In the previous article, we gave an insight into the company's business and how it has evolved since inception. In this article, we shall profile the cement sector and JK Cement's standing within the industry by applying the Michael Porter's analysis.
Entry barriers: Medium.
Cement manufacturing is a capital-intensive business requiring large infusion of capital for its set up. To put things in perspective, to set up a cement plant, Rs 3,500 per tonne of investment is required. Thus, high capital investment in itself is a big deterrent or entry barrier. Moreover, huge distribution network is required to ensure timely availability of the product and nowadays, captive power has become a necessity to ensure smooth functioning. Thus, setting up power plants for captive purposes indirectly calls for the availability or coal linkages issue, which may also act as a hindrance. Access to limestone reserves (principal raw material for the manufacture of cement) also acts as a significant entry barrier. The sector operates with a high level of fixed cost (maintenance cost is around US$ 5 per tonne annually) and therefore volume growth is critical.
Thus, fixed cost and capital-intensive nature of the industry and the need for a big distribution network are the real entry barriers. Recently, backward integration among non-cement manufacturers has also gathered pace. For backward integration, there exists two reasons- one being use of slag (slag is a waste material of steel manufacturing companies used in cement manufacturing) and the second to cash on the tight demand supply situation.
Intensity of rivalry: Medium to high.
Apart from capital-intensive nature of the industry, access to raw materials (limestone and coal) and end user markets are equally important factors from a long-term perspective. That way, JK Cement's presence in northern region is justified. By being in north, it has access to key raw material – limestone. Primary input such as limestone availability has led to cluster formation, which has resulted in competition on a regional basis. However, with the advent of split grinding units and RMC (ready mix concrete) concept, catering to nearby regional demand has become easy. Further, the infrastructural activities planned by the government have created heightened demand for cement. Owing to these factors, players have started venturing into newer regions to create a pan India presence.
Thus, in such markets strong distribution network is a must. Nowadays, to differentiate their product, companies have started brand building exercise. JK Cement's brands- JK white cement, JK water proof and JK wall putty are well recognised in the northern region and it being one of the largest manufacturers of the white cement in India, its enjoys high brand recall and has emerged as a preferred choice of retailers as well as institutions and other companies who make bulk purchases for their ongoing projects.
Availability of substitutes: Low
Though on a minuscule basis, bitumen in road and engineering plastics in building offer some element of competition, cement is an indispensable part of any construction activity. Cement being a commodity, there is no differentiation to speak of between the basic products. Although branding is gaining momentum, it is still the timely availability that sets apart the performance of the company. JK Cement caters to more than 1,400 industrial consumers. Its distribution channel is extensive with 64 warehouses, 4,000 retailers' network and marketing team of 79 members for white cement and 101 members for grey cement.
Bargaining power of buyers: Medium
As there is no substitute for the commodity the bargaining power of buyers' should be low, however, owing to increased competition and cyclical nature of the product, buyers of the product do have options.
The grey cement segment is more crowded as compared to white cement, which leads to heightened competition. On the other hand, white cement segment is dominated by a chunk of players. Owing to this, the company's products in the grey cement segment are competitively priced, while white cement segment on account of negligible competition, provides cushion to the company's margins and also helps to boost them.
Bargaining power of suppliers: Low to medium.
There is no substitute for key raw material, limestone, to manufacture cement. Licensing of limestone and coal reserves, supply of power from the state grid and availability of railways for transport are all controlled by a single entity, which is the government. However, these days producers are relying more on captive power, but the shortage of coal and rising fuel prices remain a concern.
In terms of securing raw material, JK Cement is well placed as its current limestone reserves can support current as well as planned capacity (9 MTPA by FY09) over the next 40 years. However, currently the company sources its power requirements from the state electricity board, the cost of which is considerably high. To negate this, the company is setting up a waste recovery plant and petcoke plant to meet energy requirements, which in turn will arrest cost pressure on margins.
With volume growth remaining strong and prices firm, many players have entered this sector to explore the available opportunities. With the boom in housing sector and infrastructural activity, every player has lined up expansion or modernization plans to cater to the incremental demand. MNCs have also been eyeing the emerging markets. Few global majors such as Holcim and Heidelberg have opted the inorganic way, while Lafarge is exploring organic route.
Like other domestic and global players, JK Cement has also lined up capacity expansion plans to maintain and improve its market share and strengthen its position. Since cement is a regional play on account of its high freight costs, the company should not have all its plants concentrated in one region. It should have a geographical spread so that adverse market conditions in one region can be mitigated by high growth in the other region.