A Note on Cement Industry – 2

India is the second-largest cement producer in the world with the installed capacity of 509 MTPA and accounts for over 8.0% of the global installed capacity. A total of 210 large cement plants together account for 410 MT of installed capacity in the country, while 350 mini cement plants make up the rest. Of the total 210 large cement plants in India, 77 are located in the states of Andhra Pradesh, Rajasthan, and Tamil Nadu. Of the total capacity, 98.0% lies with the private sector and the rest with the public sector. Cement production in India increased from 230 MT in 2011-12 to 337 MT in 2018-19.

The majority of the Indian cement industry constitutes domestic companies, however, the Indian cement industry has some multinational giants including Holcim and Lafarge, which have an interest in companies such as ACC, Ambuja Cement, and Lafarge Birla Cement. The top 20 companies account for around 70.0% of the total production.

Consolidation

During the period FY2016-20, a total of 60 MTPA capacity got acquired by bigger players which led to regional capacity consolidation.

  • In FY2016, Birla Corp acquired Reliance Cement’s 5.5 MTPA capacity in the central region.
  • In FY2017, Nuvoco Vistas (earlier Nirma Cement) acquired Lafarge Cements’ 10 MTPA capacity spread across east and north.
  • In FY2018, UltraTech acquired JP Associate’s 21 MTPA capacity spread across north, central, and south regions.
  • In FY2019, UltraTech further acquired 14 MTPA capacity from Century Textiles (spread across central, east, and west markets).
  • In the same year, UltraTech also acquired Binani Cement’s 6 MTPA in the north.
  • In FY2020, Dalmia acquired Murli Industries’ 3 MTPA in Maharashtra.
  • Further as per media release dated Feb 06, 2020, the Kolkata-based diversified conglomerate EMAMI Ltd announced that it has entered into a binding agreement with Nuvoco Vistas Corp, part of the Nirma group, for divesting its 100.0% equity stake in Emami Cement for an enterprise value of Rs 5,500 cr. The transaction is subject to the customary approvals including from the Competition Commission and is expected to be consummated in the next 3-4 months.

 Cement Demand:

Cement demand in the country is largely contributed by housing sector-where Urban housing segment contributes 25-26%, Rural housing contributes 28-30% and Government projects like Low-cost housing under PMAY schemes contribute another 11-12%.   infrastructure segments like roads, railways, metros, ports apart from other structure development like bridges, dams, and irrigation contribute 22-24%. Over the last few quarters, cement demand in the country has grown at a healthy rate mainly led by strong demand from government-related projects like infrastructure and low-cost housing under PMAY schemes.

cement demand breakup - India

For marketing cement, India is divided into five regions and a few companies dominate across markets:

Regional Capacity

Cement-Demand-Supply as a Whole

Cement production after touching a peak of 337.3 MT in FY2019, stood at 327 MT in FY2020.

Performance in FY2020 (Apr-Mar,2020)

After a strong FY2019 (14% volume growth), the Indian cement industry started FY2020 on a muted note. Between Jun and Oct 2019, demand declined by 2.0% YoY due to

  1. Muted government spending after the general elections in Apr-May 2019.
  2. Change of governments in demand intensive states like Madhya Pradesh, Rajasthan, Andhra Pradesh, Karnataka, and Maharashtra.
  3. Prolonged monsoon.

However, the industry was showing initial signs of recovery since Nov 2019 and reported a 6.0% YoY increase in production over the Nov 2018 to Feb 2019 period (even after higher base; 10% growth in the preceding period of 2017-18). But the nationwide lockdown in the last 10 days of Mar 2020 impacted the cement volumes. Cement production declined by 25.0% in the month of Mar 2020.

Overall, FY2020 was a weak year in terms of demand with overall cement demand contracting by 1.0%.

