2013 CemWeek's India Cement Sector Sentiment Survey

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CEMENT & CONSTRUCTION MATERIALS

CEMWEEK’S INDIA CEMENT SECTOR SENTIMENT SURVEY

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FOREWORD

T

he CW Group is pleased to release the 4th Annual India Cement Sector Business Sentiment Survey and share the findings with the members of the industry.

For the past three years in a row, the CW Group has been at the very heart of the global cement industry, providing comprehensive and reliable market intelligence data and extensive coverage on important industry topics. With the release of the 4th edition of the Annual India Cement Sector Business Sentiment Survey, we continue to bring you insightful information about the evolution of the views of the individuals participating in the development of this exciting global industry.

The task of surveying the second largest cement market in the world would not have been possible without the support of certain industry members that manifested a particular dedication to understanding India’s cement sector and the sentiment among its professionals. In this respect, we thank Loesche, Testing Bluhm & Feuerherdt and GMI Global for their support, and our own India’s Cement and Construction Materials journal.

Robert Madeira Managing Director and Head of Research, CW Group E: rm@cwgrp.com | T: +1-702-430-1748 Laura Goldner Senior Consultant, CW Group E: lg@cwgrp.com | T: +1-832-622-8921 Tudor Mircea Market Services & Marketing Manager, CW Group E: tm@cwgrp.com | T: +4-075-223-4426

As a leading cement sector research house, the CW Group is aware that the survey only mirrors the reality of the industry at a certain point in time. As such, the Survey is not intended to provide a complete view, nor answer all questions that may arise about the market. However, we see it as a starting point for further discussion and a source of insight for the development of future tailor-made business strategies. Do not hesitate to contact us should you wish to continue the dialog and hear more about our views.

CemWeek’s 2013 India Cement Sector Survey

1

INTRODUCTION

SURVEY EXECUTIVE SUMMARY

O

ptimism continues to be the name of the game for the Indian cement industry – a function of long-term trends as well as human nature. But on a closer look, the survey shows that the optimism only runs skin deep and that it has already been eroded by an increasing percentage of industry members who feel dissatisfied with the overall performance of the field last year.

For instance, the percentage of those who believe the industry performed “well” dropped from 43 percent in 2012 to 26 percent in 2013, while the number of respondents who believe the industry performed poorly almost tripled from 8 percent last year to 22 percent in 2013.

Regarding the future evolution of the industry, survey participants continue to be on the optimistic side and hope for a “somewhat better” or “much better” performance compared to the last 6 months.

Confidence in career prospects looks nearly the same in this year’s survey of the industry, with the overall career-related sentiments on

2

CemWeek’s 2013 India Cement Sector Survey

the positive side. A substantial part of respondents – 47 percent, believe they have a fairly good chance for a career boost during the next period. Some confidence erosion manifested in the percentage of those highly confident about their prospects, whose numbers dropped from 21 percent in 2013 to 13 percent this year.

The first two major challenges for the industry to overcome in the next year are no surprises: industry overcapacity and profitability. These stay on the minds of 34 percent and 20 percent of respondents, respectively.

Energy price stands third in the top of concerns for the next year, in spite of the global fuel price downtrend reported during the last period. India’s solid fuel supplydemand gap and dependence on imported coal will further deteriorate – by May 2013 imports year over year increased by 43 percent. Currently energy prices are strongly subsidized – an element which may change in the near future.

Expectations about improvements in profitability are moderate. The findings show that the proportion of those who believe that the profitability will actually decrease more than doubled compared to last year, from 11 percent to 23 percent. This correlates with concerns about profitability mentioned earlier, and signals that in spite of declared optimism, more members of the industry are circumspect about its future evolution.

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Our data reveals that capital expense reductions are on an upward trend. Survey participants who foresee cuts in capital expense doubled from 8 to 16 percent from last year, while the number of those expecting an increase in capital expenditures dropped from 57 to 36 percent.

In terms of input costs, about 60 percent of survey participants believe these will be reduced or stay the same over the next year.

