SECTOR WISE CONSUMPTION OF CEMENT

Indias cement industry has demonstrated healthy growth in the past decade, primarily driven b the buoyancy in the countrys economy, which has resulted in increased investments in the two key end user market of the cement industry- the infrastructure and residential real estate i.e. Housing sector. Housing sector accounts for almost twothirds of cement demand. Despite housing being the largest end-user segment, we expect infrastructure to be the key growth driver for cement demand over the next 5 years. Increased government focus will result in higher investments in the infrastructure space. Within infrastructure, segments like roads will play a crucial role in increasing demand for cement. Sector wise break up

20%

13% 4%

commercial real estate industrial residential real estate

63%

infrastructure

Source: Crisil Research Breakup of cement demand by end-user segments

I. Improved demand from residential real estate (housing) During FY06-FY10, approximately 522 million tonnes of cement was used by the residential real estate sector, which contributes 63.4% to the total domestic cement demand in the country. Given the intense shortage of housing in the country, this segment has been the primary demand driver for cement industry. Over the years, the

demand for the residential real estate has only increased, fuelled by increasing urbanization, rising income levels, decreasing household sizes, easy availability of home loans and tax incentives for borrowers. The total shortage in housing during the eleventh five-year plan (2007-2012), is expected to be 74 million units, the majority of which is expected to be generated by rural and below the poverty line households, he government has launched various initiatives such as national rural employment guarantee scheme (NREGS) and the Indira AwasYojana to improve rural income, which may increase the demand for rural housing in the country. Housing segment will continue to account for lion's share in cement demand While the housing segment accounted for almost 63 per cent of the cement demand over the past 5 years, CRISIL Research expects its contribution to drop marginally to around 60 per cent during 2012-13 to 2016-17. While the demand from urban housing is estimated to grow by 7-8 per cent CAGR over the next 5 years largely on account of new housing projects, demand from rural housing is likely to grow by around 5-6 per cent CAGR as rising rural income and higher government investments have boosted cement demand in the rural and semi-urban regions. Rural housing is expected to contribute to healthy growth in cement demand, as a large section of the population in the region is likely to benefit from higher farm incomes, loan waiver schemes and alternative avenues of income generation due to higher government spending through the National Rural Employment Guarantee Scheme (NREGS). This region will also witness higher traction in implementation of key central infrastructure projects like PradhanMantri Gram SadakYojna (PMGSY) etc, and rural infrastructure schemes like Bharat Nirman and Indira AwasYojna (IAY). The magnitude of shortage in housing and the higher proportion of temporary houses in rural areas, coupled with rising rural income, are expected to provide significant impetus to rural housing. This will provide a sustainable driver for cement consumption. Over the past 5 years, urban housing propelled cement demand in the housing segment. While demand from rural housing grew by around 6-7 per cent CAGR, urban housing demand witnessed a CAGR of almost 8-9 per cent from 2006-07 to 2011-12. The urban housing market has boomed over the last few years on the back of increasing affordability, change in the demographic pattern and the growing number of nuclear families due to urbanization and increasing finance penetration.

II. Increased focus on infrastructure development Indias economic growth during the past few years has increased the need for quality infrastructure facilities in the country. The government increased its total investment in the sector from US$24 billion (5% of the countrys GDP) in FY02 to US$83.5 billion (representing 7.2% of the countrys GDP) in FY10. Its total investment target for the infrastructure sector during the eleventh five-year plan is US$500 billion (9% of the countrys GDP) and 2.3 times more than investments during the tenth Five year plan period. The bulk of the investments planned during the eleventh five-year plan are likely to be absorbed by the power, road and highways, railway and port segments. Close to 21% of the investments during the eleventh five year plan period are expected to be made to improve rural infrastructure in the country. Increased investments and construction activity in the infrastructure sector have resulted in a consequent growth in the demand for cement. In FY06-FY10, approximately 166 million tonnes of cement was used by the domestic infrastructure sector, which contributes 20% to the countrys total demand for cement. Over the next 5 years from 2012-13 to 2016-17, the infrastructure segment is projected to post a robust CAGR of 14-16 per cent, primarily supported by the government's renewed thrust on infrastructure development in the country. CRISIL Research expects this segment to account for approximately 25 per cent of the total cement demand over the next 5 years. Over the next 5 years, CRISIL Research expects demand for cement to grow at a robust pace of around 8 per cent CAGR, primarily driven by infrastructure demand emanating from urban areas along with independent housing projects in both urban and rural areas.

