Cement Sector In India

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1 Cement Sector In India M&A - Way For Cementing Growth 2018 In this issue: 1 Global Overview 2 Fragmented Domestic Market 3 Outlook Driven by Domestic Growth 4 Criticality of Raw Material Linkage 5 M&A Transactions 1

1. Global Overview Rapid Urbanization Led Cement Demand Source: World urbanization prospects 2014 Demand of cement has been largely driven by urbanization.

2 1. Global Overview Rapid Urbanization Led Cement Demand Source: World urbanization prospects 2014 Demand of cement has been largely driven by urbanization. Since 1950, world has seen steady increase in urbanization rates. World cement production was 133 million tonnes in 1950 and increased seven-fold to 1 billion in 33 years by Subsequent growth has been exponential Cement production hitting 2 billion tonnes in 2004 (in next 21 years), 3 billion tonnes in 2010 (in next 6 years) and 4 billion tonnes in 2013 (next three years). In 2017, world cement production is ~4.3 billion tonnes. Production Capacity (mtpa) Global Cement Production Capacity Top 10 countries produce 87% of world cement. China has highest capacity of cement production of 2.5 billion tonnes (58% of global capacity). India has capacity of 450 million tonnes which is less than one fifth of Chinese production capacities. In terms of companies producing cement, top 10 companies control nearly 24% of world capacity. Lafarge Holcim is the largest in terms of cement producing capacities of 345 million tonnes spread across 200 plants worldwide. China India USA Russia Vietnam Brazil Turkey Iran Indonesia Saudi Arabia Others Source: Industry reports (FY17E) Companies Capacity (mtpa) No of Plants* Lafarge Holcim Heidelberg Cement Cemex UltraTech Cement Votorantim Inter Cement CRH Buzzi Unicem Eurocement Dangote Cement *integrated + grinding 2

2. Fragmented Domestic Market 450 Million tonnes 195 Cement plants Second Largest Producer of

tonnes. It is also the second fastest growing cement market globally with CAGR of 8%.

Top 5 players have 47% of Indian capacity.

3 2. Fragmented Domestic Market 450 Million tonnes 195 Cement plants Second Largest Producer of Cement Globally India is the second largest market globally with total capacity of 450 million tonnes. It is also the second fastest growing cement market globally with CAGR of 8%. Fragmented Nature of Business Indian market has over 195 cement plants with over 55 companies. Top 5 players have 47% of Indian capacity. 47% Capacity by Top 5 companies Ultratech Lafarge Holcim 85.7 mtpa 63.7 mtpa Shree Cements 27.2 mtpa Dalmia Bharat Cement 17.3 mtpa Ramco Cements 16.5 mtpa 3

2. Fragmented Domestic Market One Third Capacities Located in Southern India Limestone rich southern states of India houses maximum cement capacities.

Rajasthan and Andhra Pradesh Preferred Locations Due to proximity to limestone, Andhra Pradesh and Rajasthan has majority of capacities, 64.

7 mtpa Gujarat 30.1 mtpa Rajasthan 64 mtpa Maharashtra 28.3 mtpa Tamil Nadu 39.7 mtpa Telangana 23 mtpa Karnataka 38.2 mtpa Chattisgarh 22.

4 2. Fragmented Domestic Market One Third Capacities Located in Southern India Limestone rich southern states of India houses maximum cement capacities. More than one third of capacities are based in South India. Demand of cement seem to be equally distributed across regions. Rajasthan and Andhra Pradesh Preferred Locations Due to proximity to limestone, Andhra Pradesh and Rajasthan has majority of capacities, 64.7 mtpa and 64 mtpa respectively. Leading states having cement capacities include: State Capacity (mtpa) State Capacity (mtpa) Andhra Pradesh 64.7 mtpa Gujarat 30.1 mtpa Rajasthan 64 mtpa Maharashtra 28.3 mtpa Tamil Nadu 39.7 mtpa Telangana 23 mtpa Karnataka 38.2 mtpa Chattisgarh 22.6 mtpa Madhya Pradesh 35.3 mtpa Uttar Pradesh 21.3 mtpa 54% Capacities in Top 5 States Together top 10 states contribute to 82% of India s cement capacities. Cement Manufacturing concentrated in 5 states of India contributing to 54% of installed capacity. 4

3. Outlook Driven by Domestic Growth GDP Growth v/s Cement Demand growth Historically, the growth in cement demand has always had positive correlation to the GDP growth and generally the long-term