This is an almost 15 percent drop compared to last year. On the other hand, the number of those who expect input costs to exert even more pressure on total costs increased from 25 to 40 percent. However, half of participants believe their company will hire “a bit more/a lot more” headcount in the next 12 months. This may indicate that the industry needs to identify in the near future ways to relieve the pressure of input costs on the total costs of doing business, ways which may include keeping the same headcount, or even reducing it.

minds of both top and middle management. While as a whole the economy is expected to slow down even further, cement industry’s flag continues to fly high.

But for how long?

The overall pulse of the industry continues to be on the positive side, but this year’s survey highlights an underground current of concern and dissatisfaction. Issues such as energy price, overcapacity, controlling costs and operational efficiency linger in the

CemWeek’s 2013 India Cement Sector Survey

3

SURVEY

DEMOGRAPHICS

F

4%

or both 2013 and 2012 the sample base comprised a mix of Indian industry professionals, aiming to capture an accurate overview from their experience, perceptions and approaches. Compared to 2012, the pool of respondents has overall remained the same, but 2013 did experience a slight decrease in cement company and equipment vendor involvement.

11%

INDUSTRY FUNCTIONAL AREA AND ORGANIZATION LEVEL

47% 13%

The companies that participated in the survey represent a variety of roles within the industry – from sales and marketing, production and engineering, to trading and logistics and planning.

Consulting and research Other Planning, finance & other administrative

Several categories of companies in the cement industry answered the questions of the survey. As with previous editions, most of the respondents were cement producers – 50 percent, followed by equipment vendors with 18 percent of respondents and industry analysts with 12 percent.

8%

Production, operations & engineering Sales & marketing Trading and logistics

Thirty-four percent of survey participants identified themselves as senior management – defined at CEO, General Manager, Senior or Executive Vice President level. Another 23 percent were classified as managers (i.e., regional manager, director), and 42 percent as professional staff.

28%

50%

Cement company Cement trader Equipment vendor Industry analyst, consultant Other 9%

11%

12%

4

CemWeek’s 2013 India Cement Sector Survey

18%

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42%

23%

34%

Senior management Management Professionalstaf

LOCATION The sample corresponds to the five regions that comprise the Indian cement industry.

The northern and western regions each participated at 28 percent and 32 percent respectively, consistent with last year’s survey, followed by the southern region which reached 25 percent survey presence (a 1% increase). The eastern and northeastern regions participated at 7 percent each.

35 32%

30 28%

25

25%

20 15 East 10 5 0

North 7%

7%

Northeast South West

CemWeek’s 2013 India Cement Sector Survey

5

SURVEY

FINDINGS

RECENT PERFORMANCE

T

Q.

he 2013 survey included an increasing number of negative responses concerning thepast performance of the industry. While in 2012 only 9 percent believed the industry performed poorly or terribly, the percentage ramped up to 26 percent in 2013.

2012

2013

INDUSTRY PERFORMANCE IN THE LAST SIX MONTHS 8%

26%

12%

Generally speaking, how has the cement industry performed in the past 6 months?

41%

22%

43%

Excellent

Well

8% 1%

36%

OK

We suspect the reason behind the increase in negative responses may be the recent

Poorly

4%

Terrible

deceleration of the cement output growth rate, as illustrated in the table below.

YOY PRODUCTION 12%

8%

4%

Q4FY2013

Q3FY2013

Q2FY2013

Q1FY2013

Q4FY2012

Q3FY2012

Q2FY2012

0%

Source: CW Group Research

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cwgrp.com

INDUSTRY PERFORMANCE IN THE LAST SIX MONTHS BY FUNCTIONAL AREA

2013

6%

2012

1% Terrible

Terrible

3%

3%

12% 10%

28% Poorly

Poorly

15% 18%

1%

OK

38% 35% 47%

OK

46%

Well

35% 39% 35% 42% 40% 47%

13% Well 29% 10% 11% 14%

15% Excellent

Excellent

4% 3%

0% 10% 20% 30% 40% 50% Senior Management

0% 10% 20% 30% 40% 50% Management

Professional Staff

Of the different functional areas, cement traders were the least positive about the recent performance of the industry, with 40 percent of the group considering it as “poor” or “terrible”.

