THE EQUICOM Outlook OnIndia’s Cement Industries
CONTENTIntroductionKey PointsProspectsSector GrowthEconomic Growth with Cement SectorComparisonConclusion
INTRODUCTION The Indian cement industry is the second largest market after China.Indian cement production capacity is expected to rise to 349.6Mt in the current fiscalyear (FY13) from 336.1Mt reached in the last fiscal. It had a total capacity of about300 million tonnes (MT) as of financial year ended 2010-11, The figure is expected todouble to reach almost 550 million tonnes by 2020, as per estimates by the CementManufacturers Association (CMA). As of 2011, there were 137 large and 365 minicement plants in India. Consolidation has taken place with the top three players alonecontrolling almost 35% of the capacity. However, the balance capacity still remains quitefragmented. In India, cement demand emanates from four key segments — housing,accounting for 67%; infrastructure for 13%; commercial construction for 11%; andindustrial sector for 9%. The cement industry has evolved in the form of clusters acrossthe country due to the location of limestone reserves in certain states. Presently, thereare seven clusters, namely the Satna cluster in Madhya Pradesh; Chandrapur in northAndhra Pradesh and Maharashtra; Gulbarga in north Karnataka and east AndhraPradesh; Chanderia in south Rajasthan, Jawad and Neemuch in Madhya Pradesh;Bilaspur in Chattisgarh; Yerraguntla in south Andhra Pradesh and Nalgonda in centralAndhra Pradesh. Despite the fact that the Indian cement industry has grown at a commendablerate in the last decade, registering a growth of nearly 9% to 10%, the per capitaconsumption still remains substantially poor when compared with the world average.While China registered the highest per capita cement consumption in 2010 of about1,380 kg, India stood much lower at 230 kg. This underlines the tremendous scope forgrowth in the Indian cement industry in the long term. Cement, being a bulk commodity, is a freight intensive industry and transportingit over long distances can prove to be uneconomical. This has resulted in cement beinglargely a regional play with the industry divided into five main regions viz. north, south,west, east and the central region. With capacity addition taking place at a faster rate ascompared to demand, prices have remained southbound, especially in the last oneyear. Nevertheless, considering the government’s thrust on infrastructure, long termdemand remains intact. Given the high potential for growth, quite a few foreign transnational companieshave displayed their interest in the Indian markets. Already, while companies likeLafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim hasincreased its stake in domestic companies Ambuja Cements and ACC to gain fullcontrol. Considering the long term growth story, fair valuations, fragmented structure ofthe industry and low gearing, another wave of consolidation would not come as asurprise.
Key Points The demand-supply situation is high skewed with the latter being SUPPLY significantly higher. Housing sector acts as the principal growth driver for cement. However, recently industrial and infrastructure sectors have also DEMAND emerged as demand drivers. High capital costs and long gestation periods. BARRIERS TO Access to limestone reserves (key input) also acts as a ENTRY significant entry barrier. Licensing of coal and limestone reserves, supply of power from BARGAINING the state grid etc are all controlled by a single entity, which is the POWER OF government. However, nowadays producers are relying more on SUPPLIERS captive power, but the shortage of coal and volatile fuel prices remain a concern. Cement is a commodity business and sales volumes mostly BARGAINING depend upon the distribution reach of the company. POWER OF However, things are changing and few brands have started CUSTOMERS commanding a premium on account of better quality perception. Intense competition with players expanding reach and achieving COMPETITION pan India presence.PROSPECTS The growth of the Indian economy has slowed down in recent times on accountof the rising inflation, high interest rates, high prices of commodities and fuels.The growth prospects of the cement industry are closely linked to the growth of theoverall economy and the real estate and construction sector in particular.The importance of the housing sector in cement demand can be gauged from the factthat it consumes almost 60-70% of the country’s cement. If the slowdown in real estatepersists for an extended period, it would impact the growth in consumption of cement.In such a case, the small and medium-sized cement players would be the worst hit. Despite the overcapacity situation weighing on the cement industry, severalmajor capacity additions are expected in the next few years. Hence, the supplyoverhang is likely to persist for at least 2-3 years. This will keep a constant pressure oncement realizations. On the demand front, the cement industry is likely to maintain itsgrowth momentum and continue growing at around 8% to 9% in the medium to long
