Cement Sector Report

The cement industry is one of the key industries in India. The production and consumption of
cement indicates the amount of infrastructure in a country and hence cement consumption acts as
an indirect indicator of the countrys progress.

Demand & Supply and Capacity

Historically this sector has witnessed supply exceeding the demand. The consumption used to be
lesser than the production in the past. The industry capacity has grown by merely 6.4% in past 12
years from 78 MT in FY95 to almost 165 MT in FY07. Housing sector acts as the principal growth
driver for cement demand in India. But the scenario has changed in the recent years when demand
has grown.
The cement industry in India has added a whopping 46 MT capacity in just a little over three years,
taking the total installed capacity to 204.29 MT as on August 31, 2008. The industry added over 30
MT to its installed capacity in just one year during previous fiscal (April 2007March 2008). Almost
all players of the industry, small to medium to large, have added capacity ranging between a
minimum of 200,000 tonnes and a maximum of 3 MT in the last three years (April 2005 to March
2008), effecting a total addition of 45 MT to the installed capacity by setting up greenfield projects,
and expanding and upgrading the existing plants.
The spur in demand took place due to higher spending by the government on infrastructure projects
and a strong demand from personal home building activity in rural and semi urban areas. Demand
from the housing sector increased due to rising income levels, fiscal incentives and a moderate
interest rate regime. The housing sector accounts for 60-65% of cement consumption. Domestic
cement consumption grew at an accelerated pace of 9.4 per cent (CAGR) during FY04-FY07.

Regional Play
It has been observed that the cement industry involves a prominent regional play amongst the
players. The industry is divided into five clear regions in the country-North, South, East, West and
Central. Of these the northern and the western regions prove to be the most lucrative markets on
account of high income levels of people. Cement is a freight intensive industry and hence
transportation costs are very high and thus transportation over long distances proves to be
uneconomical. This also holds true for transportation of the raw materials. This is one of the major
reasons that cement industry is consolidated in regions. Consolidation has taken place in the
industry. This is evident from the fact that the top five players control almost 60% of total capacity

Cement Prices
Cement prices, being market determined, have risen sharply since March 2006 largely due to an
improvement in the demand-supply dynamics. Cement prices in most of the markets are ruling at
all-time highs. Thus, with the steep rise in demand as well as prices, there is a dual effect on the
increase in Sales.

Energy & Capex Intensive

Cement Industry is a highly capex intensive company. Along with being a capex-intensive industry
cement industry also incurs high energy costs. Consequently companies put a lot of emphasis on
energy conservation and also bringing in new technologies to improve efficiency. Companies are
resorting to energy efficient practices.

Imports & Exports

India owing to its geographical advantage 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 realisations (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.

Mergers & Takeovers

Given the high potential for growth, quite a few foreign transnationals 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. However, it
must be noted that the transnationals will find the going tough since cement is a game of volumes
and with the median capacity of fragmented players, the transnationals will have to acquire
capacities piecemeal and this route is fraught with a lot of uncertainties. The global players put
together account of quarter share of the domestic market. Further, turning around few of the
companies at a time when the cycle is at its peak would be a difficult task. Considering the long term
growth story, fair valuations, fragmented structure of the industry and low gearing, an another wave
of consolidation would not come as a surprise.

Porters Analysis
In order to analyze the sector qualitatively, we have also used the Porters five forces framework to
establish the attractiveness of this sector and relative positioning of various stakeholders as well.

Barriers to Entry
Cement industry is a capex intensive industry and there are significant barriers to entry:

High capital costs

Long gestation periods

Access to limestone reserves

Bargaining Power of Suppliers

Past Trend
Licensing of coal and limestone reserves, supply of power from the state grid and availability of
railways for transport are all controlled by a single entity, which is the government. Hence there was
no control over the suppliers and neither cement manufacturers nor suppliers had bargaining
power.
Present Trend
Nowadays producers are relying more on captive power, but the shortage of coal and volatile fuel
prices remain a concern.

Bargaining Power of Buyers

Past Trend
There was a lot of bargaining power with the buyers in the past which is shown by the average
Debtors Holding Days which is approximately 34 days. This is because the customers were very few.
Present Trend
However, in the present the average Debtors Holding Days has fallen to 15 days. A possible reason
for this is the increase in number of buyers with the increase in demand for this industry. Another
possible reason that could be attributed is the regulation of cement prices by the Government. With
the reduced prices, the cement companies would have tightened credit terms for the buyers.

