, cement will need to be transported across longer
distances, which will also drive up freight costs.

57
Profitability outlook over next two years

E: Estimated; P: Projected

58
Future Outlook: Region-
wise Demand

59
2013-14: Demand growth plunges to 13-year low
• The cement industry witnessed a demand slowdown for
the second consecutive year in 2013-14.
• Progress on infrastructure projects remained slow owing to
sluggish economic growth.
• In addition, restrictions on sand mining, particularly in the North,
South and West, hampered construction activity during the year.
• However, the industry has revised upward its cement demand
growth estimate for 2013-14 to around 2.7 per cent y-o-y from 1.3
per cent (published in April 2014) following a higher-than-
expected performance during the fourth quarter.

60
2013-14: Demand growth plunges to 13-year low
Second consecutive year of demand slowdown

E: Estimated
Source: Company Reports, Industry 61
2013-14: Demand growth plunges to 13-year low
Second consecutive year of demand slowdown
• Demand is estimated to have risen by 2 per cent y-o-y in the first
half and by 3.5 per cent in the second half of 2013-14.
• At a regional level, demand in the South declined, while the North
and West witnessed muted growth.
• Demand in the eastern and central regions grew at a healthier pace
on a low base, led by the state governments' focus on
development.

62
 2013-14: Demand growth plunges to 13-year low
Demand dips in southern region
• Among infrastructure sectors, demand in the region is estimated to
have been driven mainly by power and irrigation.
• West: Demand grew by a muted 3 per cent y-o-y on account of slow
pace of real estate activity mainly in Mumbai and Ahmedabad
and slow execution of infrastructure projects.
• Among infrastructure sectors, demand in the region is estimated to
have been mainly driven by irrigation.
• East: Demand grew by a better 5 per cent y-o-y (including the North-
east).
• Demand in the region was driven by infrastructure and housing
development in Bihar, the North-east and Chhattisgarh.
• Among infrastructure sectors, roads and irrigation drove demand in
63
 Demand to grow at 1.08x of GDP over next five years
• Pan-India cement demand is projected to grow by a robust 7 per
cent CAGR over 2014-15 to 2018-19 on a low base, led by
improvement in economic growth, and better execution of
housing and infrastructure projects.
• While demand is expected to be moderate during the current fiscal,
we expect a healthy pick-up from 2015-16 with the central
government's development push.
• Over the next five years, the housing sector would remain the
largest end-user of cement, followed by the infrastructure sector.

64
Demand to grow at 1.08x of GDP over next five years
Eastern, central regions to gain share in cement consumption

E: Estimated; P: Projected Source: Company Reports, Industry 65

Demand to grow at 1.08x of GDP over next five years
Demand growth in north, southern regions to improve over next five
years

E: Estimated; P: Projected
Source: Company Reports, Industry 66
 North: Demand growth to recover
• Industry analysts expects cement demand in the North to grow by
7-8 per cent CAGR from 2014-15 to 2018-19, as compared to a 6 per
cent CAGR recorded in the previous five years, with Rajasthan,
Punjab, Haryana and Delhi likely to remain the key cement-
consuming centres.
• Infrastructure projects in these states is likely to drive cement
demand in the region.
• While real estate development in the Delhi-NCR is likely to be slow
over the medium term, healthy execution is expected in
areas around Chandigarh; individual housing projects are expected
to continue to propel demand in the region.

67
South: Demand to pick up
• Cement demand in the South to grow by 5-6 per cent CAGR over
the next five years as compared to a relative flat growth rate during
the past five years.
• Andhra Pradesh, one of the key cement consuming states in the
South, has been witnessing muted demand owing to issues
regarding statehood for Telangana.
• With the bifurcation of the state in June 2014, we expect demand in
the state to pick up.
• While demand from government projects would take a while,
private sector investments, particularly in housing, are expected to
improve from the current fiscal.
• Overall demand in the South would be primarily from
68
independent housing and infrastructure projects.
 South: Demand to pick up
• On the infrastructure front, projects in Tamil Nadu, Andhra Pradesh
and Karnataka are likely to propel demand.
• Over the medium term, real estate activity, though, is likely to be
slow in Chennai and Kochi while it is expected to be
relatively better in Bengaluru.
• Meanwhile, with substantial capacities commissioned in the South
over the past 3-4 years, the region is facing oversupply.
• This, along with muted demand, has led to players transporting
excess cement output to other regions, especially to the West and
East.
• Over the next five years, we expect the quantum in outbound
movement from the southern region to remain unchanged.
69
East: Demand growth to remain healthy
• Cement demand in the East to outpace most other regions, growing
over 8 per cent CAGR over the next five years, driven by the
region's state governments' focus on development and low base
effect in the region (is one of the lowest cement-consuming regions
in India).
• Demand growth is projected to be healthy in Bihar, the North-east
and Chhattisgarh.
• Over the medium term, we expect slower execution of real
estate projects in Patna, Guwahati and Bhubaneshwar,
while moderate growth is expected in Kolkata and Raipur.
• Individual housing projects are expected to continue to drive
demand. Road (national highways and state roads) and power
(particularly in the North-east and Bihar) projects will support the
70
healthy demand for cement.
 West: Infrastructure projects to drive demand
• Industry analysts expects cement demand in the western region to
grow by 6.5 per cent CAGR over the next five years as compared
to the 7.7 per cent CAGR recorded in the previous five years.
• We expect cement demand in this region to primarily
come from investments in infrastructure (mainly in
Maharashtra) and industrial projects (in Gujarat
and Maharashtra).
• Over the medium term, though, we expect slow execution of real
estate projects in Mumbai and Ahmedabad, while healthy growth
is projected in Pune.

