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Cement manufacturers cannot ignore this region - Views on News from Equitymaster
 
 
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  • Mar 30, 2010

    Cement manufacturers cannot ignore this region

    Recently, we had interacted with a few cement manufacturers from the northern region. Here are the key takeaways.

    The growth so far...
    The northern region has witnessed an average of 9% growth in dispatches in the past 5 years. This has been led by focused investments in the real estate sector, increased urbanization and infrastructure build up.

    Slower growth in dispatches in the recent past could be attributed to slow economic growth. Economic slowdown not only impacted demand but also led to delay of upcoming projects, which further impacted volume growth. However, this was a short term impact. With signs of economic recovery and improvement in consumer sentiment, demand for goods and services has picked up. Cement, which is a basic construction material, has reported near double digit growth towards the end of CY08. Since then, this double digit growth has been sustained.

    Northern region Unit FY05 FY06 FY07 FY08 FY09
    Capacity m tonnes 28 31 34 47 50
    % of industry % 18.2 19.4 21.4 23.9 22.7
    Growth in consumption % 6.1 11.7 10.3 12.1 4.8

    Source: CMA

    The primary reasons for the same have been that a lot of infrastructure is being developed in the northern region for Common Wealth Games to be held in July, 2010. Now one would wonder, what would be the scenario post the Common Wealth Games! Will the growth decelerate? If not then what would be the other factors that would drive the regional demand for cement?

    What we deciphered from our research meetings with northern players is that growth in demand is sustainable. What would primarily drive the regional growth is infrastructure build up, housing demand, replacement demand and industrial demand.

    Infrastructure build up: The government is infusing money to build urban infrastructure in and around Delhi and Rajasthan. Infrastructure in the capital city is taking place in light of the Common Wealth Games and to support tourism sector growth. In general too there is need to upgrade and sustain infrastructure of the capital city. Rajasthan is one of the major producers of cement and nearly accounts for over 15% of the cement output within the country. This is mainly because of the region being rich in limestone reserves. Timely availability of raw material is also a key factor for cement manufacturing. Also, the government is expected to infuse Rs 140 bn to augment infrastructure facilities within the state. This would further boost demand for the commodity.

    Industrial and service sector growth: The northern regions are attracting corporate investors. In the state of Uttar Pradesh ITes and real estate sector is expected to receive an investment of around Rs 25 bn. Moreover, power and utility companies have planned huge capex; organised retail players are spreading wings in Tier II and Tier II cities and small towns.

    Also, huge cash and carry formats (Wal-Mart) are being planned. To build plants, retail outlets, corporate buildings, cement is consumed as it is a key construction material. Apart from this concretization of roads has further given a fillip to the demand for cement. Even to enable transportation, a well constructed path is necessary. This is how commercial and industrial sectors are driving demand for cement in the northern region.

    Thus, planned infrastructural investments, and industrial and commercial growth would continue to drive the demand for the commodity in the long run. This is over and above the housing demand and replacement demand that the region would witness. Moreover, with urbanisation and rising disposable income, nuclear family concept is becoming popular. Apart from rising population, changing preferences would also support growth of construction material. One must also note that with rise in population, apart from housing demand, the demand for hospitals and schools is also set rise. On these counts, the northern region is expected to sustain around double digit growth over the medium to long term.

     

     

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