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Cement: Future holds promise

Dec 8, 2003

If the topline growth is any indication, the major cement companies have failed to inspire confidence if one takes into account the results for the last four quarters. However, one cannot afford to ignore an industry that has consistently grown at a CAGR of 8%-9% in the past decade and whose per capita consumption of 110 kgs as against a world average of 260 kgs is among the lowest in the world. In this article, let us try and reason as to where the industry is headed and what is in store for the major players.

Volume growth:
As far as the growth in volumes is concerned, there has not been much of problem on this front. The housing sector, which drives almost 50% of the cement demand, is witnessing strong growth owing to very low cost of financing. The housing finance sector is growing at more than 30%, this gives an indication regarding the growth in demand for dwelling units.

The infrastructure sector, the second largest demand driver for cement is also looking strong owing to government initiatives such as the National Highway Development Program and the Golden Quadrilateral Project, which aims at 25% concretization of the new highways. Besides development of ports and airports will also help boost the demand for cement.

Thus on account of these growth drivers, the industry is expected to grow at 8%-9% over the medium to long term.

Realisations:
The low realisations have been the scourge of the industry for quite some time now. However, a couple of developments over the past one year have led us to believe that the industry is on the verge of coming out of the trough of poor realisations. These are:

Demand inching closer to supply: One of the major reasons for poor realisations was the high disparity in demand and supply. The excess capacity in the country stood at more than 30 m tonnes in FY03. This was attributed to rampant capacity addition in the past five years by the major players so that they could take advantage of the sales tax incentives given by various state governments. However, now that the incentives have gone away, the pace of capacity addition has slowed down considerably and this would lead to diminishing demand supply gap, which would help in price recovery thus benefiting all the players.

While the Eastern and the Northern regions are likely to witness demand supply parity by 2005, it will take longer for the Southern and Western regions to achieve the same on account of their high demand supply mismatch.

Consolidation gaining ground: With Grasim's acquisition of L&T's cement division, the industry will now have the top six players accounting for nearly 60% of the industry capacity. This is a healthy sign for the industry, as this would result in consolidation and would give significant pricing power to the bigger players. With consolidation taking place at the lower end also, the unviable units will be forced to shut down thus benefiting the long-term interests of the industry.

Thus with both prices as well as volumes beginning to look up, the industry seems to be in for some good times. It should however be noted that rather than investing in any cement company, the investors should look at those companies, that have continuously out performed its peers in terms of topline and bottomline growth. Also one needs to take in to account that fact that any sustainable rise in cement prices may occur only in the long-term and hence the investment objective of the investor should be long-term in nature.

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