Infrastructure development to propel demand for cement Over the next 5 years from 2012-13 to 2016-17, the infrastructure segment is projected to post a robust CAGR of 14-16 per cent, primarily supported by the government's renewed thrust on infrastructure development in the country. CRISIL Research expects this segment to account for approximately 25 per cent of the total cement demand over the next 5 years. Between 2007-08 and 2011-12, infrastructure accounted for around one-fifth of the total cement demand in India. During this period, the segment registered a modest CAGR of around 8-10 per cent. Higher investment in improving the road network and increased cement intensity in road projects are expected to remain the key growth drivers for the infrastructure segment. Moreover, continuing investments in the power sector, railways and increasing spend on urban infrastructure projects are expected to continue to provide impetus to growth. The increasing number of irrigation projects (especially in the southern region) is expected to propel infrastructure growth further. Roads segment to remain key demand driver within infrastructure Cement demand from the roads segment is expected to increase by 17-18 per cent CAGR in absolute terms from 2007-08 to 2011-12. However, in percentage terms, the share of the roads segment in the overall infrastructure pie is likely to remain the same during 2012-13 to 2016-17 as compared to its share over the last 5 years. III. Surge in development activity in commercial real estate (CRE) and civil facilities: India CRE segment includes development of retail space, office space, and hotels while civil facilities include hospitals, multiplexes and schools. This segment has grown in tandem with the countrys economy. The demand of office space in India is being driven by the influx of international of multinational companys into it and the growth of service sector especially the IT BPO Industries. Progressive liberalization and easing of Foreign direct Investment (FDI) norms in various sectors paved the way for the countrys FDI growth, which led to a burgeoning demand for office space from MNCs Growth in organized retailing and the entry of international retailers into India has fuelled the demand for good quality Mall space in the country. Strong growth in tourism, including in business and leisure travel has increased construction of hotels in India.

Its growing population and increased urbanization in the country have increased its need for more civil facilities. CRE that accounts for 10-15% of the total domestic cement demand in India consumed approximately 104 MT of cement during FY-06 to FY-10. Share of commercial construction in cement demand to decline marginally Over the next 5 years (from 2011-12 to 2016-17), demand from the commercial construction segment is forecast to grow by 6-7 per cent CAGR, primarily on account of the expected development of office spaces across businesses and likely pickup in hiring across sectors. However, CRISIL Research projects the percentage share of commercial construction in the overall cement demand during this period to decline marginally to 12 per cent over the next 5 years from 13 per cent over the previous 5 years. The commercial construction segment can be broadly classified into office space, malls and multiplexes, hotels and other civil structures such as hospitals and educational institutes. Of these sub-segments, demand from office space, accounts for a substantial portion of the overall commercial construction demand.

