Cement – Consolidation gains pace - Views on News from Equitymaster

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

  • MyStocks

MEMBER'S LOGINX

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

Cement – Consolidation gains pace

Apr 29, 2000

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.


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

  

More Views on News

RAIN INDUSTRIES Announces Quarterly Results (1QFY21); Net Profit Down 76.6% (Quarterly Result Update)

Aug 25, 2020 | Updated on Aug 25, 2020

For the quarter ended June 2020, RAIN INDUSTRIES has posted a net profit of Rs 344 m (down 76.6% YoY). Sales on the other hand came in at Rs 24 bn (down 29.3% YoY). Read on for a complete analysis of RAIN INDUSTRIES's quarterly results.

JK LAKSHMI CEMENT Announces Quarterly Results (1QFY21); Net Profit Up 12.7% (Quarterly Result Update)

Aug 20, 2020 | Updated on Aug 20, 2020

For the quarter ended June 2020, JK LAKSHMI CEMENT has posted a net profit of Rs 444 m (up 12.7% YoY). Sales on the other hand came in at Rs 8 bn (down 20.8% YoY). Read on for a complete analysis of JK LAKSHMI CEMENT's quarterly results.

ULTRATECH CEMENT 2019-20 Annual Report Analysis (Annual Result Update)

Aug 7, 2020 | Updated on Aug 7, 2020

Here's an analysis of the annual report of ULTRATECH CEMENT for 2019-20. It includes a full income statement, balance sheet and cash flow analysis of ULTRATECH CEMENT. Also includes updates on the valuation of ULTRATECH CEMENT.

BIRLA CORPORATION 2018-19 Annual Report Analysis (Annual Result Update)

Sep 23, 2019 | Updated on Sep 23, 2019

Here's an analysis of the annual report of BIRLA CORPORATION for 2018-19. It includes a full income statement, balance sheet and cash flow analysis of BIRLA CORPORATION. Also includes updates on the valuation of BIRLA CORPORATION.

More Views on News

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

I Recommended this Stock over Page Industries because it's Relevant to Doubling Your Income (Profit Hunter)

Sep 7, 2020

Things are not often what they seem in the market and how you can take advantage of this.

The NASDAQ Whale Could Harm Your Portfolio (Fast Profits Daily)

Sep 7, 2020

The discovery of Softbank pushing up prices on the NASDAQ will cause volatility in the market. Stay alert!

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

MARKET STATS