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Cement: Lacklustre year but... - Views on News from Equitymaster
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  • Dec 24, 2003

    Cement: Lacklustre year but...

    Indian cement industry, the second largest in the world after China with capacity in excess of 140 m tonnes, is touted as one of the key beneficiaries of the Indian growth story. The sector has grown consistently at a CAGR of 8%-9% in the last decade and FY03 was assumed to be no different. However, if the industry statistics are any indication, barring major players such as ACC and Gujarat Ambuja, 2003 has proved to be a rather lackluster year for the Indian cement industry.

    The industry growth was rather lukewarm as the industry grew by a modest 4.4% during the April-Nov' 03 period as compared to the previous year. The truckers' strike in the month of April 2003 and prolonged monsoons, which led to a decline in construction activity for about 3-4 months, have all been responsible for the relatively lower off-take of cement in the country. Realisations have also remained low in many regions of the country mainly on account of supply overhang. The excess capacity in the country stands in the region of around 25-30 m tonnes and this is having an adverse impact on realisations.

    While the industry suffered from poor despatches, major players reported mixed performances. ACC and Gujarat Ambuja reported a decent YoY rise of 10% and 17% respectively in despatches for the period April-November 2003. While Grasim's despatches increased by 6% during the same period, L&T actually suffered a decline of 6% for the period under consideration.

    The gainers...
    (Rs) 1-Jan-03 10-Dec-03 %Change
    Birla Corp 18 67 272%
    Grasim 313 910 191%
    India Cements 19 39 106%
    Madras Cements 383 733 91%
    Prism Cement 6 11 83%

    As far as the gains on the indices are concerned, there are quite a few companies that have outperformed the benchmark indices by a good margin. However, what is notable is the fact that the top two gainers are not pure cement companies and have other business interests also. While Birla Corporation has interests in jute and synthetics besides cement, Grasim has its footprints in VSF, sponge iron and textiles.

    Moreover, the optimism towards Grasim must have been on account of the company's acquisition of L&T's cement business, which has catapulted it into the league of global players and given it significant economies of scale. Besides, the company's sponge iron division is also at the peak of its business cycle.

    And the Laggards…
    (Rs) 1-Jan-03 10-Dec-03 %Change
    Dalmiya Cement 152 275 81%
    Gujarat Ambuja 165 291 76%
    Chettinad Cement 49 80 63%
    Mangalam Cement 7 11 57%
    Mysore Cements 7 11 57%
    ACC 164 223 36%

    What comes, as a surprise from the above list is the fact that the major players such as ACC and Gujarat Ambuja, have not been able to figure among the top five gainers. ACC has lagged owing to the fact that the company has one of the lowest operating margins in the industry and also has a high financial gearing (Debt/Equity ratio stood at 1.5 in FY03) and this results in a strong co-relation of the company's performance with cement realisations. Gujarat Ambuja on the other hand, is the most cost effective cement producer in the country and has consistently outperformed its peers in terms of growth. This leads us to believe that the company is fundamentally stronger than its peers. Therefore, the valuations of the company are more likely to reflect the company's own financial performance rather than the stock market movements.

    What to expect?

    The coming three months are said to be the peak months for the industry and therefore it is being felt that the industry should be able to achieve the projected growth rates of 7%-8% in the current fiscal. The producers, especially the ones in the western state of Gujarat, have also raised cement prices by around Rs 25/bag and it is felt that the hike would spillover into the other regions of the country.

    From a medium to long term perspective, the demand for cement is expected to witness a rise of around 8%-9% on the back of robust demand in housing and infrastructure needs. The lower realisations, which have been the scourge of the industry for quite some time now, are also likely to witness an increase on account of a couple of reasons viz. parity in demand-supply and consolidation in the industry.

    On account of huge capacity addition in the recent past, the excess capacity in the industry currently stands at close to 30 m tonnes and this is having an adverse impact on realisations. Worst affected are the western and the southern regions, where the supply overhang is particularly large. Therefore, while these regions are expected to achieve demand-supply parity by around 2007, the northern and eastern regions, where the demand-supply gap is not huge, are expected to achieve parity by 2005.

    Moreover, with Grasim's acquisition of L&T's cement division and other such acquisition by major players, the industry is looking a lot more consolidated. The top 6-7 players now account for close to 60% of the industry capacity and this consolidation is likely to help in maintaining the stability in prices. Also, the smaller and uncompetitive units may also be forced to shut down, further easing the pressure on supply side of the industry.



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