IV. Expansion in Industrial Investments: Over the past few years, the growth in Indias economy has resulted in an increased demand for steel, aluminum, textiles and petrochemicals. Several companies in these industries have announced their expansion plans, including building of new plans to address this growing demand leading to a higher intake of cement. Moreover, the governments SEZ Act, 2005 has generated additional economic activity, promoted exports and created

employment activities, promoted exports and created employment opportunities in the country. As of January 2011 373 SEZs have been notified, and the board of approval had grated formal approvals for 581 SEZs and in principle approval for 154. The industrial segment accounts for 4-6% of the total domestic demand for cement in the country and consumed close to 32 million tonnes during FY06- FY10

REGION WISE CEMENT DEMAND AND CONSUMPTION Our country is the second major cement producing country following the China; we have 137 large and 365 mini cement plants. Leading players in the industry are Ultratech Cement, Gujarat Ambuja Cement Limited, JK Cements, ACC Cement, Madras Cements etc. Cement is an adhesive that holds the concrete together and is therefore vital for meeting economys needs of Housing & accommodation and necessary infrastructure such as roads & bridges, schools, hospitals etc. Hence, the cement is one of the fundamental elements for setting up strong and healthy infrastructure of the country and plays an important role in economic development and welfare of the nation. Cement industry is being segmented regionally i.e. Northern, Central, Western, Southern and Eastern. Cement, being a bulk item transporting it over long distances can prove to be uneconomical as it attracts very high amount of freight. Thus, it has resulted in cement being largely a regional play with the industry divided into five main regions. As it is a freight intensive industry, the segment is completely domestic driven and exports account for very negligible percentage of the total cement off takes.

Northern 14% 21% 13% 11% 41% Southern Central Western Eastern

Southern region in the country is the biggest contributor in cement production and it has a largest pie in capacity with 92.11MT. India has total capacity of 226.90 MT as on March 2010 comprised of Northern Region 48.27 MT, Central Region 26.01 MT, Eastern Region 31.89 MT, Western Region 28.62 MT and as mentioned earlier Southern Region 92.11 MT. Rajasthan, Andhra Pradesh, Tamil Nadu, Madhya Pradesh and Gujarat are the prominent cement industry contributor states. The southern region generally has an excess capacity trend in the past owing to profuse availability of limestone, the western and northern regions are generally has more demand than availability. SOUTHERN REGION For the past several years south India has been largest consumer of cement in the country. The development of some key infrastructure projects including airport development and metro rail projects has lead to an increase in their demand for cement in this region. The availability of vast reserves of lime stone in south India has resulted in increase of the capacities to meet the rising demand. However Commissioning of new capacities in FY09-FY10 has lead to a surplus supply. Therefore the region has been witnessing low utilization levels. Consumption in Indias southern region has increased at the CAGR of 10.1% during FY01-FY10, and production and capacity have grown at a CAGR of 10.3 & 10.7% respectively. The key markets in the region are Andhra Pradesh, Tamil Nadu, Karnataka and Kerala.

NORTHERN REGION Consumption cement in northern region increased at CAGR of 9.7% during FY01-FY10. While production and capacity both have increased at a CAGR of 10.3%. The key markets in the north include Delhi, Rajasthan, Punjab and Haryana. The demand in this region has been primarily driven by road and bridge construction projects in these states as well as irrigation projects and the development of commercial real estate projects in many cities in their region. Recently the demand for cement has been fuelled further by the Metro rail project and the construction of infrastructure facilities for the common wealth games in Delhi-NCR.

EASTERN REGION In this region demand has been driven by growth in housing and industrial projects. Consumption has grown at a CAGR of 10.3% during FY01-FY10, and production and capacity have increased at a CAGR of 7.4% and 6.9%, respectively. The key markets in the east include West Bengal, Orissa, Chattisgarh and Bihar.

WESTERN REGION Consumption in this region has increased at a CAGR of 7.5% during FY01-FY10, driven by the growth in housing and commercial real estate projects in many cities like Mumbai, Pune and Ahmadabad. Productions and capacity increased at a CAGR of 7.5% & 6.4% respectively. Maharashtra and Gujarat are the key markets in this region.

CENTRAL REGION: Consumption the central region has increased at a CAGR of 7.4% during FY01-FY10, and production and capacity increased at a CAGR of 7.4% and 6.4% respectively. Uttar Pradesh is the key market in this region. The demand for cement in this region has increased primarily due to growth in housing and infrastructure projects.