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Cement: 'Voluminous' growth

Oct 8, 2002

Cement companies are witnessing a boom, atleast on the volumes front. Dispatches of major cement companies have risen considerably on account of a healthy demand from the housing as well as highway projects. On an average, dispatches of the four major cement companies in the country have gone up by 24% in 2QFY03 on a YoY basis with Gujarat Ambuja leading the pack.

YoY growth Jul FY03 Aug FY03 Sept FY03 2QFY03
ACC 18.5% 24.3% 11.4% 17.9%
L&T 31.4% 13.0% 7.4% 16.8%
Grasim 38.7% 23.8% 4.9% 21.8%
Gujarat Ambuja 69.0% 44.7% 25.4% 44.7%

July was a significant contributor to this growth. A poor monsoon at the beginning of the season led to good volumes in during this month. Volumes tapered off in the next two months, as rain gods smiled again. Nearly 60% of cement demand comes from the housing sector and not surprisingly, 2QFY03 trends in consumption indicate that the demand from the housing sector has been robust. However, the ongoing highway projects have been the main catalyst for this spurt in cement demand.

Gujarat Ambuja has once gain recorded impressive dispatch growth figures in the second quarter. While it may be noted that these growth numbers are at a relatively smaller base as compared to the other cement majors, nevertheless, they are still impressive. Compared to the last quarter, the top 4 companies have performed better despite the onset of monsoons (see table). The dispatch numbers are very impressive considering that the average growth rate in 1QFY03 (April - June) was just 12%.

In the second half of FY03, dispatch growth is likely to be healthy but may not be as robust as seen in the second quarter. The cement industry's long term demand drivers like infrastructure projects and housing are likely to keep dispatches robust. Also, with no major capacity additions seen in the next 2-3 years, prices are likely to firm up towards the end of FY03.

In that sense, the cement sector seems a good long term investment avenue, as the latent potential of the Indian cement industry itself is huge. Per capita cement consumption in India is just 100 Kgs compared to 300 Kgs in Western Europe and 280 Kgs in US. Even Asian neighbours like China (420 Kg) and Japan (600 Kgs) have much higher consumption rates. Having said that, investors will be better off evaluating prospective companies based on their focus towards the business and their current standing in the market i.e. size and reach etc.

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