ICR team takes a look at some published information to peep into the year ahead.
India Brand Equity Foundation
Concrete demand
India?s cement demand is expected to reach 550-600 million tonnes per annum by 2025. The sectors boosting this demand are housing, infrastructure, commercial construction and industrial construction.
Cement demand in India is expected to increase due to the government?s push for large infrastructure projects, leading to 45 million tonnes (MT) of cement needed in the next three to four years.
To meet the rise in demand, cement companies are expected to add 56 MT capacity over the next three years. The cement capacity in India may register a growth of eight per cent by next year end to 395 MT from the current level of 366 MT. It may increase further to 421 MT by the end of 2017. The country?s per capita consumption stands at around 190 kg.
The Indian cement industry is dominated by a few companies. The top 20 cement companies account for almost 70 per cent of the total cement production of the country. A total of 188 large cement plants together account for 97 per cent of the total installed capacity in the country, with 365 small plants account for the rest. Of these large cement plants, 77 are located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu.
Investments
On the back of growing demand, due to increased construction and infrastructural activities, the cement sector in India has seen many investments and developments in recent times.
According to data released by the Department of Industrial Policy and Promotion (DIPP), cement and gypsum products attracted Foreign Direct Investment (FDI) worth US$ 3.1 billion between April 2000 and September 2015.
Some of the major investments in the Indian cement industry are as follows: Birla Corporation Ltd, a part of the MP Birla Group, has agreed to acquire two cement assets of Lafarge India for an enterprise value of Rs 5,000 crore.
Dalmia Cement (Bharat) Ltd has invested around Rs 2,000 crore in expanding its business in the North East over the past two years. The company currently has three manufacturing plants in the region – one in Meghalaya and two in Assam. JSW Group plans to expand its cement production capacity to 30 MTPA from 5 MTPA by setting up grinding units closer to its steel plants.
UltraTech Cement Ltd has charted out its next phase of greenfield expansion after a period of aggressive acquisitions over the last two years. UltraTech has plans to set up two greenfield grinding units in Bihar and West Bengal.
UltraTech Cement Ltd bought two cement plants and related power assets of Jaiprakash Associates Ltd in Madhya Pradesh for Rs 5,400 crore.
JSW Cement Ltd has planned to set up a 3 MTPA clinkerisation plant at Chittapur in Karnataka at an estimated cost of Rs 2,500 crore.
Andhra Cements Ltd has commenced the commercial production in the company?s cement plants – Durga Cement Works at Dachepalli, Guntur and Visakha Cement Works at Visakhapatnam.
Government Initiatives
In the 12th Five-Year Plan, the Government of India plans to increase investment in infrastructure to the tune of $1 trillion and increase the industry?s capacity to 150 MT. The Cement Corporation of India (CCI) was incorporated by the Government of India in 1965 to achieve self-sufficiency in cement production in the country. Currently, CCI has 10 units spread over eight states in India.
In order to help the private sector companies thrive in the industry, the government has been approving their investment schemes. Some such initiatives by the government in the recent past are as follows:
The Government of Tamil Nadu has launched low priced cement branded ?Amma? Cement. The sale of the cement started in Tiruchi at Rs 190 a bag through the Tamil Nadu Civil Supplies Corporation (TNCSC). Sales commenced in five godowns of TNCSC and will be rolled out in stages with the low priced cement available across the state from 470 outlets.
The Government of Kerala has accorded sanction to Malabar Cements Ltd to set up a bulk cement handling unit at Kochi Port at an investment of Rs 160 crore.
The Andhra Pradesh State Investment Promotion Board (SIPB) has approved proposals worth Rs 9,200 crore including three cement plants and concessions to Hero MotoCorp project. The total capacity of these three cement plants is likely to be about 12 MTPA and the plants are expected to generate employment for nearly 4,000 people directly and a few thousands more indirectly.