Threat of Competition
Due to large number of players in the industry and very little brand differentiation to speak of, the
competition is intense with players resorting to expanding reach and achieving pan India presence.
Also with the entry of multinational players in this industry the competition has stiffened further.

Major Players
Domestic Players
The Indian cement industry comprises of nearly 132 large plants and another 365 small plants. While
the Cement Corporation of India, a central public sector undertaking, comprises 10 units; the various
State governments own 10 large cement plants. Among the leading domestic players in terms of
cement manufacturing are: Ambuja Cement, Aditya Birla Group (which owns UltraTech Cement),
ACC Ltd., Binani Cement, India Cements and J K Cement. They are not only the foremost producers
of cement but also enjoy a high level of equity in the market. The ACCGujarat Ambuja and
L&TGrasim combine alone accounts for 6065 per cent of the market.

Global Players
Rapid urbanisation and the booming infrastructure have lead to an increase in construction and
development across India, attracting even the global players. The recent years have witnessed a
surge of foreign direct investment in the cement sector. International players like France's Lafarge,
Holcim from Switzerland, Italy's Italcementi and Germanys Heidelberg Cements together hold more
than a quarter of the total capacity.
Holcim, one of the world's leading suppliers of cement, has 24 plants in the country and enjoys a
market share of about 2325 per cent. It will further invest about US$ 2.49 billion in the next five
years to set up plants and raise capacity by 25 MT in the country. Holcim has a global sale worth
about US$ 20 billion, where India contributes US$ 2 billion2.5 billion.
Italcementi Group, which acquired full stake in the K K Birla promoted Zuari Industries' cement, for
US$ 126.62 million in 2006 plans to invest US$ 174 million over the next two years in various
greenfield and acquisition projects.
The French cement major, Lafarge which acquired the cement plants of Raymond and Tisco with an
installed capacity of 6 MTPA a few years back plans to double its capacity to 12 MT over the next five
years by adopting the greenfield expansion route.
German major Heidelberg Cement has merged Mysore Cement, in which it owns around 54 per cent
stake, Indorama, (where it acquired 100 per cent stake in 2008) and its 100 per cent Indian
subsidiary, Heidelberg Cement India.

Growth prospects
With the boost given by the government to various infrastructure projects, road network and
housing facilities, growth in the cement consumption is anticipated in the coming years. In order to
meet the expanding demand, cement companies are fast developing new plants. The cement
industry is poised to add 111 MT of annual capacity by the end of 200910 (FY 2010), riding on the
back of approximately 141 outstanding cement projects. According to a report by the ICRA Industry
Monitor, the installed capacity is expected to increase to 241 MTPA by FY 2010end. 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.

RMC Business
Readymix concrete (RMC) is sometime preferred to onsite concrete mixing because of the
precision of the mixture and reduced worksite confusion. The Indian RMC business is growing by 25
per cent every year. In India only 23 per cent cement consumption by cement industry goes
through RMC, as against 60 per cent in developed markets. At present, India has 200 RMC plants
across the country.

Future Outlook for the Sector

The outlook for the cement sector is promising. Several manufacturers are implementing significant
capacity expansion plans. These additions will help the industry meet the increased demand for
cement in future.
The demand for cement will grow especially in infrastructure and housing sectors, keeping pace with
the growth of the nation. Housing, construction and infrastructure sectors continue to record good
growth, which will help the cement industry.
While the outlook for demand and supply is positive, the industry faces challenges of meeting steep
cost increases which will exert pressure on margins. Realty will continue to play a major role as the
development of commercial space including malls and hotels will go on full swing.
Residential realty has seen a slight moderation in demand as the cost and availability of retail
finance has adversely impacted its growth but the slowdown is momentary. Rising prosperity of the
Indian middle class segment with improved economic conditions will drive the growth momentum of
the retail realty sector. There are already positive news flowing from the reality sector about the
boom time witnessing a return.
Moreover rapid expansion of airport and railway network, capacity expansion in steel, power and
other manufacturing sectors and 2010 Commonwealth Games to be held in Delhi will all continue to
augment the growth momentum in key infrastructure areas. The country is likely to double its
infrastructure spending over the next five years towards creating and modernising its infrastructure
and sustaining its growth momentum.
Based on the last 3 year CAGR of 10% in cement demand, the Company estimates that the industry
shall continue to see double digit demand growth. The Cement Manufacturers Association estimates
addition of over 75m tonnes per annum capacity spread across India, in next two years. This would
take the country's cement capacity to over 260m tonnes per annum, to meet its rising demand
growth.

Prepared By:
Snehil Gupta (BM2008-10)