Mumbai: The Indian cement industry is expected to see a lot of churn in 2010, with large firms losing market share to smaller, regional companies and margins coming under pressure.
Domestic cement makers are likely to add 50 million tonnes (mt) of manufacturing capacity this year, according to a report by Fitch Ratings India Pvt. Ltd, taking the nation’s installed capacity to 300 mt.
Analysts say a significant amount of the additional capacity will flow from factories located in southern India that are owned by smaller firms—those with annual capacities of 2-3 mt.
Graphic: Paras Jain / Mint
Smaller companies would control at least 51% of the market by the end of 2010, up from 40% in March 2009, according to a 22 January India Cement Outlook 2010 report by Fitch analyst Himanshu Nayyar.
Nayyar said India’s top four firms—ACC Ltd, Gujarat Ambuja Cements Ltd, UltraTech Cement Ltd and Samruddhi Cement Ltd—would see their share in the market fall to 30% by December, compared with 38% in March 2009.
Cement consumption in India in the year ended 31 March 2009 was 177.6 mt. Analysts say demand is expected to grow at the rate of 10% in 2010.
Photo: Indranil Bhoumik / Mint
The additional capacity would also lead to lower prices and capacity utilization, according to Nitin Gupta, partner, transaction advisory services at audit and consulting company Ernst and Young.
“The new capacities will lead to an overcapacity scenario which in turn will create pressure on pricing in 2010,” said Priyamvada Balaji, director, corporate ratings, Fitch. “This, together with increase in coal and freight costs, could hit profitability.”
It could also trigger some consolidation in the medium term, Gupta said.
A cement maker, however, said the local market would be able to absorb the additional capacity. “There is enough demand from road, housing and infrastructure projects to absorb the 300 million tonnes supply in the market,” said Vinod Juneja, managing director at Binani Cement Ltd, adding that larger firms would lose market share.
South India is likely to see most of the shake-up because most of the additional capacity is being installed there.
Akash Gopawar, a cement industry analyst with Systematix Shares and Stocks India Ltd, said companies in northern India will add just 3.2 mt capacity in the fiscal year ending March 2011, compared with 11 mt by firms in the south.
To be sure, larger firms are preparing for the increased competition.
ACC last week announced the acquisition of Andhra Pradesh-based Encore Cement and Additives Pvt. Ltd, which has a 200,000 tonnes capacity slag grinding unit in Visakhapatnam. Slag is a key input in cement.
Aditya Birla group has announced that it will invest up to Rs16,000 crore in the cement business over the next five years to add 25 mt capacity and maintain its current market share of 19%. It is also merging UltraTech and Samruddhi.