Teena Virmani, Vice- President, Kotak Securities The year 2013 was tough for the industry, and 2014 is not expected to fare much better. Though things will be better, there is still a long way to go, for the sector to get back on track. Teena Virmani, Vice- President, Kotak Securities, shares her views about the year ahead. Excerpts from the interview.
So how do you assess the performance of the cement sector in 2013?
The current installed capacity of the cement industry stand at around 330 – 340 million tonnes per annum. The cement demand, however, was much lower. Most companies had their production volumes up to 60 – 70 per cent of installed capacity. The cement demand growth hovered at around 4 – 5 per cent in the fiscal year. The slowdown was a spillover of decreased growth in consumer sectors such as infrastructure and housing. The GDP of the country too, was very low.
The housing sector, which is the major consumer of cement, saw a decline in real estate demand.. One of the reasons was high interest rates on loans available for the housing sector. Besides this, the ban on sand mining too, impacted the sector.
We also saw very little activity in the infra sector. No major projects were launched and the actual execution of those granted did not take place. Overall, 2013 was not that good for the cement manufacturers.
Has setting up a cement plant become more difficult now?
Land acquisition process is not as smooth as it should be. When it comes to acquiring and building a cement plant, the promoters have to go through a lengthy approval process right from environment clearance to mining leases. The number of approvals required is very large and the time taken for granting is too long. This definitely slows down the growth.
Do you expect good cement demand in 2014?
2014 will not show a sharp revival although we expect the conditions to remain stable at least, if not improve. We feel that after the elections, once we see a stable government in place, we will have a clear idea of the direction in which we are moving ahead. I don´t think new governance will have an immediate impact on the market; it will be a slow and a gradual process. Projects will be planned, approved, tenders will be floated and contracts will be awarded. Only after the projects take off at ground level will we see any demand from the infra sector. So, after the elections, we do not expect any drastic improvements for at least 3- 5 quarters. At the most, we may see a positive and optimistic mindset impacting the market after the elections.
Demand from the rural housing sector too, will help in a revival and we expect it to be at least at 5 per cent. In 2015, the demand is likely to pick up.
How do you view consolidations that happened in 2013?
We saw several major consolidations in the last year. There were capacity additions, too, though the cement demand was low. Industries have to grow whether or not there is demand in the market. 2013 was a year of consolidation and we believe it was the right move for buyers. The consolidations happened at very decent rates and the dollar was at a high so both parties benefited. It was a good move to take over rather than setting up a new facility. The cost of taking over is well worth it, given the hassles of getting a slew of clearances and mining leases in the case of setting up a new plant. Replacement costs too, are very high. In a way, the slowdown was a good opportunity for the buyers.
How do you expect cement prices to move in 2014?
The last fifteen days of December usually see a dip in prices. This is an established pattern as some major cement companies close their books in December. They have to clear the cement stocks before the books are closed. As a result, the market has an over-supply of cement in this period. Prices usually come down at this time but we expect them to start improving from January onwards and keep rising till May – June 2014. After June, the pricing will depend on the monsoon. There is a likelihood of prices dipping in June. Overall, we expect prices to be on the higher side in 2014 as compared to 2013. We are expecting better days for the housing, construction and infrastructure sectors and that will certainly help in improving cement prices.
Will cement companies have a better profit margins in 2014 with the decreasing costs of production?
A good cost structure will have to be put in place for the industry. As cement prices went up, the cost of production too, went up dramatically, the cost of raw material went up, and the rise in diesel prices raised the cost of freight transport. Although the cost of coal had come down slightly, it was offset by the rise of the dollar. We don´t see costs coming down in the near future. Cement prices may go up but the cost of production is not likely to come down.
Are cement manufacturers cutting production to save on limestone reserves?
No, the cut in production is purely related to the demand and supply scenario. It has nothing to do with conservation of limestone reserves. Companies like ACC, Ambuja, UltraTech, have reserves sufficient for more than 60 – 70 years, so there is no need to conserve resources by cutting production.
The prices and the production capacity is governed by the demand and 2013 saw a dip in demand. The cut in production was in response to the lower demand. As the infrastructure and housing sectors pick up, we will see the production volumes rising correspondingly.
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