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Executive Summary

D&B Industry Research Service’s report on the Indian cement industry studies the various dimensions of the industry and assesses the future prospects for the industry. In addition to this, D&B Industry Research Service also encapsulates the emerging trends in the cement industry and analyses some of the industry’s major concerns.

Some of the emerging trends and major concerns of the Indian cement industry analysed in this report are:
• Fragmentation in the industry
• Rising share of blended cement production
• Possibility of excess capacity in the cement industry post FY09
• Adequate availability of coal – a major fuel for the industry
• A well connected logistic network – a major requisite for the industry
• Greater movement of cement through the bulk route
• Increasing pace of consolidation with entry of global cement majors
• Possibility of fall in cement exports, along with marginal cement imports into the country
• Intense competition necessitating changes in company strategies
• Vertical integration by cement companies

Section I – Industry dynamics deals with the environment in which the cement industry operates, and covers the various facets that determine the dynamics of the industry. The cement industry is one of the basic infrastructure industries and is a significant contributor to the Indian economy in terms of employment generation, tax revenues, and industrial growth. The per capita consumption of cement is considered an important indicator of the country’s economic development, as it is used in almost every sector.

Government policies, competition and ensuing consolidation activities in the Indian cement industry over the years has given rise to an oligopolistic industry structure. Though the concentration of capacities among the larger players has increased in recent times on account of consolidation activity, the industry still exhibits some degree of fragmentation. Around 60 per cent of the total capacity is scattered among approximately 50 large cement companies and over 200 mini cement plants. There is thus scope for further consolidation activity in the industry.

The cement industry is currently in the midst of an interesting phase of robust demand, very high capacity utilisation and firm prices. Demand for cement in the domestic market remains robust, driven by demand from all user segments. Demand from the housing sector continues unabated driven by rising income levels, fiscal incentives and a moderate interest rate regime. The rapid growth recorded by the services sector has led to robust demand for commercial real estate and thus demand for cement. In addition, the government’s keenness to improve the infrastructural facilities in the country and the surge in industrial investments has led to higher demand for cement from these two segments. Domestic cement consumption grew at an accelerated pace of 9.4 per cent (CAGR) during FY04-FY07 as compared to a CAGR of 7.5 per cent over the last 15 years.

Domestic cement production has kept pace with the rise in cement consumption. Additionally, the industry has witnessed a greater acceptance of blended cement. This is reflected in the steady rise in share of Portland pozzolana cement (PPC) in total cement production from 19.1 per cent in FY99 to 60 per cent in FY07. Unlike production, capacity additions in the industry tend to be bunched together, given the indivisible nature of investments in the industry. The bunching up of capacity additions distorts the demand-supply equilibrium in the industry and has an adverse effect on the industry’s profitability. The industry witnessed substantial additions to capacity in FY02, which led to an overcapacity situation. However, since then incremental capacity additions have slowed down and the demand-supply equilibrium has been restored. Consequently, the industry has observed an increase in the operating rates and in prices.

The industry is now investing heavily in augmenting its cement capacity to be able to cater to the expected rise in demand. The planned capacity additions in the cement industry are likely to add (around) 80 million tonnes of capacity (FY08-FY10). On-time commissioning of these capacities could tilt the demand-supply situation towards overcapacity. However, capacity additions are likely to miss the scheduled deadline due to delays on various fronts, such as environmental clearances, delays in supply of equipment, among others. A situation of overcapacity in the cement industry is therefore likely to emerge post-FY09.

On the resources/inputs front, while there are no problems with respect to availability of limestone, there are concerns with regard to availability of adequate quantity of coal — a major fuel — to the industry. Coal receipts by the cement industry have been lower than the assured coal linkages granted to the industry. In a recent policy change, the government has reduced the assured coal supply to around 75 per cent of the cement industry’s total coal requirements. Cement companies are resorting to coal imports and use of alternative fuels (pet coke, lignite) to meet their fuel requirements.

Logistics is another area of concern for the industry, and distribution cost is one of the major costs for the industry. Cement companies are working towards strengthening their distribution network, while concurrently trying to bring down distribution costs. The industry has witnessed a rise in movement of cement through the sea route. Most of the cement sales in the country occur through retail network in the bagged form. The industry is now witnessing a gradual change towards movement of cement through the bulk route. Split-location units are another move adopted by companies to cut down on distribution costs. Under this concept, the clinkerisation unit is located close to the limestone reserves, while the grinding units are located at 2–3 different
locations, generally closer to the markets.

