ement Sector Analysis Report

41

[Key Points | Financial Year '13 | Prospects | Sector

Do's and Dont's]

The Indian cement industry is the 2nd largest market after China accounting for about 8% of the total

global production. It had a total capacity of about 347 m tonnes (MT) as of financial year ended 201213. Cement is a cyclical commodity with a high correlation with GDP. The housing sector is the biggest
demand driver of cement, accounting for about 67% of the total consumption. The other major
consumers of cement include infrastructure (13%), commercial construction (11%) and industrial
construction (9%).

The Indian cement industry grew at a commendable rate in the last decade, registering a compounded

growth of about 8%. However, the growth has slowed down in recent years owing to the sluggishness
in the economy. Moreover, the per capita consumption of cement in India still remains substantially
poor when compared with the world average. This underlines the tremendous scope for growth in the
Indian cement industry in the long term.

Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances

can prove to be uneconomical. This has resulted in cement being largely a regional play with the
industry divided into five main regions viz. north, south, west, east and the central region. The
Southern region of India has the highest installed capacity, accounting for about one-third of the
country's total installed cement capacity.

Given the high potential for growth, quite a few foreign transnational companies have ventured into the

Indian markets. Already, while companies like Lafarge, Heidelberg and Italicementi have made a
couple of acquisitions, Holcim has increased its stake in domestic companies Ambuja
Cements and ACC to over 50% to gain controlling interest. Consolidation has taken place with the top
two cement groups controlling nearly one-third of the total domestic capacity. However, the balance
capacity still remains quite fragmented.

Key Points
Supply

The demand-supply situation is highly skewed with the latter being significantly
higher.

Demand

Housing sector acts as the principal growth driver for cement. However, industrial
and infrastructure sectors have also emerged as demand drivers.

Barriers to entry High capital costs and long gestation periods. Access to limestone reserves (key
input) also acts as a significant entry barrier.
Bargaining
power of
suppliers

Licensing of coal and limestone reserves, supply of power from the state grid etc
are all controlled by a single entity, which is the government. However, nowadays
producers are relying more on captive power, but the shortage of coal and volatile
fuel prices remain a concern.

Bargaining
power of
customers

Cement is a commodity business and sales volumes mostly depend upon the
distribution reach of the company. However, things are changing and few brands
have started commanding a premium on account of better quality perception.

Competition

Intense competition with players expanding reach and achieving pan India
presence. The industry is a lot more consolidated than a couple of decades ago with
a few large players controlling substantial market share.
TOP

Financial Year '13

During the financial year 2012-13 (FY13), India's cement production grew by 5% year-on-year (YoY).

The subdued growth was mainly attributable to slowdown in construction activities, regulatory delays
in infrastructural projects and the overall downturn in the economy. As such, the supply glut resulted in
lower capacity utilisation levels.

The industry witnessed high operating costs, including all major cost heads such as raw materials,
energy and freight. The steep depreciation of the rupee and hike in rail freight and diesel prices
further aggravated the concerns.

TOP
Prospects

Slowdown in demand, high inflation, government deficits and weaknesses in the global economy have

resulted in a slowdown in India's GDP growth. Cement demand is closely linked to the overall
economic growth, particularly the housing and infrastructure sector. As such, cement demand is likely
to remain sluggish over the medium term. However, the long term growth prospects remain intact
given the huge untapped housing demand and positive demographics.

However, the long term drivers for cement demand remain intact. Higher government spending on

infrastructure, robust growth in rural housing and rising per capita incomes are likely to augur well for
the cement industry. The government plans to spend US$ 1 trillion on infrastructure in the 12th five
year plan period (2012-17). The same during the 11th plan period was US$ 514 bn. The focus on
infrastructure development is expected to boost cement demand.