PAST PERFORMANCE VERSUS EXPECTATIONS

C

ement production expanded significantly between 2010 and 2012 by a 7 percent growth rate to 236 million tons in 2012, driven by housing and commercial real estate investments. The rapid increase in cement demand created a very positive business climate, but after the credit to both sectors started to decline in mid-2012, cement production growth rate slowed down.

Q.

Looking back at the past 6 months how did it meet your expectations?

The industry did not see this change coming and almost half of the respondents to the 2013 survey feel their expectations about the past industry performance were not met.

CemWeek’s 2013 India Cement Sector Survey

7

SURVEY FINDINGS

2013

4%

2012

INDUSTRY PERFORMANCE VS. EXPECTATIONS

3%

14%

36%

24%

Far exceeded

41%

5%

45%

Exceeded

Met my expectations

Disappointment was particularly high in the professional staff and senior management groups, with 58 percent and 45 percent of

26%

Below my expectations

2%

Nowhere near my expectations

participants respectively stating that the results were “below” or “nowhere near” their expectations.

INDUSTRY PERFORMANCE VS. EXPECTATIONS BY RESPONDENTS FUNCTIONAL AREA

Nowhere near my expectations

13%

2013

3% 23%

Below my expectations

55% 42% 42%

Met my expectations

26% 42% 13% 19% 11% 10%

Exceeded

Far exceeded

Nowhere near my expectations

30% 26% 20%

Below my expectations

46% 45% 43%

Met my expectations 23% 21% 28%

Exceeded

Far exceeded

5% 5%

3% 0%

20% 40% 60%

Senior Management

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CemWeek’s 2013 India Cement Sector Survey

2012

1% 3% 4%

0% Management

20% 40% 60%

Professional Staff

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EXPECTATIONS FOR THE FUTURE

P

articipants are more optimistic about the future as compared to the previous year.

Caution seems to be the rule in 2013 among survey participants, as the percentage of respondents that think the industry will improve in the next 12 months remained unchanged from last year, at 55 percent.

Q.

How will the next 12 months perform compared to the last 6 months?

42%

12%

43%

Much better

Somewhat better

7% 1%

2013

13%

11% 1%

2012

FUTURE INDUSTRY PERFORMANCE 37%

33%

About the same

Somewhat worse

A lot worse

However the industry looks more optimistic than in 2012, and this year only 8 percent believe things are going to get worse – a decrease of 4 points versus last year. Industry analysts and cement companies are the most optimistic groups, with 62 and 55 percent anticipating a better future. This comes to contradict the projected growth rate for this year, which falls behind the 8.2 percent registered in 2012. Market perspective on a longer term still looks favorable, with stimulus offered in the construction sector through decreases in interest rates. However, the impact will be less visible in 2013, when the industry is expected to expand by only 5 percent versus the initially projected 7-8 percent.

CemWeek’s 2013 India Cement Sector Survey

9

SURVEY FINDINGS FUTURE INDUSTRY EXPECTATIONS BY RESPONDENTS FUNCTIONAL AREA

2013 A lot worse

2012 A lot worse

4%

3% 13%

Somewhat worse

5% 32% 31%

About the same Somewhat better 15% 8% 13% 0%

20%

36% 29% 32% 38% 47% 47%

About the same

47% 40% 58% 34%

Much better

16% 11% 5%

Somewhat worse

Somewhat better 10% 13% 14%

Much better 40%

60%

Senior Management

0%

Management

20%

40%

60%

Professional Staff

MORE COMPANIES FORESEE A DECLINE IN PROFITABILITY

I

10

t is highly noticeable that the proportion of participants that believe the profitability will deteriorate over the next period more than doubled from 2012.

CemWeek’s 2013 India Cement Sector Survey

Q.

How will profitability change?

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32%

57%

Improve

23%

32%

No change

This loss of confidence could have been triggered by a recent decline in cement prices that started in March 2013 in most regions,

11%

2012

45%

2013

PROFITABILITY IMPROVEMENT PERSPECTIVES

Decrease

combined with a weak demand that leaves the companies with small room for price increases and with a substantial growth in freight costs.