71
 Central: Infrastructure, housing, commercial projects to drive
demand
• Cement demand in the central region to grow at a healthier rate
than most other regions over the next five years, clocking a CAGR
of 8.1 per cent.
• The region is also one of the lowest cement-consuming regions in
India.
• Demand will primarily be driven by infrastructure projects,
especially in Madhya Pradesh, which has had a stable political
environment.
• In Uttar Pradesh, demand is expected to gradually pick up over the
next five years with the execution of announced projects.
• Commercial development is also expected to drive cement demand
in the region with the development of office spaces and retail
72
projects.
Central: Infrastructure, housing, commercial projects to drive
demand
• Over the medium term real estate development is expected to be
moderate in the major cities of Bhopal, Indore, Lucknow, Kanpur,
Noida.
• Individual housing, though, is forecast to continue to propel
cement demand.

73
Future Capacity
Additions

74
Significant capacity addition in 2013-14 despite muted demand
• Industry analysts estimated around 23 MTPA of capacity addition
was done during 2013-14 despite muted demand.
• However, over 60 per cent of the addition has been by the large
cement companies (>8 MTPA capacity), which have strong
financials.
• There has been greater capacity addition in the North, East and
Central regions, which have together accounted for 85 per cent,
while the rest has been added in the South.
• There has been no major capacity addition in the West during the
year.
• Overall installed capacity to be around 375 MTPA as of March 31,
2014.
75
Significant capacity addition in 2013-14 despite muted demand
Major capacities commissioned in 2013-14

Source: Industry 76
Steady capacity addition over next 2 years, pace to reduce
thereafter
• With significant capacity addition in the last 5 years,
we estimate capacity addition to be 60 per cent lower over the next 5
years (2014-15 to 2018-19) .
• The industry is approaching the end of an investment cycle
(typically lasting 6-8 years) and demand is growing at a muted pace.
• Industry experts expects around 60 million tonnes per annum
(MTPA) of cement capacities to be commissioned over the next 5
years.
• Capacity addition is expected to remain steady over the next 2
years, with a decline thereafter.

77
Steady capacity addition over next 2 years, pace to reduce
thereafter
Trend in installed capacity additions (2006-07 to 2018-19)

P: Projected Source: Company Reports, Industry 78

Steady capacity addition over next 2 years, pace to reduce
thereafter
Trend in installed capacity additions (2006-07 to 2018-19)
• Industry expert's's estimates on capacity expansion in the cement industry
are lower than aggregate planned expansions because:
• Some of the expansion plans are expected to be deferred/ cancelled because
of oversupply in select regions.
• Issues pertaining to land acquisition and limestone mining leases exist,
which can cause delays in the execution of capex plans.
• During our interactions with equipment manufacturers, they shared
the likely commissioning schedule of capacities for which orders have
already been placed - typically work on a cement plant has to begin at
least 3 to 4 years before it is commissioned.

79
Steady capacity addition over next 2 years, pace to reduce
thereafter
Region-wise capacity addition over next 2 years

Source: Company Reports, Industry 80

North, East to account for major capacity addition
• Over the next 5 years, bulk of incremental cement capacities are likely to be
added in the North and East.
• Traditionally, the South has accounted for bulk of India's cement capacities
due to an abundant availability of limestone - the key raw material for
cement.
• Two large limestone clusters - Nalgonda and Yeraguntla - are situated in
Andhra Pradesh.
• The southern region housed 40 per cent of the 156 million tonnes of cement
capacities added in the industry between 2009-10 and 2013-14.
• Therefore, over the next 5 years, incremental capacity addition in this region
is expected to be lower at about 15-20 per cent of the total capacity addition.

