Cement: Consolidation gains - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Cement: Consolidation gains

Feb 7, 2002

The cement industry is in the process of consolidation; the top five players now account for nearly 60% of the capacity as compared to 33% just a few years ago. Even though the major players are in a better position due to consolidation, they are still a long way from global trends where just 2 or 3 players control 85% of the capacity. Consolidation coupled with slower growth in capacity additions will finally put an end to a scenario where growth in supply outstripped demand growth. The Indian cement sector has a capacity of about 129 million tonnes and is the largest after China (capacity of 550 million tonnes). The per capita consumption of cement in India is around 90 kgs as compared to a world average of 256 kgs and an Asian average of 200 kgs, making India a very lucrative market.

However, despite this apparently attractive market, cement realisations over the past 5 years (until December 2000) have been subdued. This was mainly due to the large-scale capacity additions during the three-year period, 1994-1997. What triggered this large-scale capacity expansion was the hope that the initiation of economic reforms would greatly increase spend on infrastructure and housing, resulting in a surge in demand. As the spend did not materialize, the industry was left with excess capacity, creating a situation where the supply continued to grow, even as demand growth was below expectations. The situation was made worse by the fact that the industry was very fragmented, resulting in intense price competition. More recently large capacities have been added to avoid the December 2001 deadline on sales tax exemption.

Having said that, the scenario going forward is likely to improve due to the following reasons. First, there has been a 25% growth in housing loans disbursals (FY02) compared to the previous year. This augurs well for the industry as nearly 60% of cement demand is from the construction industry. The future of this industry is quite bright. For instance, if we consider the housing sector alone the present shortage of houses is about 30 million units - 10 million in the urban and rest in the rural areas. This shortage implies tremendous business opportunity for players in the construction industry.

Second, infrastructure spending in the country has got an immense boost due to the aggressive implementation of the Golden Quadrilateral, North - South and the East - West corridor projects by the National Highway Authority of India (NHAI). These projects involve laying nearly 13,000 kilometers (kms) of highways at a planned expenditure of Rs 540 bn.

With 25% concretization and an average consumption of around 2,700 tonnes per kilometer of highway, the estimated demand for cement works out to be around 11 million tonnes for the Golden Quadrilateral project and 5 million tonnes for the North - South and the East - West corridor projects. The two projects are scheduled to be completed by 2004 and 2007 respectively and are expected to account for 2-3% of the demand growth in the next 4-5 years.

With the construction of highways, developmental activity along these roads is bound to pick up. This could further fuel the demand for cement in the coming years. Apart from these projects the government has already initiated the rural roads project for which Rs 5 bn has already been allocated; cement demand from this project is also expected to be considerable.

Third, the reconstruction work in Gujarat will require nearly 2-3 million tonnes of cement in the next 2 years. Given these developments, coupled with the anticipated pick up in the domestic economy in FY03, the cement demand is expected to grow at over 8% per annum in the near future.

On the supply side too the situation looks to be very promising. After the rush to set up capacities to meet the December 2001 deadline, capacity additions over the next two years will be limited to 2 to 3 million tonnes per annum. Moreover, as of now, no large green field capacity is being planned by any of the domestic majors.

Even as capacity additions slow down, the Indian cement industry has become more consolidated. This has resulted in a scenario where price competition has reduced dramatically. Indeed, since December 2000, cement companies have witnessed a sharp rise in realisation per bag. Going forward, this trend is likely to persist, notwithstanding the short-term volatility.

Over the next two years, the cement sector is likely to witness a scenario where demand growth outstrips the growth in supply. By some estimates, the sector should see a balance in demand and supply by 2004. Such a scenario will benefit companies in terms of a better pricing environment. Such a development would surely bring cheer to the cement sector, which is probably one of the most competitive industries in the country.

Equitymaster requests your view! Post a comment on "Cement: Consolidation gains". Click here!


More Views on News

GUJARAT SIDHEE CEM 2020-21 Annual Report Analysis (Annual Result Update)

Nov 22, 2021 | Updated on Nov 22, 2021

Here's an analysis of the annual report of GUJARAT SIDHEE CEM for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of GUJARAT SIDHEE CEM. Also includes updates on the valuation of GUJARAT SIDHEE CEM.

SHIVA CEMENT 2020-21 Annual Report Analysis (Annual Result Update)

Nov 18, 2021 | Updated on Nov 18, 2021

Here's an analysis of the annual report of SHIVA CEMENT for 2020-21. It includes a full income statement, balance sheet and cash flow analysis of SHIVA CEMENT. Also includes updates on the valuation of SHIVA CEMENT.

HEIDELBERG CEMENT Announces Quarterly Results (2QFY22); Net Profit Down 4.6% (Quarterly Result Update)

Oct 20, 2021 | Updated on Oct 20, 2021

For the quarter ended September 2021, HEIDELBERG CEMENT has posted a net profit of Rs 596 m (down 4.6% YoY). Sales on the other hand came in at Rs 6 bn (up 12.2% YoY). Read on for a complete analysis of HEIDELBERG CEMENT's quarterly results.

Key Points to Know Before Applying to Nuvoco Vistas' Public Issue (Views On News)

Aug 7, 2021

Nuvoco Vistas is one of the leading ready-mix concrete manufacturers in India. The issue will open for subscription on 9th August.

ULTRATECH CEMENT Announces Quarterly Results (2QFY22); Net Profit Up 45.8% (Quarterly Result Update)

Oct 20, 2021 | Updated on Oct 20, 2021

For the quarter ended September 2021, ULTRATECH CEMENT has posted a net profit of Rs 13 bn (up 45.8% YoY). Sales on the other hand came in at Rs 120 bn (up 16.1% YoY). Read on for a complete analysis of ULTRATECH CEMENT's quarterly results.

More Views on News

Most Popular

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.

MobiKwik IPO Opens for Subscription Soon. Key Things to Know Before Subscribing. (Views On News)

Nov 20, 2021

The Rs 19 bn issue is set to hit the market soon.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms