India is the second largest producer of cement in the world. No wonder, India’s cement industry is a vital part of its economy, providing employment to more than a million people, directly or indirectly. Ever since it was deregulated in 1982, the Indian cement industry has attracted huge investments, both from Indian as well as foreign investors. The construction sector alone constitutes 7% of the country’s Gross Domestic Product (GDP). The industry occupies an important place in the Indian economy because of its strong linkages to other sectors such as construction, transportation, coal and power.
India is the second largest producer of quality cement in the world. The cement industry in India comprises of 210 large cement plants and over 365 mini cement plants. Currently, there are around 40 big players in the industry across the country. India’s cement production capacity is expected to reach 550 million tonnes by 2025. Of the total capacity, 98% lies with the private sector and the rest lies with public sector. The top 20 cement companies in India account for around 80% of the total production.
Structure of the Indian cement industry
Generally, cement industry players are divided into three categories namely pan Indian players, local players and regional players. The pan-India players enjoy around 50% of the market share. Some of the key players are Holcim, Grasim Industries, and Dalmia. They are characterised by expansion through greenfield and brownfield projects.
The regional players command around 37% of the market share. They have a strong command in their respective regions. Some of the key players are Lafarge (eastern region), India Cements (southern region), JP Associates (northern and central region) and Shree Cements (northern region). Regional players are often characterised by looking to expand in other regions.
The local players enjoy around 13% market share. These stand-alone players often stand the risk of being marginalised. Key players in this segment are CCI, J&K Cement, Star cement, Panyam Cement, Penna Cement.
Cement demand was hit by the general slowdown in the economy. The Index of Industrial Production dipped to 0.4% in June 2017 from 1.5% in the same period prior to last year, rattling the industry’s confidence. It bounced back the following month largely due to lower base effect. The Finance Ministry has lowered its GDP growth expectation to 7.5% for this fiscal.
However, the slew of economic reforms announced by the government and expectation of RBI lowering interest rates will boost sentiments and kick start the sagging economy. After an impressive December quarter, cement companies are staring at a muted growth in the March quarter. Despite dropping prices, the demand in few regions remained quite dismal. The high interest and slowdown in economic activities had dampened the demand in last two months.
The eastern states of India are likely to be the newer and virgin markets for cement companies and could contribute to their bottom line in future. In the next 10 years, India could become the main exporter of clinker and gray cement to the West Asia, Africa, and other developing nations of the world. Cement plants near the ports, for instance the plants in Gujarat and Visakhapatnam, will have an added advantage for exports and will logistically be well armed to face stiff competition from cement plants from up country.
Due to the increasing demand in various sectors such as housing, commercial construction and industrial construction, cement industry is expected to reach 550-600 Million Tonnes Per Annum (MTPA) by the year 2025.
A large number of foreign players are also expected to enter the cement sector, owing to the profit margins and steady demand. In future, domestic cement companies could go for global listings either through the FCCB route or the GDR route. With help from the government in terms of friendlier laws, lower taxation, and increased infrastructure spending, the sector will grow and take India’s economy forward along with it.
Merger and acquisitions
The cement industry has been going through consolidation phase with large Indian cement players preying on smaller ones and foreign cement majors acquiring controlling stake in Indian majors. According to data from VCCEdge, the Indian cement industry has seen seven M&A deals worth a total $3.3 billion since January 2013.
The compelling reasons why domestic and foreign cement majors appear to be so bullish on India are varied. Excess capacity of the existing players which can be used to fulfill the global demand at lower cost of production is an important factor. Entry of foreign players who wanted a pie of untapped Indian market is another contributing factor and thirdly, rising cost of greenfield projects which also tends to have longer gestation periods is also another contributing factor. The consolidation in the cement industry would prove to be beneficial both for the acquiring companies as well as for the cement industry.
The sector does provide varied business oppurtunities. Over the period, we can expect the CAGR of demand to vary between 7.5% to 9.5 %. In the most likely case, it is expected to be around 9%, which would result in the install capacity reaching around 450 million tonnes per annum by FY2021.After trailing potential supply between FY2013-FY2020, demand could exceed supply beyond FY2020, if fresh capacity expansion is not planned earlier. The capacity expansion is expected to continue in next three to four years.
The sector has seen substantial surplus capacity in FY 2016 - FY 2018. This might lead to lower valuation. Additionally, it can see some movement in the coming years. According to industry insiders, as many as 15-25 cement companies can be seen exchanging hands. Many companies in the sector may initiate expansion plans by FY 2018 -19.
-The author is Senior Vice President, Commercial and Finance, Srei Infrastructure Finance Limited
Some of the governmental policies that can augment the sector are:
Focus on expanding railway connectivity
l Increased capital expenditure plan for Indian railways by over 71% to Rs 1 lakh crore.
l Five year capital investment plan of Rs 8.6 lakh crore introduced for the first time.
l For the first time, the Railways has tied up with LIC for low-cost institutional finance of Rs 1.5 lakh crore.
l The Railway Ministry initiating steps to enter into a Joint Venture with Odisha government for developing the ra. l infrastructure in the state
Big push to freight corridor project:
l Between November 2014 and now, contracts for Rs 17,500 crore were finalised as against Rs 12,500-crore worth of cumulative contracts awarded between the project’s inception in 2006 and November 2014
l Another project of Rs 17,000 crore has been finalised by March 2016 and the phased commissioning of the project would start from 2018.
Massive push to railway infrastructure under way in north eastern India:
l The target is to connect all capitals of north eastern states by 2020.
l Economic revival of ports.
To achieve targets of government plans:
l Increasing capacity of 12 major ports and 200 minor ports from current 1400 MMT to 2000 MMT.
l Mega transshipment hub of Rs 5000 crore in Tamil Nadu to reduce dependence on Colombo and Singapore ports.
l Plans to build five new ports at an investment of around Rs 25,000 crore.
l New sites in West Bengal, Maharashtra, Tamil Nadu, Karnataka and Andhra Pradesh.
Real Estate revival in sight:
l NITI Aayog approved re-launching of Affordable Housing Scheme Indira Aawas Yojna.
l Mulling to rename to “The National Mission for Rural Housing”.
l Interest subvention on housing loans increased to 6.50% from current 5% to beneficiaries belonging to the EWS.