81
North, East to account for major capacity addition
Inter-regional movement to continue at similar levels

• Capacity addition in the North is expected to cater to demand in the North,

West (mainly Gujarat) and Central regions.
• Traditionally, 25-30 per cent of the overall cement consumption in the
central and western regions is met by cement produced in other regions.
• Despite lowest operating rates in the South, capacity additions are expected
to continue mainly in order to cater to the western region and demand
from the South.
• Most upcoming plants in the South are situated in Karnataka, which is
located close to Maharashtra in the West.
• Capacities in Andhra Pradesh are expected to continue to supply some of
their excess cement to the eastern region.
82
Player-wise capacity additions over next 5 years

Source: Company Reports, Industry 83

Signs of consolidation in the South with higher M&A activity
• In the cement industry, mergers and acquisitions (M&A) have taken place
during 2013-14, mainly in the South, East and West.
• However, greater focus can be seen in the South where operating rates have
reduced and are the lowest in the country, due to significant capacity
addition over the years.
• M&A is expected to reduce financial stress of the companies in these times
of lower operating rates and subdued prices.
• In many cases, the valuations of stressed companies turn out to be
attractive and thus, make for a good deal.
• M&As are also helping the acquiring companies to expand their
geographical presence.

84
Signs of consolidation in the South with higher M&A activity

• As a result of the M&A activity in the industry, we expect to see

more signs of consolidation and thus easing of competitive intensity -
which is especially higher in the South.
• Industry expert's expects further consolidation in the cement industry
given that, 1) the industry operating rates are expected to fall further and
touch new lows with significant capacity overhang and muted demand.
• In addition, we expect only a modest price rise over the next 2 years.
• Therefore, financials of cement companies are likely to be further stressed.
• 2) the financials of small and mid-sized companies have deteriorated with
very low net profit margins and interest coverage ratios in 2013-14.
• Small players have already begun to make losses in the 9 months of 2013-
14.
85
Signs of consolidation in the South with higher M&A activity
• Therefore, in this muted scenario, such companies would not be able to
sustain for long and will make for good M&A targets.
• On the other hand, most large players and some mid-sized players continue
to have a strong financial position despite the muted demand, which will
enable them to acquire small companies.
• 3) If one looks at the valuations of many south based companies in the mid
size and small categories, their valuations are way below the replacement
cost in the industry which will further aid consolidation.

86
 Future Outlook:
Operating Rates
(Capacity Utilization)

87
 Operating rates decline further in 2013-14
• The cement industry's average operating rates touched levels not
seen in two decades, declining to 69 per cent in 2013-14, as demand
growth slowed sharply (grew by a mere 2.7 per cent y-o-y) to a 13-
year low amidst continuing capacity additions despite a significant
overhang.
• The deceleration in pan-India cement demand was due to slowdown
in key segments of housing, infrastructure development and related
economic activity.
• Pan-India operating rates were pulled down by weak capacity
utilisation in the South, where there was significant overcapacity and
demand remained subdued.

88
 Operating rates decline further in 2013-14
• Operating rates in the western and central regions were high at
around 85 per cent as the two regions have limited production
capacity with typically 25-30 per cent of their consumption catered
through the supply from other regions.
• Operating rates in the North and East were moderate at around 70
per cent.
• Overall, the industry added 23 million tonnes per annum (mtpa) of
capacities during the year, with higher additions in the eastern and
central regions.
• Despite weak operating rates, the South added 3-4 mtpa of capacities
given the good availability of limestone in the region and prospects
of outbound supply.
89
Pan-India operating rates to be muted over next two years
• Industry expert's estimates pan-India operating rates to average 75
per cent over 2014-15 to 2018-19, as compared to 74 per cent in
the previous five years, which is higher than our earlier projection of
71 per cent for the five-year period, published in April 2014.
• The revision follows announcements made in Union Budget 2014-
15, industry performance during the first quarter of 2014-15,
improved consumer sentiment post the general elections and our
interactions with industry stakeholders.
• Cement demand is expected to grow at a moderate pace of 7 per
cent CAGR during the period, with a meaningful recovery projected
only from 2015-16.

90
Trend in cement operating rates

Source: Company Reports, Industry 91

 Trend in cement operating rates
• Over the next two years, we expect steady capacity additions of
around 44 mtpa whereas effective capacity additions would be
lower at around 32 mtpa.
• While current demand would not support significant addition in
capacity, our interactions with equipment manufacturers and
cement manufacturers indicates that most of the capacity
additions over the next two years are at an advanced stage of
construction.
• Thereafter, from 2016-17, Industry expert's expects capacity
additions to abate, and thus operating rates will recover.

