Fixed Forever! Knowledge Series 8. DhanBank PRU takes you on a whirlwind tour of the industry.

Transcription

1 Knowledge Series 8 Fixed Forever! It is the critical glue required to build up any economy. Whether it s for the new housing complex, the newest mall in town, the expressway that stretches out ahead of you or the sprawling mega factories, cement is an indispensable part of rising India. DhanBank PRU takes you on a whirlwind tour of the industry. 1

2 Contents Page No 1. Intro: Brick by brick 3 A) Industry cycle 4 2. Growth mode: The current scenario 5 A) Demand 5 B) Prices 5 C) Costs 6 D) Financial performance 6 3. What s the stuff, really? 7 A) Types 7 B) Raw materials 7 C) Power 7 D) Freight 7 E) Taxation 7 4. Regulatory framework 8 A) Consolidation 8 5. Major players 9 A) ACC 9 B) Ambuja Cements 9 C) UltraTech Cements 9 6. Outlook 10 A) Consumption-driven growth to continue 10 B) Supply to match demand despite incremental capacity addition SWOT analysis 11 2

3 Brick By Brick C ement is one of the most important inputs for the construction industry. Be it homes, commercial complexes or infrastructural facilities like bridges, warehouses or office buildings, cement is an inseparable part of their construction. According to the Cement Manufacturer's Association, India is the world s largest cement producer after China, with a total annual capacity of 224 million tonnes (mt) as on April 30, The Indian cement industry has been on a high growth trajectory for over a decade now. Demand is closely linked to growth of the construction sector. The main drivers of consumption are: Housing sector demand: It accounts for a large portion of domestic demand. According to the 11th five year plan ( ), housing demand is estimated to increase from over 24 million units in 2007 to over 26 million units at the end of the Plan period. Growing urbanisation, an increasing number of households and higher employment are the prime drivers. Rising pace of infrastructure development: Allocation and government emphasis on development of dedicated freight corridors, airport upgrades as well as greenfield projects, besides ports, are driving consumption. Industrial projects: Development of industrial clusters and SEZs are bolstering demand. Commercial construction, including retail, office space, hotels, malls, hospitals and schools, are rising as the economy is developing. Growth and development of industries also requires additional office space. Rising incomes are driving the demand for malls and hotels. Lakh tn 3

4 Demand for cement is also seasonal in nature, with the monsoon months usually forming the slack period as construction activity slows down. Cement consumption also witnesses a spurt during the run-up to big events such as the forthcoming Delhi Commonwealth Games. Hosting such events requires adequate infrastructure and logistics, which leads to a surge in demand for cement. Cement is also a regional product in many ways. What that means is manufacturers in one region rarely sell in the other regions. This is because cement is a bulk, low-value commodity and transporting it from one region to another involves high costs. Increase in demand has also been supported by a higher installed capacity and production on the supply side. This was well reflected by the healthy performance of the sector, particularly between 2004 and In January 2010, rating agency Fitch predicted that India will add about 50 million tonnes of cement-making capacity in 2010, taking the total to around 300 million tonnes. This is expected to result in a rise in the FY11 production levels. Industry cycle: Besides the seasonal effects, the cement industry also is known to follow a structural cycle. In this cycle, when the economy is growing demand for cement rises substantially. This is followed by capacity addition by cement makers. However, since the capacity addition process takes 2-3 years, the demand situation has the potential to change drastically either for the better or worse. If demand slows down during this time, prices obviously fall and the industry takes a downturn. Those undertaking capacity addition during this period are particularly hit the hardest since they have an interest outgo but reduced cash flows. This impacts their overall financial performance. When smaller players are unable to withstand this downturn, it either leads their shutdown or to consolidation. Ready Mix Concrete T his is a type of concrete that is manufactured in a factory or batching plant, according to a set recipe, and then delivered to a work site, by truck mounted transit mixers. This results in a precise mixture, allowing specialty concrete mixtures to be developed and implemented on construction sites. The first ready-mix factory was built in the 1930s, but the industry did not begin to expand significantly until the 1960s, and it has continued to grow since then. Ready-mix concrete is sometimes preferred over on-site concrete mixing because of the precision of the mixture and reduced work site confusion. However, using a pre-determined concrete mixture reduces flexibility, both in the supply chain and in the actual components of the concrete. The leading ready-mix concrete supplier worldwide is the Mexican concrete company Cemex; its main competitor is France-based Lafarge. Ready mixed concrete or RMC is also referred as the customized concrete products for commercial purpose. The RMC companies offer different kinds of concrete according to user's mix design or industrial standard. Source: Wikipedia 4

