The cement sector has seen it all in the last year or so - booming demand, better realisations and even brighter prospects. Then came the drought and the subsequent decline in both demand and realisations. Now there is talk of a diesel price hike, which is likely to impact margins.
* Excluding extraordinary income
# Calculation includes extraordinary income
No one disputes the fact that demand for cement is likely to be buoyant over the next couple of years as expenditure on housing and infrastructure is stepped up. The fact is that existing capacity is inadequate to meet this demand. Indeed, at present growth rates, India is likely to witness a deficit in supply as early as next year. To put this in perspective, here are some numbers – the world average for per capita cement consumption is 250 kilograms as against 90 kilograms in India.
The scenario could not be better. Even after the heady growth of 15% recorded in FY00, the sector is anticipated to grow 10% this year. Nevertheless the cement sector has failed to show buoyancy in profitability. Infact, as aptly reflected in low valuations accorded to cement companies by the stock markets, cement companies have been grappling with declining realisations. Some have even gone bankrupt. Who’s to blame?
The fragmentation in the cement sector. There are over 50 companies operating in the sector with five major groups accounting for 50% of the capacity. The rest are marginal/regional players (some of them often termed as undisciplined players). The result is that competition is intense with players vying for market share and consequently cartels are unable to hold up prices. As one industry player aptly put it.
No doubt that the drought in parts of the country contributed to the decline in realisations. However, even late last year, when demand was buoyant, realisations failed to rise as expected. Even the recent consolidation in the sector has failed to put a lid on this intensive competition. The fragmentation in the sector, by all means, is largely to blame for the ills of the sector.
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