PRICE RS PER BAG 320 310 300 290 280 270 260 250 240

For the quarter ended March 2013, only three out of the twelve companies included in CW Group’s financial results analysis

increased their net profits, while for most of them the declines were in the range of double digits.

CemWeek’s 2013 India Cement Sector Survey

11

SURVEY FINDINGS PROFITABILITY IMPROVEMENT PERSPECTIVES BY RESPONDENTS FUNCTIONAL AREA

2013

2012 14%

38% Decrease

Decrease

12%

8%

14%

9% 29%

22% No change

No change

36%

30%

41%

37% 57%

40% Improve

Improve

52%

62%

46% 0%

20%

40%

60%

54% 0%

80%

Senior Management

Management

20%

40%

60%

80%

Professional Staff

INPUT COSTS PRESSURE TO INCREASE OVER THE NEXT YEAR

P

erception about input costs flipped from 2012 to 2013. Last year 42 percent of participants were positive about an improvement in input costs and only 25 percent were expecting an increase. In 2013 only a mere 21 percent foresee a decline in input costs, while 40 percent anticipate that costs will climb in the next 12 months.

More than 60 percent of respondents expect that input costs will be maintained at current levels or be reduced in the next 12 months.

12

CemWeek’s 2013 India Cement Sector Survey

Q.

How do you estimate that your input costs will change?

cwgrp.com

40%

40%

42%

33%

Improve

Stay the same

2012

21%

2013

INPUT COSTS MODIFICATIONS FOR THE NEXT PERIOD

25%

Worsen

INPUT COSTS EXPECTATIONS BY RESPONDENTS FUNCTIONAL AREA

2013

2012

31% Worsen

25% Worsen

44%

22%

47%

28%

51% Stay the same

31% Stay the same

20% 39%

32% 37%

18% Improve

45% Improve

36%

47%

14% 0%

20%

36% 40%

Senior Management

60%

0% Management

Senior management is the less optimistic; only 14 percent of high level executives look forward to reduced input costs, compared to a 36 percent of medium-level executives and 18 percent of professional staff.

20%

40%

60%

Professional Staff

Respondents of the management group had the biggest change in expectations from previous year. In 2012, 79 percent of the group was confident that the costs will stay the same or improve, while in 2013 only 56 percent believes so.

CemWeek’s 2013 India Cement Sector Survey

13

SURVEY FINDINGS CAPITAL INVESTMENTS EXPECTED TO SLOW DOWN

W

ith the economy slowing down and a weak beginning of 2013, where most cement companies observed a decrease in profitability, the number of participants expecting their companies to cut capital expenditures in the next 12 months has increased from 2012.

Q.

How will your company’s capital budget change?

2013

CAPITAL INVESTMENT EXPECTATIONS FOR THE NEXT PERIOD

2012

36%

48%

16%

57%

35%

Increase

Stay the same

8%

Decrease

CAPITAL BUDGET CHANGES BY RESPONDENTS FUNCTIONAL AREA

2013

2012 11%

27% Decrease

Decrease

4%

5%

11%

7% 39%

47% Stay the same

Stay the same

44%

27%

53%

36% 50%

27% Increase

Increase

52%

68%

36% 0%

20% 40% 60% 80% Senior Management

14

57%

CemWeek’s 2013 India Cement Sector Survey

Management

0%

20% 40% 60% 80% Professional Staff

cwgrp.com

The local cement industry will need to handle overcapacity for at least a few months, so most

CAREER BOOST CONFIDENCE SLIGHTLY DECLINES

T

his year respondents are somewhat less certain about a boost in their careers compared to last year.

Among the three categories of survey participants, only the professional staff and management groups show confidence about a boost in their careers in the next 12 months.

of the cuts in capex are expected to come from a slowdown in expansion projects.

Q.

Are you confident your career will see a boost in the next 12 months?

47%

21%

Highly confident

33%

46%

Fairly confident

4% 4%

29%

Stay the same

Highly concerned

4%

2012

13%

2013

CONFIDENCE IN CAREER BOOST

At risk

Senior management remains the most self-assured of the three groups, but this year their confidence declined.