5 Growth Mode: The Current Scenario Demand Cement consumption has been rising (see All Indian production & consumption graph ) sharply over the past few years on account of a spurt in affordable housing. Demand for real estate, particularly in the Tier II and III cities, has boosted cement consumption. Payment of the sixth pay commission arrears, rise in corporate wages and salaries and government stimulus packages resulted in a pick-up in housing demand. Cement demand is witnessing moderation with despatches growing at 6.6% during the June 2010 quarter, compared to the 12.3% growth seen in the corresponding year-ago quarter. Poor demand growth in the southern region resulted in this lacklustre performance. Prices Prices of cement have been highly volatile in the southern, central and western regions of the country due to substantial capacity addition and slower demand growth. In the north prices were less volatile because of sustained high demand due to the infrastructure development for the upcoming Commonwealth Games. The east was largely insulated from the capacity addition and, hence, saw stable prices. Interestingly, prices in the east are at a premium because there is only one large player (Lafarge) and it is largely uneconomic for manufacturers from other regions to sell cement in the east. 5

6 Costs High international coal prices are likely to hit cement companies performance in the June 2010 quarter. Slow demand growth will hold companies from raising prices, thereby, putting pressure on profitability. Total coal consumed by the cement industry in (latest available with CMA) stood at 27.43mt, of which 6.97mt was imported. Financial Performance The industry recorded poor profit performance during Q4 FY10. The industry s sales growth slid sharply to 6% YoY. Although cement companies raised prices during January-March 2010, these were still ruling low on a YoY basis. In spite of higher sales in volume terms (up 9.2%), the lower price per bag of cement (down 3%) has pulled down the growth rate of sales in value terms. Poor sales performance and rising production costs took a toll on industry profits, which dipped 18.2%. Financial Performance Of Cement Industry (% YoY Growth) Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Net Sales Raw materials, stores & purchase of finished goods Salaries & Wages Power & Fuel Selling Freight Other Depreciation Interest Tax PAT Source: CMIE 6

7 What s The Stuff, Really? ement is a mixture of limestone, clay, silica and gypsum. Production is highly energy-intensive and involves C the chemical combination of calcium carbonate (limestone), silica, alumina, iron ore and small amounts of other materials. Cement is produced by burning limestone to produce clinker (an intermediate product) and the clinker is blended with additives and then finely ground to produce different types of cement. Types Cement can be broadly classified as portland, blended and special varieties. However, most of the production consists of ordinary portland cement (OPC), portland pozzolona cement (PPC) and portland slag cement. Special purpose cements such as oilwell, high alumina cement, rapid hardening portland and others are manufactured depending on requirement. Raw Materials Limestone is one of the most important raw materials for cement production. It is available in adequate quantities in Indian states, including Rajasthan, Himachal Pradesh and Madhya Pradesh. Power Being highly energy-intensive, the industry, on an average, requires 110 units of power to produce a tonne of cement. To overcome frequent power cuts and voltage fluctuations, most companies have set up captive power units. Power from these plants cost lesser than that supplied by the grid because power tariffs for industrial use (from the grid) are set quite high. But, at the same time, project cost for cement plants have escalated because of the need to include a captive power plant. However, the industry is now vulnerable to a rise in prices of coal -- used in captive plants. Also, coal to fire plants must be imported as existing coal linkages are not enough to meet cement sector s needs. Domestically produced coal is 40% cheaper than the imported one, although the former s quality is poorer. Freight Transportation of cement mostly by rail and roads -- from plants (located near limestone reserves) to end users is an expensive process. In order to control these costs, clinkers are set up close to limestone reserves while grinding units are closer to consumption areas. While rail is the preferred mode of transport when the distance between the manufacturing unit and market is more, for relatively shorter distances road transport is preferred. In an interesting strategy, Gujarat Ambuja set up its production units near the coast so that it could use the sea route to minimise transportation cost of bulk cement. Taxation The major taxes levied on cement are central excise duty and sales tax levied by the state governments. In addition to this there is royalty and cess on limestone and coal. 7

