India’s Cement Industries

THE EQUICOM Outlook On

India’s Cement Industries

CONTENT

Introduction

Key Points

Prospects

Sector Growth

Economic Growth with Cement Sector

Comparison

Conclusion

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 fiscal year (FY13) from 336.1Mt reached in the last fiscal. It had a total capacity of about 300 million tonnes (MT) as of financial year ended 2010-11, The figure is expected to double to reach almost 550 million tonnes by 2020, as per estimates by the Cement Manufacturers Association (CMA). As of 2011, there were 137 large and 365 mini cement plants in India. Consolidation has taken place with the top three players alone controlling almost 35% of the capacity. However, the balance capacity still remains quite fragmented.

In India, cement demand emanates from four key segments — housing, accounting for 67%; infrastructure for 13%; commercial construction for 11%; and industrial sector for 9%. The cement industry has evolved in the form of clusters across the country due to the location of limestone reserves in certain states. Presently, there are seven clusters, namely the Satna cluster in Madhya Pradesh; Chandrapur in north Andhra Pradesh and Maharashtra; Gulbarga in north Karnataka and east Andhra Pradesh; Chanderia in south Rajasthan, Jawad and Neemuch in Madhya Pradesh; Bilaspur in Chattisgarh; Yerraguntla in south Andhra Pradesh and Nalgonda in central Andhra Pradesh.

Despite the fact that the Indian cement industry has grown at a commendable rate in the last decade, registering a growth of nearly 9% to 10%, the per capita consumption still remains substantially poor when compared with the world average.

While China registered the highest per capita cement consumption in 2010 of about 1,380 kg, India stood much lower at 230 kg. This underlines the tremendous scope for growth in the Indian cement industry in the long term.

Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances can prove to be uneconomical. This has resulted in cement being largely 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 as compared to demand, prices have remained southbound, especially in the last one year. Nevertheless, considering the government’s thrust on infrastructure, long term demand remains intact.

Given the high potential for growth, quite a few foreign transnational companies have displayed their interest in the Indian markets. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim has increased its stake in domestic companies Ambuja Cements and ACC to gain full control. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, another wave of consolidation would not come as a surprise.

Key Points SUPPLY

The demand-supply situation is high skewed with the latter being significantly higher.

DEMAND

Housing sector acts as the principal growth driver for cement.

However, recently industrial and infrastructure sectors have also emerged as demand drivers.

BARRIERS TO ENTRY

High capital costs and long gestation periods.

Access to limestone reserves (key input) also acts as a significant entry barrier.

BARGAINING POWER OF SUPPLIERS

Licensing of coal and limestone reserves, supply of power from the state grid etc are all controlled by a single entity, which is the government. However, nowadays producers are relying more on captive power, but the shortage of coal and volatile fuel prices remain a concern.

BARGAINING POWER OF CUSTOMERS

Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company.

However, things are changing and few brands have started commanding a premium on account of better quality perception.

COMPETITION

Intense competition with players expanding reach and achieving pan India presence.

PROSPECTS The growth of the Indian economy has slowed down in recent times on account of 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 the overall economy and the real estate and construction sector in particular.

The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 60-70% of the country’s cement. If the slowdown in real estate persists 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, several major capacity additions are expected in the next few years. Hence, the supply overhang is likely to persist for at least 2-3 years. This will keep a constant pressure on cement realizations. On the demand front, the cement industry is likely to maintain its growth 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 likely to be the main growth drivers.

In the Union Budget 2011-12, the government restructured the excise duty on cement in a way that would effectively increase the tax incidence on the cement industry. However, certain initiatives chalked out to benefit the user industries would in turn boost demand for cement. Custom duties on key inputs such as pet coke and gypsum were also reduced which would provide some marginal relief against the rising costs of inputs.

SECTOR GROWTH Growth in Cement Demand (All Over India)

IN MILLION TONES

200203

200304

200405

200506

200607

200708

200809

201011

DOMESTIC CONSUMPTION YEAR-ON-YEAR GROWTH %

99

108

114

123

136

149

164

178

APRNOV 11 100

9.7

8.7

5.8

8.1

10.1

9.9

10.1

8.4

12.5

Financial year 2011-12 During financial year 2011-12 (FY12), the cement industry added nearly 28 MT over and above the 60 MT added in the previous year taking the total capacity to nearly 300 MT. However, cement demand during the year grew at a paltry rate of 5.3%, the lowest since 2003-04. A significant slowdown was witnessed following the first quarter of FY11 mainly on account of the several hikes in key lending rates by the Reserve Bank of India aimed at curbing the inflationary pressures. The credit crunch resulting from the monetary 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 was even worse in the southern region, which witnessed the highest capacity additions.

The low cement demand severely affected average industry realizations (average price per bag of cement). Additional capacities coming on stream further intensified the oversupply situation. On the cost front, rising input and fuel costs severely hurt the margins of cement players. Export markets also remained sluggish due to the slowdown in the global economy, and particularly the sagging construction activity in the Gulf region.