92
 Incremental demand and effective capacity additions

: Estimated; P: Projected
Note: Effective cement capacity is calculated on a pro-rata basis, taking into account the
93
month in which the capacity becomes operational. Source: Company Reports, Industry
Overall Future Outlook

94
Better times ahead for cement industry
Demand growth to improve gradually over next five years

• Cement demand slowed down over the last two years because of
slow progress of infrastructure projects and a sluggish economy.
• In addition, labour constraints and restrictions on sand mining,
particularly in the North, South and West, hampered construction
activity.
• Industry expert's estimates cement demand growth fell to a 13-
year low of around 2.7 per cent y-o-y in 2013-14.

95
Better times ahead for cement industry
Demand growth to improve gradually over next five years
Growth forecast by region and PAN India level over medium term

Source: Company Reports, Industry 96

 Better times ahead for cement industry
Demand growth to improve gradually over next five years
Growth forecast by region and PAN India level over medium term
• In 2014-15, we expect cement demand to improve by a moderate 5.0-
5.5 per cent.
• Demand would be driven by state government and private sector
spends (mainly towards housing).
• Rural cement demand is also expected to be better during the year
owing to a healthy growth in agriculture income in 2013-14.
• A meaningful recovery in demand is only expected from 2015-16
onwards owing to an acceleration in central government projects
when growth is expected at 6-6.5 per cent.
• For the next five-year period, cement demand is projected to grow
by 7 per cent CAGR, led by growth in the housing and
97
infrastructure sectors.
Better times ahead for cement industry
Demand growth to improve gradually over next five years
Growth forecast by region and PAN India level over medium term
• Demand growth from the commercial and industrial segments is,
however, expected to be muted.
• Cement demand growth is projected to be healthier in the northern,
central and eastern regions on a low base with the state
governments' focus on development.

98
 Pan-India average operating rates to touch 82 per cent by 2018-19
• Industry analyst’s estimates show that pan-India average capacity
utilisation rates declined to around 69 per cent in 2013-14, the lowest in
the last two decades.
• Operating rates in the South hovered around 55 per cent during the
year, owing to significant overcapacity and poor demand from the
region.
• With recovering demand growth and lower capacity additions, we
expect capacity utilisation to average 75 per cent over the next five
years.
• Since capacity additions are expected to be steady over the next two
years, utilisation rates are estimated to remain muted.
• From 2016-17 onwards, we expect a healthy improvement, with capacity
utilisation reaching 82 per cent by 2018-19. 99
Pan-India average operating rates to touch 82 per cent by 2018-19

• Operating rates in the South, which are currently hovering at sub-

60 levels, are expected to gradually improve and stand at 60 per
cent over the next five years, but will still remain much lower than
the pan-India average rate.
• As operating rates in the region are likely to remain at lower levels,
some consolidation is expected in the region.

100
Capacity additions to be steady over next two years, decline
thereafter
• Cement capacities totalling 23 million tonnes per annum (mtpa)
were added in 2013-14 despite the weak growth in demand, with
the central and eastern regions accounting for a larger share of the
capacity additions.
• Over the next two years, we expect capacity additions of around 20
mtpa annually.
• However, from 2016-17 onwards, annual capacity additions are
expected to reduce.
• With significant capacity overhang, we expect overall capacity
additions over the next five years to be 60 per cent lower than that
seen in the past five years.
• The North and East are expected to witness higher capacity
101
additions during the period.
Modest price hikes expected over next two years
• Average pan-India prices fell by 1.3 per cent y-o-y in 2013-14 on
account of muted cement demand.
• The decline in prices was sharper in the West, followed by the
North and East.
• The drop in prices in the South and Central regions was marginal.
• With cement demand gradually rising over the next two years, we
expect average pan-India cement prices to increase by a modest 3-5
per cent.
• Based on available capacity, we do not foresee any major supply
bottlenecks in any of the regions; constraints in supply would have
led to sharper price hikes.
• We project a higher rise in prices in the central region as we expect
better growth in cement demand in the region. 102
Pressure on margins to ease over next two years
• As per Industry expert's estimates, the industry's operating
margins declined by around 520 bps in 2013-14, with muted
realisations and increase in costs.
• Consequently, profitability fell to a 10-year low with operating
margins at 15-16 per cent.
• During the year, we estimate industry RoCE to have decreased by
around 300 bps y-o-y.

103
Pressure on margins to ease over next two years
• In 2014-15, operating margins are forecast to decline by a marginal
30 bps y-o-y.
• We expect growth in realisations to be better than in 2013-14, but
the increase in freight and raw material costs is likely to continue.
• In 2015-16, operating margins are expected to be flat or improve
marginally.
• Meanwhile, small players have been affected the most by the
demand slowdown, registering losses in 2013-14.
• We do not expect significant improvement in their credit profile in
2014-15 as well.
• This would trigger consolidation in the sector, given the healthy
financial profile of the larger players.
• This is already evident with the ongoing deals in the sector. 104