Hyderabad: India’s cement industry, which rode on a building boom to become the world’s second largest cement manufacturer after China with an installed capacity of more than 200 million tonnes (mt), is all set to take big hits.
A sharp slowdown in real estate as well as capital-starved infrastructure sectors coupled with a broad economic downturn will see the industry face considerable pressure on profitability just as new capacity starts kicking in, say industry watchers.
India’s cement industry has 132 large plants and 365 small plants with a cumulative installed capacity of 204mt at the end of August.
The main Indian manufacturers in terms of capacity are ACC Ltd, UltraTech Cement Ltd, Ambuja Cements Ltd, Grasim Industries Ltd, Binani Cement Ltd, India Cements Ltd and JK Cement Ltd. In addition, several international cement manufacturers such as France’s Lafarge, Switzerland’s Holcim Ltd, Italy’s Italcementi and Germany’s HeidelbergCement AG now hold at least a quarter of the total Indian cement manufacturing capacity.
Slack days: A file photo of an ACC plant in Himachal Pradesh. ACC says growth in cement consumption may decline in the coming months. Ramesh Pathania / Mint
The industry’s capacity utilization for second quarter ended September has declined to 82%, a four-year low, largely because 31mt of capacity was added in the past year, according to Jinesh Gandhi, an analyst with Motilal Oswal Securities Ltd.
If the industry sticks to its announced expansion, he sees some 120mt of capacity coming online over two-three years in addition to several companies modernizing their plans.
Gandhi predicts capacity utilization for the year ending March will be at around 87% down from an optimum level of around 95% in the year-ago quarter ended March. He also estimates capacity utilization to fall sharply to 74% in 2009-10. “We believe that cement prices would come under pressure from second quarter of next fiscal, as the full impact of new capacity additions are felt,” said Gandhi. Companies are starting to flag this issue.
UltraTech Cement, while announcing September quarter results on 18 October, said, “The likely commissioning of around 90mt capacity in a phased manner over the next three years could lead to a surplus scenario by 2009 resulting in pressure on earnings, sales realization and margins. All these pose a challenge to the cement industry.”
Emkay Global Financial Services Ltd, another Mumbai-based equity research firm, which covers nine Indian cement companies that together control 65% of the industry’s installed capacity, maintains a “negative” view on the sector after reviewing their performance through September. The companies under Emkay’s coverage include ACC, Ambuja Cements, Grasim Industries, UltraTech, India Cements, Madras Cements Ltd, Shree Cement Ltd, JK Cement and Orient Paper and Industries Ltd.
“We believe that the profitability of the industry will continue to be under pressure as the cement consumption growth is expected to face strong headwinds as high interest rates and medium term liquidity crunch hits housing demand and investment in infrastructure sector,” wrote Ajit Motwani and Chirag Dhaifule of Emkay.
In recent weeks, India’s top two cement manufacturers—UltraTech?and?ACC—have scaled down their demand expectation from 9% to 7% and shared a bleak outlook on growth. “There is a visible slowdown in the real estate and infrastructure sector on account of the current liquidity crisis,” said UltraTech. “This has resulted in a slackening of demand for cement which is now expected to grow around 7-8% as compared with earlier forecasts of 9-10%.”
Expressing similar views, ACC said in its outlook: “The global and domestic economic environment is decidedly unfavourable. While GDP (gross domestic product) growth target for the country is being moderated to around 6.5-7%, ACC expects growth of cement consumption in the coming months, particularly in the housing sector, may decline. Overall, we foresee challenging times ahead of us, in respect of markets, investments and input costs.”
International cement giant Holcim, which operates in 70 countries worldwide and has sizeable stakes in ACC and Ambuja Cements, said while announcing September quarter results, “In the third quarter (July-September), the global economy declined much more than expected. Holcim is expecting that the course of business will remain difficult in the coming months.”
On its Indian operations, Holcim said, “In a number of market regions, growth in cement consumption was slightly muted. Rising cement imports from Pakistan led to tougher competition in some places. During the monsoon season, northern India and large parts of Bihar and Uttar Pradesh were plagued by land slides and severe flooding which temporarily halted cement deliveries at ACC and Ambuja Cements.”
According to the president of All India Mini Cement Manufacturers’ Association and managing director of Hemadri Cements Ltd, K. Gopi Prasad, the first casualty in the cement industry would be the blended cement capacity, which is estimated to be around 20% of the industry’s overall capacity.
“Apart from cutting down on the blended cement production, the industry will also prefer not to push the expansion projects,” he said.
South India, where growth is projected to be around 12%, provides a bit of comfort to players based in this region.
The vice-chairman and managing director of India Cements, N. Srinivasan, says, “Though there seems to be some slowdown in real estate in the southern region, I am yet to see similar slowdown in the infrastructure sector here. The cement industry here has been recording a growth of around 12% for the last few years and it is unlikely to see any significant moderation in growth. As regards the overall Indian market, we need to wait and see what will be the exact impact of slowdown.”
Gopi Prasad said, the pricing pressure would be witnessed mostly in the regions with excess capacities and slowdown in realty and infrastructure. “The cement industry in Andhra Pradesh (AP) may not feel the heat for at least another nine months on account of government spend on roads, ports, housing and irrigation.”
On the declining capacity utilizations in the industry, the managing director of Hyderabad-based Bheema Cements Ltd, S.R.B. Ramesh Chandro, said it is good to have cushion in the capacity since cement utilization is dependent on the seasons in every year. “Otherwise, during summer the country will cringe for cement supply.”
S. Srekanth Reddy, managing director of Sagar Cements Ltd, says pressure on cement prices would vary from region to region based on the concentration of cement manufacturing capacities. “Even within AP, the pressure could be felt more in the southern facilities where about 60% of the state’s new capacities are coming up. Southern AP mainly caters to the needs of the Chennai and Bangalore markets.”
Motilal Oswal’s Gandhi notes that cement demand in September quarter in the south and east grew 12.7% and 13.6%, respectively, while demand in northern region was flat, central was up 2.6% and western region by 7%.
“We expect cement prices to remain stable in the west and south markets, given strong demand growth. However, prices are under pressure in the northern, central and eastern regions due to weak demand and new capacities commissioning operations,” he cautions.
Sagar’s Reddy says manufacturers have no choice but to stick to their capacity expansion plans despite the current slowdown. “In view of cyclicality of the industry, the manufacturers never plan or postpone their capacity additions based on the present day realities,” he claims. “We are going ahead with our capacity expansion programme of adding 2.25mt, to our existing 2.5mt, at Gulbarga, Karnataka, which will take off in 36 months.”