8 Regulatory Framework T ill 1982, India s cement industry was strictly regulated, with the government determining prices, production capacity and distribution. The process of dismantling that regime was initiated in February By 1989 it was fully decontrolled. It was de-licensed in July The partial decontrol of the cement industry in 1982 led to a spurt in production capacities. The 1989 move ushered in market forces, which could now determine prices and guide production and distribution. Until then, the industry was known for shortages. By the end of the mid-1990s supplies increased substantially as smaller players with relatively smaller capacities entered the market and chronic shortage was replaced by plentiful supplies. However, intense competition among manufacturers led to a fall in prices, rendering several smaller and inefficient players uncompetitive. This triggered a wave of consolidation in the industry. Consolidation Being a high-volume, low-value commodity, transportation costs have a direct bearing on profit margins of cement companies. This makes cement a regional product. The Indian cement industry can be divided into five geographical zones -- north, south, east, west and central. The south zone is the largest market with the highest installed capacity, followed by the north. The major industry players include ACC, UltraTech Cement, Grasim Industries, Ambuja Cements, India Cements and Madras Cements. On the basis the presence of companies across regions, the industry can be broadly classified into three categories: 1. National players: This involves companies with pan-india presence the Holcim-controlled ACC and Ambuja Cements, Grasim-controlled Century Textiles and UltraTech. 2. Regional players: These are confined to a particular region, where they are market leaders. Lafarge (east), India Cements (south), Jaypee Group (north and central) and Shree Cement (north) are examples. 3. Local players: These are small players, typically restricting their operations to a state or, at the most, two states. They increasingly run the risk of getting marginalised. With the ACC-Ambuja combine and the Birla clan (comprising Grasim and Ultratech) collectively controlling over 40% of the Indian market, a duopoly has emerged in the Indian cement sector. Multinationals like Holcim, Lafarge and Italcementi entered the industry via acquisitions and JVs. Lafarge India acquired Tata Iron & Steel s cement division in 1998 and Raymond s cement unit in In a major consolidation deal in 2005, Swiss cement major, Holcim, in strategic partnership with Ambuja Cements, acquired a 35% stake in ACC. Further, in January 2006, it entered Ambuja Cements by purchasing a 14.8% stake in it from its promoters. 8

9 Major Players ACC Formed in 1936 by the merger of 10 different companies, ACC (earlier called Associated Cement Companies) is one of the oldest and largest Indian cement makers. In 2005, Swiss cement major Holcim and Gujarat Ambuja picked up a 34.17% stake in ACC through Ambuja Cement India (ACIL) -- the holding company. ACC owns 16 factories and is the only company which has a pan-india presence. Cement being its primary business, the company also provides consultancy services, plant erection and management contracts. Ambuja Cements Gujarat Ambuja Cements was promoted as a JV in 1986 between Gujarat Industrial Investment Corporation and a group of investors, including the Neotia family of Kolkata and Narotam Sekhsaria, who was also CEO. It has a presence in most parts of the country, barring the south. In January 2006, Swiss giant Holcim picked up a 14.8% stake in it from its promoters. The Holcim group increased its stake to 45.68% in the company in March UltraTech Cement UltraTech Cement is a subsidiary of Grasim Industries, the Aditya Birla Group flagship. The company was incorporated in Earlier it was a unit of the Larsen & Toubro group and was called L&T Cement. In what was touted as one of the most important consolidation deals of the Indian cement industry, Grasim paid `2,200 crore to buy a 51% stake in L&T Cement in L&T Cement was thus renamed UltraTech Cement and management control was taken over by Grasim. 9

