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  • Jun 16, 2000 - "India is a particularly fascinating market currently"

"India is a particularly fascinating market currently"

Jun 16, 2000

Mr. Andrew Melrose is a 'guru' when it comes to understanding the global cement market. With over 23 years of experience as an investment analyst, Mr. Melrose is currently with BNP Paribas. In an interview with equitymaster.com, Mr. Melrose spoke about the global cement sector and the 'fascinating' Indian cement market.

EQM: How long have you been covering the cement sector, and in which regions?

Mr. Melrose: I have been an investment analyst for 23 years. I have covered the building materials industry throughout that period. The biggest sub-sector within this classification is the cement industry. The major publicly quoted cement groups have become increasingly global in their portfolio of cement assets and my stock coverage has also become increasingly global.

EQM: Over the years, which companies in the global arena have struck you as being the most astute in charting strategy and implementing it?

Mr. Melrose: The global cement majors have each pursued slightly different strategies. Holderbank, the world's largest cement manufacturer, has retained its focus on cement whilst continuing to benefit from, and invest in, emerging economies which offer superior organic growth rates. The thrust of its expansion moves over the last decade has been predominantly directed at capital investment in its cement capacity, both greenfield expansion and modernisation of existing facilities, although it has also been active in acquiring cement assets.

Lafarge, the world's second largest cement manufacturer with an annualised production capacity of 110 m tonnes in 1999, has a broad range of building materials interests. It has also pursued a strategy of increasing the involvement of its cement division in emerging markets. Acquisition growth has been an important part of the group's development over the last decade.

Cemex has focused predominantly on cement. It has continued to broaden its portfolio of emerging market interests (outside its domestic base in Mexico), whilst significantly improving its operational and financial ratios over recent years. Cemex is an excellent vehicle for participating in the long-term growth potential of emerging markets.

EQM: How do you compare cement companies in different countries? What is/are the yardstick(s) that you use to value cement companies in economies with different demand-supply dynamics?

Mr. Melrose: Financial comparison is focused on recurrent PER and PCF ratios and EV/EBITDA multiples. EV/cement capacity multiples are useful, but should be treated with great caution, not least because of the nature and variability of that cement capacity. The market position, the long-term growth potential of that market, the cost of production, the age of the plants, the length of consented raw material reserves, the scope for the import/export of cement and the degree of consolidation of a market are all important considerations.

EQM: India has over 80 million tonnes of capacity with the top 10 groups controlling about 70% of capacity and then many small manufacturers? How does that level of concentration compare with the global standard?

Mr. Melrose: India is more fragmented than most major cement markets (excluding China), although the degree of concentration would be similar to the USA. Clearly, the vigour with which anti-trust regulators monitor and control their regional (European Commission) and national (FTC in USA and Kartellamt in Germany) markets is an important factor on the degree of industry consolidation and the potential for further consolidation. However, there is a common theme of consolidation across almost all national and regional markets. Globally, the cement industry has been experiencing an accelerating pace of consolidation over the last decade. Finally, in assessing the degree of consolidation of the domestic manufacturing capacity, investors need to be cognizant of the degree of cement import penetration.

In France, the market is controlled by four cement groups. In the UK, the market is controlled by three cement groups. In Portugal, the market is controlled by two cement groups In Denmark, there is only one domestic cement manufacturer. In the other major European markets (Germany, Italy, Spain and Poland), the top five cement groups typically control about 70% of the market. In South East Asia and Latin America, the cement industry now has similar degrees of concentration as in Europe.

Of course, the heavy capital investment costs required for cement manufacture are always going to act as a constraint on new entrants to the industry.

EQM: Which country in the cement sector fascinates you the most? Why?

Mr. Melrose: India is a particularly fascinating market currently. All the global cement majors would appear to be positioning themselves to increase their involvement. The US cement market is also very interesting currently. After several years of upward demand momentum and with infrastructure spending prospects remaining buoyant, the extent to which domestic manufacturers respond with additional capacity will be very interesting.

EQM: What are your views on the Indian cement industry (recently Lafarge has become active)?

Mr. Melrose: The long-term growth prospects for the Indian cement market are very exciting. In addition, there are clear signs that the process of industry consolidation, which has already started, is accelerating. The entry of the global cement majors in to the Indian market, notably Lafarge and Italcementi/Ciments Francais is likely to act as a further catalyst for the process of industry concentration.

EQM: How does it feel tracking an old economy sector? Are clients (fund managers) even looking at this sector at all?

Mr. Melrose: I must confess that the last year has been particularly difficult. However, February 2000 was probably the low point (in terms of investors' attitude to this industry) and there are signs of investors increasingly recognising the outstanding value offered by the low multiples of many groups, the good visibility of their earnings over the next two years and the strong cash generation characteristics of the industry.

EQM: What do you do in your non-work time? Any hobbies?

Mr. Melrose: One of the advantages of following the global cement industry is the opportunity to travel. There are always numerous ideas for subsequent family holidays, although these tend not to include the local cement plant as part of the tourist trail.

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