5 3. Outlook Driven by Domestic Growth GDP Growth v/s Cement Demand growth Historically, the growth in cement demand has always had positive correlation to the GDP growth and generally the long-term average cement demand growth has been 1.2x of GDP growth. However, last 3-4 years we have seen a negative correlation between the GDP growth and cement despatches growth. FY17 was the first year in history of cement industry that it witnessed a negative growth of 0.6%. Demand Growth Drivers Infrastructure - GOI committed towards increased investment in infrastructure sectors viz. roads, railways, irrigation etc. Infrastructure development in newly formed AP and Telangana shall also fuel infrastructure growth. Commercial Construction - Strong demand from IT / ITES, historically like Chennai, Bangalore & Hyderabad Urban housing Urbanization has increased rapidly. From 33% in 2011, urbanization is expected to be 40% by Number of 1mn+ cities are growing and by 2030 around 87 cities are expected to have 1 mn plus population from around 53 in Increased financial inclusion and reduced interest rate shall also promote urban housing. Rural Housing Improvement in rural economy, increased government spending in rural affordable housing and good monsoon shall help growth in rural housing and thus the cement demand from rural India. 5

3. Outlook Driven by Domestic Growth Sector guidance - Positive signs for demand pick up Government led spending will continue to be a key growth driver: Government Housing Plan o Housing for all: 20

size of house along with interest subvention scheme Roads (concrete) - another 1,00,000 kms in addition to 1,00,000 kms road which is already in process (Road Execution target for FY18 15000 kms; 40

6 3. Outlook Driven by Domestic Growth Sector guidance - Positive signs for demand pick up Government led spending will continue to be a key growth driver: Government Housing Plan o Housing for all: 20 million Houses for urban areas and 40 million in Rural areas o Pradhan Mantri Awas Yojana Gramin: To construct 10 million units by end of FY19 o Introduced affordable housing program with increased size of house along with interest subvention scheme Roads (concrete) - another 1,00,000 kms in addition to 1,00,000 kms road which is already in process (Road Execution target for FY kms; 40 kms/day against actual of ~ 23 kms/day in FY17) Recently government approved 83,677 kms road construction by 2022 (~ $105 billion) Western and Eastern dedicated freight corridor (~$13 billion) 100 smart cities, Identified first 20 smart cities (Expenditure plan $7.5 billion in next 5 years) Metro rail project coming up in various cities (Plan to construct ~ 1000 Kms network) Bullet train project from Ahmedabad to Mumbai (~ $17 billion) 5 new Mega Power Projects each of 4000 MW in the Plugand-Play mode (~ $16 billion) Port Development Handling capacity to increase more than double 3000 million tons by 2025 (~ $15 billion) Demand Supply Scenario Cement capacities have always superseded the demand. Cement players have put up the capacities in advance whenever the utilisation levels were high. In view of this, in when the capacity utilisation were higher, new capacities got installed and from 2008 until 2017, the cement capacity more than doubled from 169mtpa in 2008 to 420mtpa in

7 4. Criticality of Raw Material Linkage Limestone reserves Key element for Cement Plant Limestone - Cement Manufacturing Process 1. Quarrying: Raw materials (Limestone and clay) are obtained from the mines by blasting rocks using explosives and transported to plant. 2. Grinding: Raw materials from mines are crushed into smaller pieces. 3. Blending: Raw materials are blended into correct proportion. 4. Burning: The raw materials are fed into rotary kiln and heated up to 2000 degree Centigrade. The clinker obtained is cooled and stored in silos. 5. Clinker Grinding: Clinker is mixed with gypsum or additional cementitious (blast furnace slag, fly ash etc.) in appropriate ratio and fine grinded and stored in silos. 6. Clinker Packing: Cement is extracted from silos and conveyed to electronic packers to be packed in bags or dispatched in bulk. Limestone is the key raw Material for manufacturing cement. Historically, limestone mines were allotted to the cement manufacturer based on the applications made by the company on first come first served basis. In view of this, almost all the cement plants have limestone mines attached to the facility and mostly at the pit head. However, in 2014, the government made changes to regulations and introduced a concept of auctions of natural resources for new mines. The new mines are now allotted based on the highest price bid by the bidder for the mines. However, land acquisition is still a challenge once the mines are allotted to bidder. The mines auctioned till date are as follows: State Name of the Block Area (ha) Reserves (MT) E-auction date Jharkhand Harihaspura Block I, Ramgarh Feb 2016 Burnpur Cement Plant 74 Jharkhand Harihaspura Block I, Ramgarh Feb 2016 Burnpur Cement Plant 73 Chhattisgarh Karhi Chnadi, Balodabazar-Bhatapara Feb 2016 Shree Cements 285 Chhattisgarh Kesla, Raipur Feb 2016 Century Cements 47 Andhra Pradesh Gudipadu limestone block June 2016 Penna Cements 40 Rajasthan Limestone block- 3B1-(b) n.v Deh of tehsil Jayal District Nagar Sept 2016 Emami Cements 299 Odisha Kottameta, Malknagiri Dec 2016 Dalmia (Bharat) Cement 58 Rajasthan Sindwari, Ramkhera, Satkhanda Block- B, Chittaurgarh Jan 2017 Dalmia (Bharat) Cement 232 Rajasthan Limestone block- 3B1-(a) n.v Deh of tehsil Jayal District Nagar Jan 2017 Emami Cements 327 Chhattisgarh Kesla II, Raipur May 2017 Dalmia (Bharat) Cement 464 Gujarat Mudhvay Sub-Block B, Kachchh May 2017 Shree Cement 94 Gujarat Mudhvay Sub-Block C, Kachchh May 2017 Adani Cementation Ltd 141 Gujarat Mudhvay Sub-Block D, Kachchh May 2017 JSW Cement Ltd 164 Maharashtra Nandgaon, Ekodi, Dist Chandrapur June 2017 Ambuja Cements Ltd 604 Andhra Pradesh ErragudiHussainapuram Yanakandla Sept 2017 Sree Jayajothi Cements 50 Andhra Pradesh Nandavaram Venkatapuram Sept 2017 Sree Jayajothi Cements 50 Bidder Auction price INR/ ton Rajasthan 3D1, n/v HarimaPithsar, Tehsil & District Nagpur Sept 2017 Ambuja Cement Ltd 190 7