term. Government initiatives in the infrastructure sector and the housing sector are likelyto be the main growth drivers. In the Union Budget 2011-12, the government restructured the excise duty oncement in a way that would effectively increase the tax incidence on the cementindustry. However, certain initiatives chalked out to benefit the user industries would inturn boost demand for cement. Custom duties on key inputs such as pet coke andgypsum were also reduced which would provide some marginal relief against the risingcosts of inputs.SECTOR GROWTHGrowth in Cement Demand (All Over India) IN MILLION TONES 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2010- APR- 03 04 05 06 07 08 09 11 NOV 11 DOMESTIC 99 108 114 123 136 149 164 178 100 CONSUMPTION YEAR-ON-YEAR 9.7 8.7 5.8 8.1 10.1 9.9 10.1 8.4 12.5 GROWTH %Financial year 2011-12During financial year 2011-12 (FY12), the cement industry added nearly 28 MT overand above the 60 MT added in the previous year taking the total capacity to nearly 300MT. However, cement demand during the year grew at a paltry rate of 5.3%, the lowestsince 2003-04. A significant slowdown was witnessed following the first quarter of FY11mainly on account of the several hikes in key lending rates by the Reserve Bank of Indiaaimed at curbing the inflationary pressures. The credit crunch resulting from themonetary tightening impacted real estate, infrastructure and other construction projects.Prolonged monsoons and logistical constraints further dampened the construction work.As a result, average industry capacity utilization fell as low as 70%. The impact waseven worse in the southern region, which witnessed the highest capacity additions.
The low cement demand severely affectedaverage industry realizations (average priceper bag of cement). Additional capacitiescoming on stream further intensified theoversupply situation. On the cost front, risinginput and fuel costs severely hurt the marginsof cement players. Export markets alsoremained sluggish due to the slowdown in theglobal economy, and particularly the saggingconstruction activity in the Gulf region.Fig: Regional Distribution of CementIndustriesGrowth in Cement Consumption in Major States of India (CAGR between2007-2011) GROWTH (%)1816141210 8 6 GROWTH (%) 4 2 0 ANDHRA HARYANA ORISSA GUJRAT M.P DELHI U.P PUNJAB PRADESH
ECONOMIC GROWTH WITH CEMENT SECTORS The Role of Cement Industry in India GDP is significant in the economicdevelopment of the country. The cement industry in India is one of the oldest sectors inIndia. The industry is driven by the immense growth in the housing sector, theinfrastructure development, and construction of transportation systems. An increasedoutflow in infrastructure sector, by the government as well as private builders, hasraised a significant demand of cement in India. It is the key raw material in constructionindustry. Also, it has highly influenced those bigger companies to participate in thegrowing sector. At least 125 plants set up by the big companies in India with about 300other small scale cement manufacturers, to fulfill the growing demand of cement.Being one of the vital industries, the cement industry contributes to the nation’ssocioeconomic development. The sum total utilization of cement in a year indicates thecountry’s economic growth. The demand of cement in year 2012-2013 is expected to increase by 50 milliontons despite of the recession and decline in demand of housing sector.Against India’s GDP growth of 7%, the experts have estimated the cement sector togrow by 9 to 10 % in the current financial year. Major Indian cement manufacturers andexporters have all made huge investments in the last few months to increase theirproduction capability. This heralds an optimistic outlook for cement industry.The housing sector in India accounts for 50 % of the cement’s demand.And the demand is expected to continue. With the constant effort made by cementmanufacturers and exporters, India has become the second largest cement producer inthe world. Madras Cement Ltd., Associated Cement Company Ltd (ACC), AmbujaCements Ltd, Grasim Industries Ltd, and J.K Cement Ltd. are among few renownednames of the major Indian cement companies. In India, the Department of Industrial Policy and Promotion (DIPP), underthe Ministry of Commerce and Industry, is the nodal agency for the development ofcement industries, that is, it is involved in monitoring their performance at regularintervals and suggesting suitable policy incentives, as per the requirement.The Department is responsible for formulation and implementation of promotional anddevelopmental measures for growth of entire industrial sector in general and of someselected industries like cement, light engineering, leather, rubber, light machine tools,etc. in particular. It is involved in framing and administering overall industrial policy andforeign direct investment (FDI) policy as well as promoting FDI inflow into the country.It plays an active role in investment promotion through dissemination of information oninvestment climate and opportunities in India as well as by advising prospectiveinvestors about various policies and procedures.
