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Cement: Bottoming out? - Views on News from Equitymaster
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  • Nov 13, 2000

    Cement: Bottoming out?

    The current financial year so far has been one of disappointment for the cement sector. After having posted a 15% rise in dispatches in FY00, growth in the current year has been a disappointing 5%. The drought, and subsequently the floods, is largely to blame for this. But, there is a possibility that the worst may be over for the sector.

    Let’s step back a bit and look at the factors driving interest in the cement sector. First, consider the supply side factors. In FY00, the effective domestic capacity stood at 104 million tonnes. The sector produced 94 million tonnes (capacity utilization of 90%), most of which was consumed (92 million tonnes). Capacity additions over the next few years are likely to slow down dramatically, with only 12 million tonnes of capacity being added over the next three years.

    On the demand front, there is little doubt that the potential is huge. This is borne out by the low per capita consumption figure of 90 kgs (global average of 250 kgs). There is a tremendous demand for housing, roads and other infrastructure facilities. Already, construction activity has been rejuvenated after the government passed on some tax benefits to those investing in a house. Further, work on the national highway corridor is likely to pick up pace, stimulating demand for cement. With a pick up in investment in other infrastructure facilities, demand would receive a further boost. The average demand growth is anticipated to remain in the vicinity of 8% over the next few years.

    Therefore, what we have is a situation where there is a slowdown in supply even as demand continues to rise i.e. better pricing power. However, so far the ‘pricing power’ has eluded the cement sector. This is largely due to the fragmentation in the industry, which has over 50 players. Also the drought and subsequently the floods earlier this year, led to a sharp drop in demand, as construction activity in parts of India came to a stand still.

    Things may however be finally looking up for the sector. On the supply side, consolidation is gaining pace. This is expected to limit the intensity of competition, and result in better pricing power. On the demand side, growth finally seems to be filtering in, with dispatches in October growing nearly 15% YoY. If growth figures were to sustain for another two to three months, it would be safe to assume that the sector is back on its high growth trajectory.

    To make a near term call on cement stocks in the near term is a dangerous proposition. To take an example, earlier this year, the boom in demand for cement witnessed an abrupt halt after the monsoon turned out to be weaker than anticipated. Subsequently, the floods in parts of India further aggravated the demand scenario resulting in a sharp drop in cement prices.

    However, over the long term, prospects for the sector are very promising. Rising demand, slowdown in capacity additions and consolidation all indicate that the cement sector does present an investment opportunity.



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