4. Criticality of Raw Material Linkage Cement Producing Clusters Cement manufacturing facilities are primarily set up at the limestone mine pit head and now cement players are setting up Grinding

8 4. Criticality of Raw Material Linkage Cement Producing Clusters Cement manufacturing facilities are primarily set up at the limestone mine pit head and now cement players are setting up Grinding Unit closer to consumption centres. The chart below shows the limestone clusters in India where it is available to set up the manufacturing facility Limestone rich clusters have intense competition, however this offers scope for consolidation and bringing efficiencies Attractiveness of Each Sector Cement manufacturing facilities are primarily set up at the limestone mine pit head and now cement players are setting up Grinding Unit closer to consumption centres. The chart below shows the limestone clusters in India where it is available to set up the manufacturing facility Concentration Production Cost Competition Scope of expansion / consolidation Market Connectivity Nalgonda High limestone deposit 1 mn ton/ 5 acre of area Low mining cost due to continuous seam and lower overburden ratio. However, lack of captive power Large concentration of cement players Scope for consolidation and reasonable expansion AP, Orissa and other Central and Eastern states Gulbarga High concentration 1 mn ton /10 acre Mining cost is optimal and efficient plants Significant capacity additions in recent period Some scope for expansion Southern and Western Maharashtra Satna - Katni Low concentration 1 mn ton / 25 acre Higher mining cost due to higher overburden and discontinuous seam Relatively newer plants Some degree of saturation of cement units Central and Eastern markets Chandrapur High concentration 1 mn ton / 10 acre Mining cost is optimal Most of the units have captive power supply Low, as all large players have presence Low scope for expansion Central and Western Maharashtra Rajasthan High concentration 1 mn ton / 15 acre Mining cost is optimal Efficiencies are low in number of older plants Saturated cluster with large capacities in place Low scope for expansion North, NCR, Gujarat & Madhya Pradesh 8

9 4. Criticality of Raw Material Linkage Setting up a new cement plant a challenging task The chart below shows activity timeline for setting up Greenfield Cement project in current context. Greenfield project execution in current environment is taking 5-6 years from date of conception. Mining land acquisition is critical item and needs to be accomplished upfront unlike in the past when it could be done after commencement of plant operations. Since obtaining a limestone mine is a challenge and setting up a Greenfield plant is time consuming, cement sector has seen good consolidation in the past. 9

10 4. M&A Transactions Date Investee / Target Investors EV (Rs crs) Capacity EV / ton ($) 2016 Lafarge India Ltd Nirma 9, Jaiprakash Associates UltraTech 15, Reliance Cement Birla Corp 4, Jaypee Panipat (GU) Shree Cements Jaypee Boakro (GU) Dalmia Cement 1, BMM Cement Sagar Cement Anjani Portland Cement Chettinad Cement Jaypee Gujarat UltraTech 3, Jayajothi Cements MyHome-CRH 1, Andhra Cement Jaiprakash Associates Bharathi Cement Vicat 5, Source: Multiple Industry News 191 Deals closed in 2017 $12+ bn Transaction value of deals closed in % Cross border transactions share in 2017 About IMAP IMAP is a global network of investment banking firms with presence in 35 countries. IMAP closed over 2100 transactions valued at $90+bn in last 10 years. IMAP is ranked 7th in the world in the mid-market segment by Thomson Reuters and has executed 191 transactions worth US$12 billion in IMAP has 48 offices in more than 35 countries, > 400 M&A professionals. IMAP India is exclusive India partner of IMAP Mumbai, India Contact Person: Paresh Raja paresh@imapindia.in Priya Jain priya@imapindia.in Last edited: 1 February 2018 Image Credit: Concrete Insights Blog - Financial Tribunal

May 3, 2018 I Research. Cement: Round-up and outlook. Graph 1. Global Cement Production ( By region)

May 3, 2018 I Research. Cement: Round-up and outlook. Graph 1. Global Cement Production ( By region) Cement: Round-up and outlook Contact: Madan Sabnavis Chief Economist madan.sabnavis@careratings.com 91-22-67543489 Ashish K Nainan Research Analyst ashish.nainan@careratings.com Mradul Mishra mradul.mishra@careratings.com