India has joined hands with Switzerland to reduce energy consumption and develop newer methods in the country for more efficient cement production, which will help India meet its rising demand for cement in the infrastructure sector.
The Government of India has decided to adopt cement instead of bitumen for the construction of all new road projects on the grounds that cement is more durable and cheaper to maintain than bitumen in the long run.
Road Ahead
The eastern states of India are likely to be the newer and virgin markets for cement companies, and could contribute to their bottom line in the future. In the next 10 years, India could become the main exporter of clinker and gray cement to the Middle East, Africa, and other developing nations of the world. Cement plants near the ports, for instance the plants in Gujarat and Visakhapatnam, will have an added advantage for exports and will logistically be well armed to face stiff competition from cement plants in the interior of the country.
A large number of foreign players are also expected to enter the cement sector, owing to the profit margins and steady demand. In future, domestic cement companies could go for global listings either through the FCCB route or the GDR route. With help from the government in terms of friendlier laws, lower taxation, and increased infrastructure spending, the sector will grow and take India?s economy forward along with it.
Reliance Securities
Weak Earnings
Cement firms? Q3 earnings may dip on dismal pricing environment. Cement companies are likely to witness a muted growth in y-o-y earnings A delay in capex revival along with dismal pricing environment is likely to affect performance of cement companies in the third quarter of this fiscal, says a Reliance Securities report. "Cement companies are likely to witness a muted growth in y-o-y earnings. The performance of cement companies is likely to be affected in the December 2015 quarter due to delay in capex revival along with dismal pricing environment," the report said.
Average volume growth is expected to the tune of six percent year-on-year mainly led by volume push, whereas average realisations are down by one percent y-o-y and two per cent on a q-o-q basis. Notably, softened fuel and input prices are likely to arrest margin erosion from realisations dip as operating cost/tonne is expected to decline by three per cent y-o-y, the report said. Companies having substantial exposure in eastern, western and central regions are likely to report maximum deterioration in operating margins as realisations in these regions have witnessed an average yearly decline of 4-6 percent y-o-y.
The report foresees FY17 as being better for cement companies mainly on account of low base of volume growth, realisations recovery, expected pickup in construction activities in the busy season and possible pickup in rural consumption. The report said that the demand environment remained tepid. Demand scenario remained abysmal and it could not see a convincing bounce-back post the seasonal overhang owing to impediments to private investments and decelerating rural demand. "Cement companies under our coverage have witnessed an average volume growth of 6 per cent mainly led by new capacity and volume push," it said.
ICRA
Moderate Demand
Given the capacity overhang and a moderate demand growth, capacity utilisation is likely to decline marginally to 70 per cent in FY16, says an ICRA report. India?s cement demand is likely to improve gradually in the medium term in line with recovery in infrastructure, investment cycle and overall economy, says a report from ICRA.
The results of policy initiatives taken by the new government will take time to materialise. With demand growth showing a sluggish trend during the first half of FY16, ICRA expects the pace of recovery in the cement industry to be moderate at 3.8-4.0 per cent during 2015-16.
Given the capacity overhang and a moderate demand growth, capacity utilisation is likely to decline marginally to 70 per cent in FY16. But it is expected to improve to 73 per cent in FY17 driven by both pick up in demand as well as slowdown in new capacity addition, adds the report.
All-India cement production grew by 1.26 per cent in the first half of FY16 compared with 9.73 per cent in the corresponding period of FY15.
Sabyasachi Majumdar, senior vice-president, ICRA Limited, said, "The overall growth of 1.26 per cent in H1 FY16 was impacted by continued muted demand from key consuming industries (real estate and infrastructure), slow recovery in infrastructure spending and high base effect (as cement demand had increased by 9.73 per cent in the corresponding period last year). Further, muted growth in the Minimum Support Price (MSP) for crops for FY2015-16 as well as drought conditions affected agricultural incomes and post-monsoon rural demand for cement for housing and other purposes."