While last year 79% of senior management respondents were confident about a boost in their careers, the p e rc e n t a g e was reduced to 66% in 2013.

CemWeek’s 2013 India Cement Sector Survey

15

SURVEY FINDINGS CONFIDENCE IN CAREER BOOST BY RESPONDENTS FUNCTIONAL AREA

2013

4% 8%

At risk

2012

7% 3%

At risk

9% Highly concerned

Highly concerned 34% 31% 34%

Stay the same

47% 50% 45%

Fairly confident 6% 12% 21%

Highly confident 0%

20%

40%

Senior Management

37% 24% 21% 36%

Stay the same

Fairly confident

55% 52% 20% 18% 27%

Highly confident 0%

60% Management

Half of respondents working in cement companies say they are fairly confident about career prospects while the rest believe they will remain the same. Cement traders on their side are equally split in saying their jobs are

20%

40%

60%

Professional Staff

fairly safe, at risk, highly or fairly secured, while among equipment traders the sentiment varies between fair confidence, with 45 percent, high concern with 20 percent and staying the same with 20 percent of the total answers.

COMPANIES TO RAISE OR MAINTAIN HEADCOUNT

A

ccording to half of the survey respondents, headcount in their companies is expected to increase in the next 12 months. However, with profitability going down, a weaker demand forecast for the following period and expected cost cuts, this seems to be an unlikely scenario.

16

CemWeek’s 2013 India Cement Sector Survey

Q.

Will your company hire more employees?

cwgrp.com

41%

11%

42%

53% A lot more

8%

32%

A bit more

Remain the same

2012

9%

2013

EXPECTED HEADCOUNT MODIFICATIONS OVER THE NEXT PERIOD

4%

Lay off workers

EXPECTED HEADCOUNT MODIFICATIONS BY RESPONDENTS FUNCTIONAL AREA

2013

7% Lay off workers

2012

5% Lay off workers

20% 3%

3% 3%

47% Remain the same

43% Remain the same

36%

27%

39%

24% 47%

A bit more

A bit more

32%

57% 59%

47% 7% A lot more

6% A lot more

12%

14%

11% 0% 20% 40% 60% 80% Senior Management

13%

Management

0% 20% 40% 60% 80% Professional Staff

Increase in workforce will likely come from cement producers, as 59 percent of the group’s respondents believe their companies will hire “a bit more” or “a lot more” employees in the next 12 months.

CemWeek’s 2013 India Cement Sector Survey

17

SURVEY FINDINGS KEY ISSUES OF THE INDUSTRY

W

ith cement prices sliding and no signs of recovery in the short term, controlling costs becomes more important than ever. April 2013 cement price is 10 percent down from a year ago and at this point some companies could be operating with marginal profits.

Under this price scenario, it will be a challenge for Indian companies to transfer any future increase in cost to their customers.

Q.

About 64 percent of respondents in 2013 classified both cost controlling and improving domestic sales as very important for the company. While in last year’s survey both issues had the same relevance, this year “controlling costs” has surpassed “improving domestic sales” by almost 20 points.

What will be your company’s most important theme for the next 12 months?

2013

4% 7%

2012

COMPANIES’ AGENDAS MAIN DRIVERS

5% 7%

3% 2%

42%

30%

3% 6%

22%

29%

12% 1% 5% 3%

10%

10%

Alternative fuels

Improving domestic sales

Capacity expansion

Operational improvement

Controlling costs

Securing coal and fuel

Environmental issues

Securing limestone

Finding new export opportunities

Other

Comparative analysis between demographic groups based on type of priority shows that professional staff is the most concerned of the surveyed categories about cost controlling. Senior and middle management share about the same degree of concern for the issues mentioned.