COMPARISONSGrowth Comparison among India Cement, JK Cement and Prism Cement for FY2011-12 INDIAN CEMENT J K CEMENT PRISM CEMENT KEY FACTOR 2012 2011 2012 2011 2012 2011 (Mar) FY (Mar) FY (Mar) FY (Mar) FY (Mar) FY (Mar) FY NET WORTH 4067.20 4089.76 1529.01 1399.05 1210.60 1250.64 TOTAL DEBT 2268.59 2456.07 1079.35 1319.15 1038.95 1169.84 TOTAL LIABILITIES 6336.21 6545.83 2608.36 2718.20 2187.52 2377.67 TOTAL ASSETS 6336.20 6545.83 2608.36 2718.18 2187.52 2377.67 BOOK VALUE 132.42 115.23 184.32 163.92 22.82 24.00 TOTAL INCOME 4215.90 3550.01 2588.45 2400.16 4528.96 3415.68 TOTAL EXPENDITURE 3296.88 3074.38 2,032.66 2,111.24 4257.27 3065.99 EPS (RS.) 9.54 2.22 25.36 9.16 -0.60 1.90 EQUITY DIVIDEND (%) 20.00 15.00 50.00 20.00 5.00 10.00 CURRENT RATIO 0.95 1.28 1.03 1.17 0.77 0.93 QUICK RATIO 1.35 1.69 0.81 0.88 0.54 0.63 DEBT EQUITY RATIO 0.56 0.69 0.84 1.15 0.90 0.97 LONG TERM DEBT EQUITY RATIO 0.37 0.53 0.77 1.10 0.81 0.90RETURN ON LONGTERM FUND (%) 12.06 3.75 19.27 7.43 6.60 10.33 EARNING RETENTION RATIO 7.93 -38.05 80.42 58.40 --- 40.56 MARKET SHARES INDIA CEMENT 7.23% J K CEMENT 2.97% ACC 18.03% AMBUJA CEMENT 11.88%
TECHNICAL VIEW JK CEMENTOUTLOOK Trend: - Bullish Resistance: - 285,305 Support: - 191,176 Strategy: - Buy on Dips
INDIA CEMENTOUTLOOK Trend: - Consolidate Resistance: - 105,120 Support: - 82, 71 Strategy: - Sell on High
Results from our study:- CEMENTS FUNDAMENTAL VIEW TECHNICAL VIEW JK cement BUY Buy on dips India cement BUY Sell on high Prism cement SELL Buy on dipsAs per our research Investors should buy JK Cement for long term view becausefundamental view and technical view both are bullish for long term scenario inJK Cement among these three cements stocks.CONCLUSION On the back of the analysis of this report, there is a suspicion of a functioningcement cartel in the zonal markets in India except for the central zone market.The suspicion is well placed since most of the conditions for cartel formation arestrongly satisfied in the cement markets in India. With the findings of the data analyzedin the report, there is a strong suspicion of the presence of price control and marketsharing in the zonal markets, especially in an industry like cement industry with highamount of crossholding of shares between some of the companies.The suspicion of price control is evident from 2007-08 onwards till the period Mar-2011,and that of market sharing is fuelled by the near constant market shares of individualcompanies over the last six years. On the all India level, suspicion hovers above Ultratech Cement Ltd., ACC Ltd.,India Cement Ltd, Shree Cement Ltd., and Madras Cements Ltd. While in the northzone, strong suspicion hovers over ACC Ltd., Shree Cement Ltd., Grasim IndustriesLtd. and JK Lakshmi Cement Ltd., whereas in the west zone, Ultratech Cement Ltd. andSanghi Industries Ltd should be under the scanner of the Commission.In the east zone, OCL India Ltd., Ambuja Cement Ltd. and ACC Ltd. show signs ofcollusion. The south zone provided the highest amount of suspicion with as many asseven players controlling production. The players are India Cements Ltd., MadrasCements Ltd., Ultratech Cement Ltd., Kesoram Industries Ltd., Dalmia Bharat SugarInds. Ltd., Chettinad Cement Corpn. Ltd and Penna Cement Inds. Ltd. Despite the fact that the Indian cement industry has grown at a commendablerate in the last decade, registering a growth of nearly 9% to 10%, the per capitaconsumption still remains substantially poor when compared with the world average.While China registered the highest per capita cement consumption in 2010 of about1,380 kg, India stood much lower at 230 kg. This underlines the tremendous scope forgrowth in the Indian cement industry in the long term.