Cement prices, being market determined, have risen sharply since March 2006 largely due to an improvement in the demand-supply dynamics. Cement prices in most of the markets are ruling at all-time highs. Due to the consistently high cement prices, the government has adopted various measures to facilitate imports. This attempt is to ease cement supply and thus rein in rising cement prices; prices have, however, continued to rise.

The rise in input costs has also contributed to the rise in cement prices. Energy, raw material and distribution are the major expenses for the cement industry. The industry is constantly working towards reducing these costs, through measures such as use of alternative fuels, setting up captive power plants, and greater production of blended cement.

Section II – Global perspective analyses the scenario in the global cement industry. Globally, cement production has grown at a CAGR of 7.7 per cent over the last 6 years. The industry is, however, witnessing shifts in production patterns with most of the growth occurring in the developing markets. China and India have emerged as the largest producers and consumers of cement in the world. The global cement industry is highly localised, with demand for cement in most of the countries being met by domestic producers. Thus, international trade in cement is limited. Global cement exports account for only around 7 per cent of the total global cement production.

Demand for cement is closely related to overall economic development and tends to vary across countries, depending on the level of industrialisation and infrastructure development. Global cement majors are strengthening their production bases across countries to mitigate the locational risk associated with operating in individual countries. This has led to increased consolidation activity in the global cement industry. Consequently, the level of concentration in the industry has increased and the top six global players account for around 28 per cent of the global cement capacity. The pace of consolidation activity at the global level is likely to continue.

With the Indian cement industry’s huge potential, the country could witness the entry of more global cement majors or the strengthening of production bases by existing companies. Global cement majors, who adopted the inorganic route to gain entry into the Indian cement industry, already control a substantial part of cement capacity in the country.

India’s share in international cement trade (exports) stood at 5 per cent in 2006. Middle East is one of India’s largest cement export markets, accounting for around 25 per cent of India’s total cement and clinker exports. The region is witnessing substantial additions to cement capacity and there are concerns of a possible fall in cement exports to the Middle East from India. Cement and clinker exports from India declined in FY07, as companies diverted exports to the domestic market to capitalize on the higher domestic cement prices.

The Indian cement industry faces a possible threat from imports, following the removal of all duties (basic customs duty, CVD and SAD) on imported cement. The threat is from Pakistan, India’s immediate neighbour, which currently has excess cement capacity. However, D&B Industry Research Service does not expect cement imports into the country to occur on a large scale, largely due to infrastructural constraints.

Section III – Industry performance reviews the financial performance of the industry over the last 5 years. In line with the cyclical upturn in the cement industry, the financial health of the industry has improved considerably in FY07. The industry has recorded a sharp rise in sales, and marked improvement in profitability. During FY07, its PBDIT (NNRT) margin improved by 9.3 percentage points to 28.9 per cent, while its net profit margin improved by 7.4 percentage points to 16.8 per cent as compared with margins earned in FY06. Cement companies across the sector fared well during FY07. Returns recorded by the cement companies also improved considerably. Backed by the strong cash flows and moderate interest rate regime, the cement industry has been able to bring down its debt-equity ratio, as also its interest incidence.

D&B Industry Research Service expects the cement industry to continue recording healthy sales growth. However, rising input costs — coal, power tariff, prices of transportation fuels — remains a cause of worry.

Section IV – Strategic insight reviews the level of competition in the industry, the growth prospects for the industry, and assesses the intensity of various risks the Indian cement industry faces. Competition in the Indian cement industry has intensified over the last 2 years, with the global cement majors gaining a major foothold in the country. Cement companies are looking for innovative strategies to capture a substantial market share and survive amidst aggressive competition.

The strategies adopted include non-price instruments such as branding, greater expenditure on advertising, innovative packaging, strengthening of their distribution networks as well as several customer-focussed initiatives. Companies are also integrating vertically by moving into the ready-mix concrete business in an attempt to retain their clients. Regional players are also moving out of their regions in an attempt to establish a pan-India presence. This is expected to intensify the level of competition in the industry.

Prospects look bright for the Indian cement industry. Cement consumption would remain robust, driven by higher offtake by all user segments, while prices would remain high because of the tightness in the demand-supply situation. Backed by these, the industry is expected to register rise in sales revenue during FY08 and FY09.

Though there is immense growth potential, the Indian cement industry does face some risks. These include poor infrastructure facilities in the country, possible slowdown in implementation of government policies regarding infrastructure, among others. There are also concerns of a situation of overcapacity emerging in the industry leading to a fall in capacity utilisation rates.