 

  • Pricing trends: Strong utilization in the north/central/Gujarat markets (NCG) has kept cement prices robust vs those in the south/east/Maharashtra markets (SEM). During FY2020, prices in the NCG region rose more than 10.0% YoY. However, in the south, prices remained almost flat against a modest increase in the East. Demand contraction in the southern region in FY2020 and heightened competition in the Eastern region has been driving the sharp divergence in realization trends.
  • Operating expenditure: The cement industry benefitted from fall in pet coke and diesel prices during 2019 which has led to a reduction in input and freight cost for the cement industry. Thus, in spite of the slight rise in unitary fixed costs on account of lower utilization, unitary opex fell YoY, boosting margins.
  • Power & Fuel Cost: Average pet coke prices declined from USD 91/Ton in Q4FY19 to USD 68/ton in Q4FY20. This coupled with various cost control initiatives are undertaken by cement companies in the form of installation of WHRS (Waste Heat Recovery Systems) and other alternate sources like the use of lignite have led to a decline in power and fuel cost.
  • Freight Cost: Road transport comprises of 65-75% of the freight mix for all the major cement manufacturers in India. After a sharp decline in diesel prices recently, most of the cement companies saw a sharp decline in Freight costs in the last few quarters. Also, the applicability of higher axle load carriage capacity norms has positively impacted the freight cost for most of the cement companies. However, the crude prices have recovered from low of US$ 19.56/ per barrel in Apr 2020 to US$ 39.27/per barrel.crude price in USA
  • Margins: Higher realizations and moderation in OPEX expenditure led to firming up of operating margins of the cement industry to decade high of Rs 1,000/MT.Q4FY2020 (Jan-Mar,2020) update:
    1. Since Nov-2019, demand for cement started improving, however, in Mar-2020, due to nationwide lockdown due to Covid-19 the volumes of the cement industry declined. Cement volumes declined around 10.0% in Q4FY2020. As per a research report, the industry sells significant volumes in the last 10 days of the financial year.
    2. Net Sales Realization (NSR): During Q4FY2020, due to an increase in demand the industry increased the prices by 3.0%. Region-wise, West price was up 6.0% QoQ, South/East was up 3.0% QoQ and North/Central is up 2.0% QoQ.
    3. Cost: Variable cost including fuel and freight remained soft on account of crude witnessing sharp correction.
    4. Margins: Better realizations on account of an increase in prices coupled with a decline in variable cost led to healthy margins in Q4FY2020.

    Q1FY2021 so far:

    Cement Demand: Cement production in the month of April 2020 decreased by 86.0% YoY led by nationwide lockdown for the first 19 days of Apr 2020. Industry resumed factory operations from Apr 20, 2020 post gradual lifting of lockdown. During May, cement companies witnessed increased capacity utilization to 60-65.0% as against 35-40.0% at the start of the month. Capacity utilization further improved in the month of June 2020. The sharp increase was due to the pent-up demand before monsoon slows down the construction activity.

    Demand recovery is expected to be gradual till monsoon ends in Sep-2020. Further, from the demand side, rural housing which constitutes around 30.0% is expected to pick up faster on account of good rabi crop and labor availability. However, there is no clarity in urban housing demand due to an increase in Covid-19 cases in some of the urban cities which have led to partial shutdown of the cities once again.

    Prices: Prices on a pan India basis increased by 10.0% MoM in May-2020 with a steep rise of 16.0% MoM in the southern and eastern regions. Cement prices across other regions increased by 5-7.0%. Further, prices increased by 0.8% MoM in Jun-2020. The rise in prices is attributable to limited supply led by restrictions on labor, logistics, and factory operations.

    Margins: Low diesel and coke prices and firm realizations may boost the margins to some extent. However, higher per ton fixed cost due to lower volumes might negate the benefits of lower variable cost.

    Road Ahead

    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 the future. In the next 10 years, India could become the main exporter of clinker and grey cement to the Middle East, 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 in the interior of the country. India’s cement production capacity is expected to reach 550 MT by 2025.

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