Fig: Regional Distribution of Cement Industries

Growth in Cement Consumption in Major States of India (CAGR between20072011)

GROWTH (%) 18 16 14 12 10 8 6

GROWTH (%)

4 2 0 ANDHRA HARYANA PRADESH

ORISSA

GUJRAT

M.P

DELHI

U.P

PUNJAB

ECONOMIC GROWTH WITH CEMENT SECTORS The Role of Cement Industry in India GDP is significant in the economic development of the country. The cement industry in India is one of the oldest sectors in India. The industry is driven by the immense growth in the housing sector, the infrastructure development, and construction of transportation systems. An increased outflow in infrastructure sector, by the government as well as private builders, has raised a significant demand of cement in India. It is the key raw material in construction industry. Also, it has highly influenced those bigger companies to participate in the growing sector. At least 125 plants set up by the big companies in India with about 300 other small scale cement manufacturers, to fulfill the growing demand of cement.

Being one of the vital industries, the cement industry contributes to the nation’s socioeconomic development. The sum total utilization of cement in a year indicates the country’s economic growth.

The demand of cement in year 2012-2013 is expected to increase by 50 million tons 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 to grow by 9 to 10 % in the current financial year. Major Indian cement manufacturers and exporters have all made huge investments in the last few months to increase their production 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 cement manufacturers and exporters, India has become the second largest cement producer in the world. Madras Cement Ltd., Associated Cement Company Ltd (ACC), Ambuja Cements Ltd, Grasim Industries Ltd, and J.K Cement Ltd. are among few renowned names of the major Indian cement companies.

In India, the Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, is the nodal agency for the development of cement industries, that is, it is involved in monitoring their performance at regular intervals and suggesting suitable policy incentives, as per the requirement.

The Department is responsible for formulation and implementation of promotional and developmental measures for growth of entire industrial sector in general and of some selected industries like cement, light engineering, leather, rubber, light machine tools, etc. in particular. It is involved in framing and administering overall industrial policy and foreign 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 on investment climate and opportunities in India as well as by advising prospective investors about various policies and procedures.

COMPARISONS

Growth Comparison among India Cement, JK Cement and Prism Cement for FY 2011-12 INDIAN CEMENT KEY FACTOR NET WORTH TOTAL DEBT TOTAL LIABILITIES TOTAL ASSETS BOOK VALUE TOTAL INCOME TOTAL EXPENDITURE EPS (RS.) EQUITY DIVIDEND (%) CURRENT RATIO QUICK RATIO DEBT EQUITY RATIO LONG TERM DEBT EQUITY RATIO RETURN ON LONGTERM FUND (%) EARNING RETENTION RATIO

2012 (Mar) FY 4067.20 2268.59 6336.21 6336.20 132.42 4215.90 3296.88 9.54 20.00 0.95 1.35 0.56 0.37 12.06 7.93

2011 (Mar) FY 4089.76 2456.07 6545.83 6545.83 115.23 3550.01 3074.38 2.22 15.00 1.28 1.69 0.69 0.53 3.75 -38.05

J K CEMENT 2012 (Mar) FY 1529.01 1079.35 2608.36 2608.36 184.32 2588.45 2,032.66 25.36 50.00 1.03 0.81 0.84 0.77 19.27 80.42

2011 (Mar) FY 1399.05 1319.15 2718.20 2718.18 163.92 2400.16 2,111.24 9.16 20.00 1.17 0.88 1.15 1.10 7.43 58.40

PRISM CEMENT 2012 (Mar) FY 1210.60 1038.95 2187.52 2187.52 22.82 4528.96 4257.27 -0.60 5.00 0.77 0.54 0.90 0.81 6.60 ---

2011 (Mar) FY 1250.64 1169.84 2377.67 2377.67 24.00 3415.68 3065.99 1.90 10.00 0.93 0.63 0.97 0.90 10.33 40.56

MARKET SHARES

INDIA CEMENT 7.23% J K CEMENT 2.97% ACC 18.03% AMBUJA CEMENT 11.88%

TECHNICAL VIEW JK CEMENT OUTLOOK Trend: - Bullish Resistance: - 285,305 Support: - 191,176 Strategy: - Buy on Dips

INDIA CEMENT OUTLOOK Trend: - Consolidate Resistance: - 105,120 Support: - 82, 71 Strategy: - Sell on High

PRISM CEMENT OUTLOOK Trend: - Consolidate Resistance: - 61, 65 Support: - 43, 39 Strategy: - Buy on Dips

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 dips

As per our research Investors should buy JK Cement for long term view because fundamental view and technical view both are bullish for long term scenario in JK Cement among these three cements stocks.

CONCLUSION On the back of the analysis of this report, there is a suspicion of a functioning cement 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 are strongly satisfied in the cement markets in India. With the findings of the data analyzed in the report, there is a strong suspicion of the presence of price control and market sharing in the zonal markets, especially in an industry like cement industry with high amount 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 individual companies 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 north zone, strong suspicion hovers over ACC Ltd., Shree Cement Ltd., Grasim Industries Ltd. and JK Lakshmi Cement Ltd., whereas in the west zone, Ultratech Cement Ltd. and Sanghi 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 of collusion. The south zone provided the highest amount of suspicion with as many as seven players controlling production. The players are India Cements Ltd., Madras Cements Ltd., Ultratech Cement Ltd., Kesoram Industries Ltd., Dalmia Bharat Sugar Inds. Ltd., Chettinad Cement Corpn. Ltd and Penna Cement Inds. Ltd. Despite the fact that the Indian cement industry has grown at a commendable rate in the last decade, registering a growth of nearly 9% to 10%, the per capita consumption still remains substantially poor when compared with the world average.

While China registered the highest per capita cement consumption in 2010 of about 1,380 kg, India stood much lower at 230 kg. This underlines the tremendous scope for growth in the Indian cement industry in the long term.