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Cement – Consolidation gains pace - Views on News from Equitymaster
 
 
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  • Apr 29, 2000

    Cement – Consolidation gains pace

    India Cement – Raasi Cement. Larsen & Toubro – Narmada Cement. Gujarat Ambuja – DLF Cement. Gujarat Ambuja – Associated Cement Companies. Zuari Industries - Ciments Francais. Raymond – Lafarge (the latest to join the list). Exhausting, isn’t it!


    The above is a list of acquisitions/mergers/strategic investments that have taken place in the cement sector over the last 24 months. With a fear of being repetitive, we would once again like to shed some light on the reasons for the increasing consolidation in the cement sector.

    Liberalisation in India triggered hopes of grand investments in domestic infrastructure. Manufacturers responded to this by investing in large fresh capacities. Unfortunately for cement companies, most of the capacities went on stream only when the business cycle was headed downwards. Worst of all, the anticipated level of investment in the infrastructure segment failed to materialise. Excess supply led to declining cement prices, thus adversely affecting the profitability of the sector.

    The situation is, once again, of hope. Cement demand is supposed to have grown by 15% in FY00 (production grew to touch 94 million tonnes in FY00 and demand grew to 93.8 million tonnes implying a capacity utilisation level of 87.5%), in line with the growth in supply. It is anticipated that by 2002, the cement sector will witness a deficit in supply, thus benefiting pricing power.

    The deficit situation is the result of two factors. First, growth in supply (existing as well as new) is expected to slowdown in coming years as manufacturers, hurt by profitability, curtailed fresh investments in recent years. And, importantly, with the economy in an upswing the demand for cement is expected to continue posting robust rates of growth. This in turn is due a boom in housing demand and a pick up in investment activity.

    In order to capitalise on this anticipated boom, cement companies have been aggressive in acquiring capacities (the fastest route to build capacity). Therefore the consolidation. Another fallout of this measure is likely to be a reduction of competition in the retail market. This too, in turn will benefit the pricing environment.

    The cement sector, as is portrayed thus far, is poised for good times. However it must be mentioned that as in the first half of the previous decade, a large part of these expectations rest on the premise that investment activity (especially in infrastructure) will rise in coming years. In case this were not to turn out, the cement sector could once again be faced with testing times.India Cement – Raasi Cement. Larsen & Toubro – Narmada Cement. Gujarat Ambuja – DLF Cement. Gujarat Ambuja – Associated Cement Companies. Zuari Industries - Ciments Francais. Raymond – Lafarge (the latest to join the list). Exhausting, isn’t it!

    The above is a list of acquisitions/mergers/strategic investments that have taken place in the cement sector over the last 24 months. With a fear of being repetitive, we would once again like to shed some light on the reasons for the increasing consolidation in the cement sector.

    Liberalisation in India triggered hopes of grand investments in domestic infrastructure. Manufacturers responded to this by investing in large fresh capacities. Unfortunately for cement companies, most of the capacities went on stream only when the business cycle was headed downwards. Worst of all, the anticipated level of investment in the infrastructure segment failed to materialise. Excess supply led to declining cement prices, thus adversely affecting the profitability of the sector.

    The situation is, once again, of hope. Cement demand is supposed to have grown by 15% in FY00 (production grew to touch 94 million tonnes in FY00 and demand grew to 93.8 million tonnes implying a capacity utilisation level of 87.5%), in line with the growth in supply. It is anticipated that by 2002, the cement sector will witness a deficit in supply, thus benefiting pricing power.

    The deficit situation is the result of two factors. First, growth in supply (existing as well as new) is expected to slowdown in coming years as manufacturers, hurt by profitability, curtailed fresh investments in recent years. And, importantly, with the economy in an upswing the demand for cement is expected to continue posting robust rates of growth. This in turn is due a boom in housing demand and a pick up in investment activity.

    In order to capitalise on this anticipated boom, cement companies have been aggressive in acquiring capacities (the fastest route to build capacity). Therefore the consolidation. Another fallout of this measure is likely to be a reduction of competition in the retail market. This too, in turn will benefit the pricing environment.

    The cement sector, as is portrayed thus far, is poised for good times. However it must be mentioned that as in the first half of the previous decade, a large part of these expectations rest on the premise that investment activity (especially in infrastructure) will rise in coming years. In case this were not to turn out, the cement sector could once again be faced with testing times.

     

     

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