18

CemWeek’s 2013 India Cement Sector Survey

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CEMENT & CONSTRUCTION MATERIALS

SURVEY FINDINGS COMPANIES’ AGENDAS DRIVERS BY RESPONDENTS FUNCTIONAL AREA

2013

2% 8% 5%

Other Securing limestone

18% 4% 11% 18% 31% 22%

Improving domestic Finding new export

4% 3% 2% 8%

Environmental issues Controlling costs

Alternative fuels 0%

53%

Alternative fuels

20%

40%

60%

2012

11% 5% 13%

Other Securing limestone

4% 5%

Securing coal and fuel

3%

18% 4% 11% 18% 31% 22%

8% 8% 13%

Operational Improving domestic

7% 9% 3% 3% 4%

Finding new export

4% 3% 2% 8%

Environmental issues

4% 8% 11% 2% 4% 5% 0%

31% 35%

4% 8% 11% 2% 4% 5%

Capacity expansion

2% 8% 5%

Q.

20%

31% 35%

53%

60%

0% Senior Management

20

6% 11% 6% 4% 5% 6%

Alternative fuels 40%

32% 35% 22%

Controlling costs Capacity expansion

20%

40%

6% 4% 5% 6%

KEY CHALLENGES 0% FACING20% THE INDUSTRY

E

xcess capacity is the main concern in senior management, as 43% of the group identified it as the biggest challenge to overcome in the next years. Management and professional staff groups also recognized it as the most relevant issue.

In FY 2012 – 2013 estimated utilization rate stood at a disappointing 71 percent from a high 89 percent reached in FY 2009 – 2010.

30% 32% 28%

Management

CemWeek’s 2013 India Cement Sector Survey

What is the biggest8% 8% Operational challenge 13% 32% Improving domestic the Indian 7% 22% 35% Findingcement new export sector 9% 3% Environmental issues will face in3% 4% 30% the next few Controlling costs 32% 28% 6% years?

Capacity expansion 11%

Securing coal and fuel

3%

Operational

11% 5% 13%

Securing limestone

4% 5%

Securing coal and fuel

Other

60% Professional Staff

cwgrp.com

40%

10% 5%

6%

34%

20%

6% 4%4% 6% 6%

Energy Prices

Raw materials availability

Environment/emissions

Regulatory

Excess capacity

Securing fuels

Plant efficiency

Shortage of skilled labor

Profitability

Other

Profitability was ranked as the second most important challenge by the senior management and professional staff groups, while the management group believed energy prices would remain a concern for the industry over the next period.

2013

BIGGEST CHALLENGE FOR INDIAN CEMENT SECTOR

The more strategic issue of fuel security was only identified by senior management, while shortage of skilled labor – a more operational aspect, represented the third most important challenge for the professional staff group.

CHALLENGES TO BE FACED OVER THE NEXT FEW YEARS Other Shortage of skilled Securing fuels Regulatory Raw materials Profitability Plant efficiency Excess capacity Environment/emissions Energy Prices

4% 4% 8% 16%

2013

11% 2% 8% 3% 7% 4% 5%

27% 12% 19% 4% 8% 5% 27% 35% 43% 4% 12% 9% 19% 5%

0% 10% 20% 30% 40% 50% Senior Management

Management

Professional Staff

CemWeek’s 2013 India Cement Sector Survey

21

SURVEY

CONCLUSIONS

T

o sum up, the Indian cement industry has passed another demanding year, and the next period will besprinkled with both challenges and opportunities.

The CW Group and CemWeek Magazine’s 4th Annual India Cement Sector Business Sentiment Survey offers solid insights about sentiments held among industry participants and professionals, its main sectors and regions.

Overall, the last six months’ industry performance was considered reasonable.

But as highlighted in the executive summary, a large part of the respondents feel it did not meet their expectations. The industry is almost equally divided between representatives whose expectations remained intact for the period, and respondents with expectations unresolved. This equilibrium will probably continue to hold through the second part of the year.

In order to support business growth, the Indian cement industry’s main three focus areas for the next period will be managing the excess capacity, the improvement of profitability and the level of energy prices – a major change compared to the previous year.

All three answers indicate that the industry expects to go through a period of adjustment and that awareness is growing regarding the challenges ahead.

These challenges come both from the outside, through the threats posed by the generally more difficult economic context, but also from the inside, where the time of tough decisions does not look so far away as the year before.

22

CemWeek’s 2013 India Cement Sector Survey

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