Sep 17, 2003|
Cement: Topline troubles
Cement is one industry that has grown consistently at around 8% in the past decade. In FY03, the industry managed to grow by 9%. Given the scale of infrastructure and construction activity in the country, the growth momentum is likely to sustain in the coming years as well. However, amidst this euphoria, there is a big concern staring industry in its face. This concern is regarding the lower prices of cement across major markets in the country.
Consider the graph above that shows volume growth, value growth and net sales growth for key cement companies in FY03. In FY03, all the four major players recorded impressive growth in volumes, which was well above the average industry growth rate (9%). However, unfavorable cement prices resulted in net sales growing at a much slower rate in the same period. The growth in topline was lower for all cement majors, with the exception of Gujarat Ambuja. Here it would be pertinent to add that production commenced in its Chandrapur plant last fiscal, which resulted in higher volume sales and it also managed to sell 19% of its cement in exports market where realisations improved by 7% in US$ terms.
The industry has been in an oversupply situation for quite some time now. There is close to 26 m tonnes of unused capacity currently. This is affecting prices and despite the industry clocking impressive growth rates, the topline has not been improving in line with the volume growth. But there are a couple of indicators, which make us believe that things might improve for the better in the future.
First, the pace of capacity addition has slowed down considerably in FY03 as compared to the year before where nearly 16 m tonnes of capacity was added. There are no major greenfield expansions lined up for this year also and this augurs well for the industry.
Secondly, the acquisition of L&Tís cement division by Grasim has given the industry a more consolidated look. The consolidation is likely to benefit all the players in terms of pricing power. The consolidation is not just restricted to the top end of the industry but also among smaller players. In the long term, unviable cement units will be forced to shut down.
These developments coupled with significant improvement in operational efficiency makes us believe that, good times lie ahead for the industry.
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