analysis on cement industry

by Beena Chacko on Saturday 17 July 2010, 2:37 PM | Category: Banking and Finance| View: 4505 views
 
 
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TABLE OF CONTENTS

 

Page No

1. Introduction                                                        3

2. Indian Cement Industry Analysis                       4

3. Aditya Birla Group                                              9

4. Ultra Tech Cement                                              14

5. Conclusion                                                           19

6. Bibliography                                                20

Figures

1. Cement Demand Drivers                                      5

2. Hindalco Net Sales                                             11

3. Birla Nuvo Consolidated Revenues                      12

4. Birla Nuvo Revenue Mix                                      12

5. Ultra Tech Net Earnings                                     16

6. Ultra Tech Net Worth                                        16

7. Movement of Share Prices of Ultra Tech          17

Tables

1. Cement Dispatch Growth                                     5

2. Ultra Tech Sales Volume                                    14

3. Ultra Tech Sales Realisation                              15

4. Financial Highlights of Ultra Tech                     17

5. Ultra Tech and its Competitors                          18

 

 

 

INTRODUCTION

 

The Indian cement industry is on a roll. Driven by a booming housing sector, global demand and increased activity in infrastructure development such as state and national highways, the cement industry has outpaced itself, ramping up production capacity, attracting the top cement companies in the world, and sparking off a spate of mergers and acquisitions to spur growth. The recent boom in the housing and construction industry in India has worked wonders for cement manufacturing companies with capacity utilization crossing the 100 per cent mark for the first time in January 2007.

 

Globally, India is the second largest producer of cement. Cement production grew at the rate of 9.1 per cent during 2006-07 over the previous fiscals' total production of 147.8 mt. Of this, 9.3 million tone of cement was exported. The Indian cement industry comprises 130 large cement plants and 365 mini-cement plants, with installed capacities of 165 million tones per annum (tap). Large cement plants accounted for over 94 per cent of the total installed capacity.

 

The booming demand for cement, both in India and abroad, have attracted global majors to India. In 2005-06, four of the top-5 cement companies in the world entered India through mergers, acquisitions, joint ventures or Greenfield projects. These include France's Lafarge, Holcim from Switzerland, Italy's Italcementi and Germany's Heidelberg Cements.

 

Despite the growth of the Indian cement industry, India's per capita production of 115 kilograms per year lags the world average of over 250 kilograms and China's production of more than 450 kilograms per year. Clearly there remains room for growth in the industry in India.

 

This Project is an Analysis on Indian Cement Industry and Ultra Tech Cement.





 

 

 

 

 

INDIAN CEMENT INDUSTRY ANALYSIS

 

The Indian cement industry with a total capacity of about 200 m tonnes (MT) in FY09 is the second largest market after China. The key drivers for cement demand are real estate sector, infrastructure projects and industrial expansion projects. Among these, real estate sector is the main key driver and accounted for almost 55% in FY 07. A few of the leading manufacturers are the UltraTech/Grasim combine, Dalmia Cements, India Cements, and Holcim etc. With the boost given by the government to various infrastructure projects, road networks and housing facilities, growth in the cement consumption is anticipated in the coming years. According to Jyotiraditya Scindia, Minister of State for Commerce and Industry, cement production could rise to 236.16 MT in FY11 and touch 262.61 MT in FY12.

With almost total capacity utilization levels in the industry, cement dispatches have maintained a 10 per cent growth rate. Total dispatches grew to 170 MT during 2007–08 as against 155 MT in 2006–07.Moreover, cement dispatches were 15.95 MT in July 2009, showing a growth of 9.92 per cent as compared to 14.51 MT in July 2008. During July 2009, cement production was 16.23 MT, registering a growth of 10.63 per cent as compared to 14.67 MT in July 2008. Between April to July 2009, cement production totaled 66.38 MT while cement dispatches totaled 65.80 MT.

Despite the fact that the Indian cement industry has clocked production of more than 100 MT for the last five years, registering a growth of nearly 9% to 10%, the per capita consumption of around 134 kgs compares poorly with the world average of over 263 kgs, and more than 950 kgs in China. This, more than anything, underlines the tremendous scope for growth in the Indian cement industry in the long term.

 

Given the high potential for growth, quite a few foreign transnational have been eyeing the Indian markets and are planning to acquire domestic companies. Already, while companies like Lafarge, Heidelberg and Italicementi have made a couple of acquisitions, Holcim has acquired stake in domestic companies Ambuja Cements and ACC and has increased its stake gradually to gain full control. After acquiring stake in big companies, transnationals eyed median capacity producers. Italcementi acquired 100% stake in Zuari Cement and 95% stake in Shree Vishnu. Cimpor, the Portugese cement manufacturer, acquired Grasims stake (53.63%) in Shree Dig Vijay. The global players put together account of quarter share of the domestic market

 

 

 

DEMAND DRIVERS:

 

                                                Figure 1

 

Cement dispatch growth at 5-year high in April:

             

Table 1

Strong Growth
Cement dispatches in April

Year

Dispatch

Growth (%)

2004

10.63

17.85

2005

11.78

10.82

2006

13.05

10.78

2007

13.88

6.36

2008

14.73

6.12

2009

16.65

13.03

All figures in million tonnes

ACC, the country's largest cement maker had a dispatch growth rate of 4.05 per cent in April whereas Ambuja Cements registered a rise of 10.74 per cent. The cement despatches of Aditya Birla group, comprising UltraTech Cement and Grasim, in April jumped 17.43 per cent while the cement major from north Shree Cement's despatches surged a steep 28 per cent. The dramatic rise in April despatches is due to the low base last year because of the export ban which came into effect during the same period last year, thereby impacting despatches

The price hike of Rs 12-15 for a 50 kg bag of cement during the March quarter of FY09 is helping cement makers reap the benefits. The market players have always maintained that pricing of cement is the function of supply and demand. The government had come up with two stimulus packages which also benefited the cement sector with excise duty cuts and re-imposition of counter-vailing duty (CVD) on the imported cement from Pakistan.