10 Consumption-Driven Growth To Continue Outlook The cement industry has grown by around 9% in the past two years and we expect the trend to continue, notwithstanding the slowdown which may be transient and short-lived. Investment is likely to continue with a targeted addition of 60,000 tonnes by The coming infrastructure thrust will maintain this growth for the next 2-3 years. Currently, however, cement realisations are under pressure due to lower offtake. Also, rising coal and freight costs, coupled with weakening cement prices, are resulting in lower profit margins. The current situation is on account of an increase in production capacities and the seasonal slump. Supply To Match Demand Despite Incremental Capacity Addition The planned investments are expected to result in total cement capacities of up to 250mtpa. However, looking at the government of India s thrust on construction and infrastructure, demand is set to increase by 60 million tones per annum over the next five years, ensuring that the existing pressure on realisations do not increase. The government s $350-billion layout for infrastructure in the 11th five year plan ( ) augurs well for the industry. CEMENT CAPACITY AS ON 31 MARCH 2010 (in lakh tonnes) Holcim A C C Ambuja Cements Birla Aditya Group Grasim Industries Ultratech Cement 219 Birla B.K. Group Century Textiles & Inds 78 Kesoram Industries 60.1 Mangalam Cement 20 India Cements - India Cement Group Jaiprakash Associates Madras Cements - Ramco Group 98.9 Shree Cement 91 Dalmia Cement 85.8 Private Indian 79 Binani Cement 60.8 Birla Corporation - Birla M.P. Group 57.8 Chettinad Cement Corpn 56.5 Private Foreign 53.7 O C L India 53.5 J K Lakshmi Cement 44.8 J K Synthetics 40.5 Rain C I I Carbon 40 Central Govt. Commercial Enterprises - Cement Corpn. Of India 38.5 Orient Paper & Inds. Ltd. - Birla C.K. Group 34 My Home Inds. Ltd. - Nagarjuna Group 32 Sanghi Industries Ltd. 26 Zuari Industries Ltd. - Birla K.K. Group 22 Prism Cement Ltd. - Raheja Rajan Group 20 State Govt. - Commercial Enterprises 15.2 Saurashtra Cement Ltd. 15 Andhra Cements Ltd. - Goenka G.P Gujarat Sidhee Cement Ltd. 12 Kalyanpur Cements Ltd.- Jenson & Nicholson Group 10 Others 28.6 All India Total 1,971.9* *This excludes cement capacities of those manufacturers who have not submitted their capacity break-ups to CMA. 10

11 SWOT Analysis Strength Second largest in the world in terms of capacity Bargaining power of suppliers is high as there are few large sellers No substitutes for cement Weakness High dependence on imported coal Erratic and expensive power supply from the grid forces cement companies to set up captive power plants, which increases overall project cost Opportunities Cement demand increases as the economy grows Thrust on infrastructure development by the Indian government and increase in government spending Increase in demand for housing The roads and highways ministry plans to invest $354 billion in road infrastructure by Housing and infrastructure projects and the nascent trend of concrete roads will continue to accelerate consumption. Concretisation of roads. Budgetary allocation for roads also hiked by 13% to $4.3 billion. Threats Imports from Pakistan Regulatory tightening for quarrying of limestone over environmental issues. 11

12 Note: The data for all graphs, unless mentioned otherwise, are sourced from the Cement Manufactures Association. Disclaimer Clause This report is for customer information only and does not constitute investment advice or an offer to purchase or subscribe for any investment. This document is not intended to provide professional advice and should not be relied upon in that regard. Persons accessing this document are advised to obtain appropriate professional advice where necessary. This document is not directed to or intended for display, downloading, printing, reproducing or for distribution to or use by any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or would subject The Dhanalakshmi Bank Limited or its associates or group companies to any registration or licensing requirement within such jurisdiction. If this document is inadvertently sent or has reached any individual in such country, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purpose without prior written approval of The Dhanalakshmi Bank Limited. 12