Financial Year 09:

 FY09, the industry maintained volume growth of around 10% YoY. The industry added nearly 30 MT in FY09 over the previous year taking the total capacity to nearly 212 MTPA. India also has been catering to the cement requirements of the Middle East and the South East Asian nations. However, the exports were curtailed in FY09 in order to satisfy the domestic demand and contain inflation. While demand growth stood at 10% YoY, average industry cement realizations (average of price per bag of cement) were higher by about 5% YoY. The growth in realisations slowed down as additional capacities coming on stream eased the supply pressures.

Considering the financial turmoil witnessed globally, financial institutions have tightened their credit norms. This cautious stance has led to a credit crunch and the same has impacted upcoming projects. On account of general economic slowdown and these issues, the demand for cement has moderated. However, stimulus packages that included reduction in excise duty announced by the government and agricultural income gave a fillip to the demand for the commodity.

The industry volumes and realisations were higher during FY09 that boosted top line growth. However, cost of operation did also witnessed northward movement that exerted pressure on margins. To ensure smooth functioning of plants and lower costs, industry has opted to set up captive power plants based on coal. This has resulted in increase in demand for coal. But coal linkages for the industry are poor. Recently the ratio has dropped below 50%. So the players either have to purchase it from open market or import it. This has increased cost of operation.

 

New Investments

  • JSW Cement, part of the OP Jindal Group, plans to set up cement units near the group's steel plants at Kurnool, Andhra Pradesh, and Vijayanagar, Karnataka. The units which will have a combined capacity of 5.5 MT per annum will be set up at a cost of US$ 393.1 million.
  • Anil Ambani Group Company Reliance Infrastructure will invest US$ 2.1 billion to set up cement plants with a total capacity of 20 MT per annum over the next five years.
  • Reliance Cementation, an Anil Dhirubhai Ambani Group (ADAG) company plans to set up a 5 MT integrated cement plant in Yavatmal district of Maharashtra at a cost of US$ 463.2 million.
  • Jaiprakash Associates Ltd has inked a MoU with state-owned Assam Mineral Development Corporation Limited (AMDC) for setting up a 2 MT per annum capacity cement plant at an estimated cost of US$ 221.36 million.
  • Iron ore mining firm Rungta Mines (RML), the flagship company of SR Rungta group, plans to set up a one million tonne cement plant in Orissa with an investment of around US$ 123 million

Mergers and Acquisitions (M&As)

  • Holcim strengthened its position in India by increasing its holding in Ambuja Cement from 22 per cent to 56 per cent through various open market transactions with an open offer for a total investment of US$ 1.8 billion. Moreover, it also increased its stake in ACC Cement with US$ 486 million, being the single largest acquirer in the cement sector.
  • Leading foreign funds like Fidelity, ABN Amro, HSBC, Nomura Asset Management Fund and Emerging Market Fund have together bought around 7.5 per cent in India's third-largest cement firm, India Cements (ICL), for US$ 124.91 million.
  • Cimpor, the Portugese cement maker, paid US$ 68.10 million for Grasim Industries' 53.63 per cent stake in Shree Dig Vijay Cement.
  • CRH Plc, the world's second biggest maker and distributor of building materials, acquired a 50 per cent stake in My Home Industries Ltd for almost US$ 372.64 million.
  • Vicat SA, a French cement maker acquired a 6.67 per cent stake in Hyderabad-based Sagar Cement for US$ 14.35 million.

 

 

 

 

Prospects:

·        The industry is likely to maintain its growth momentum and continue growing at around 8% to 9% in the medium to long term. Government initiatives in the infrastructure sector and the housing sector are likely to be the main drivers of growth for the industry.

·        According to a report by the ICRA Industry Monitor, the installed capacity is expected to increase to 241 MTPA by FY 2010-end. India's cement industry is likely to record an annual growth of 10 per cent in the coming years with higher domestic demand resulting in increased capacity utilization.

  • In the recent past, demand has surpassed supply, resulting in healthy cement prices across the country. However, this scenario is likely to reverse as the industry has lined up huge capacity expansion plans. With the growth in the sector and waning demand supply gap, cement producers have lined up capacity expansion plans.
  • Real estate and construction activities in the urban areas have taken a back seat with economic slowdown. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 60%-70% of the country's cement. If this support wanes, it would impact the growth in consumption of cement, leading to demand supply mismatch. Also, the hike in prices of coal and petroleum products could impact cement companies margins.

 

SWOT ANALYSIS:

Strengths:

1. Growing International Presence

2. Cement Demand has increased due to the growth in Housing sectors,   

Infrastructure sectors, Industrial projects etc.

3. Capacity Utilization over 90%

Weakness:

1. Cement Industry is highly regionalized.

2. Low value commodity makes transportation over long distances Uneconomical.

Opportunities:

1. Growth of core sector industries

2. Rapid integration with global economy.

3. Growing e-commerce business

4. Increasing urbanization

Threats:

1. Entry of global players

2. Political Threats

3. The impact of foreign currency fluctuations and interest rates.

 

 

 

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