CEMENT INDUSTRY

INTRODUCTION The Indian cement industry is the second largest producer of quality cement. Indian Cement Industry is engaged in the production of several varieties of cement such as Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement, etc. They are produced strictly as per the Bureau of Indian Standards (BIS) specifications and their quality is comparable with the best in the world.

In last ten years, this sector has recorded a CAGR of 8%, against the world cement industry average of 3.5% and Chinas cement industry growth rate of 7.2%. Today this industry not only outshines that of developed countries such as US and Japan but also has become the second largest cement producer in the world after China. The cement industry has continued its growth trajectory over the past ten years. Domestic cement demand growth has surpassed the economic growth rate for the past three years. Cement demand in the country grows at roughly 1.5 times the GDP growth rate. The industry had a turnover of around US$ 7.8 billion in 2003-04 and according to CRISIL is expected to grow at a CAGR of around 7 per cent in the next five years. The key drivers for cement demand are real estate sector, infrastructure and industry expansion projects. Among these real estate sector is the key driver of cement demand. The demand for cement is closely related to the growth in the construction sector. Consequently, cement demand has been posting a healthy growth rate of around 8 per cent since 1997-98, propelled by the increased thrust on infrastructure development, and the higher demand from the housing sector and industrial projects. Cement is bulky commodity and cannot be easily transported over long distances making it a regional market place, with the nation being divided into five regions. Each region is characterized by its own demand-supply dynamics. Over the past few years the cost of cement production has grown at a CAGR of 8.4%.

With increase in infrastructure development activity with projects such as state and national highways, and global demand has led Indian cement industry to increase their production capacity. This in turn has attracted the top cement companies in the world to enter the Indian market and take the advantage of growth in demand. The cement sector continues to emphasize on cost cutting through enhanced productivity, reduction in energy costs and logistic expenses. The government has considered spending more than US $500 billion on infrastructure in the 11th five year plan. Apart from this railways, urban infrastructure, ports, airports, IT sector, organized retailing, malls and multiplexes will be the main sectors driving the demand of cement in the country. So we can see that cement industry is moving towards both challenges and opportunities poised by the presence of domestic and global players in the Indian market. This trend is likely to continue in the coming years.

The cement industry is one of the main beneficiaries of the infrastructure boom. With robust demand and adequate supply, the industry has bright future. The Indian Cement Industry with total capacity of 165 million tones is the second largest after China. Cement industry is dominated by 20 companies who account for over 70% of the market. Individually no company accounts for over 12% of the market. The major players like L&T and ACC have been quiet successful in narrowing the gap between demand and supply. Private housing sector is the major consumer of cement (53%) followed by the government infrastructure sector. Similarly northern and southern region consume around 20%-30% cement while the central and western region are consuming only 18%-16%.

The overall outlook for the industry shows significant growth on the back of robust demand from housing construction, Phase-II of NHDP (National Highway Development Project) and other infrastructure development projects. Domestic demand for cement has been increasing at a fast pace in India. Cement consumption in India is forecasted to grow by over 22% by 2009-10 from 2007-08.Among the states, Maharashtra has the highest share in consumption at 12.18%,followed by Uttar Pradesh, In production terms, Andhra Pradesh is leading with 14.72% of total production followed by Rajasthan. Cement production grew at the rate of 9.1 per cent during 2006-07 over the previous fiscal's total production of 147.8 mt (million tons). Due to

rising demand of cement the sales volume of cement companies are also increasing & companies reporting higher production, higher sales and higher profits. The net profit growth rate of cement firms was 85%. Cement industry has contributed around 8% to the economic development of India. Outsiders (foreign players) eyeing India as a major market to invest in the form of either merger or FDI (Foreign Direct Investment). Cement industry has a long way to go as Indian economy is poised to grow because of being on verge of development.

Despite the growth of Indian cement industry India lags behind the per capita production. Supply for cement is expected to remain tight which, in turn, will push up prices of cement by more than 50%. The most important factor for better prices is consolidation of the industry. It has just begun and we will see more consolidation in the coming years. Other budget measures such as cut in import duty from 12.5 per cent to nil etc. are all intended to cut costs and boost availability of cement.

Sadly the adverse effects of global slowdown have not spared this industry too. Demand is sluggish, the government is keeping an eagle eye on prizes, domestic coal and pet coke, prizes have increased sharply and utilizations rates are down. The numbers coming out are a reflection of grim times. ACC the countrys largest cement company thats controlled by Swiss giant HOLCIM, registered 2% fall in august sales. It is the biggest fall since Feb 2007. Production fell by 5%.

To stand against the problematic situation, government as well as cement industry has taken some steps. Companies are focusing on cost of transportation. One of the strategy is to decrease dependence on road & opt for sea logistics as that can cut transportation cost by 30- 50 %. Some plants are adopting futuristic plan such as setting up captive power plant, moving closer to the customers by creating clicker, crushing, and capacity in key markets, to be more customer centric to generate better revenue. India should push for stricter regulations of market place as to control the prices of big companies and prevent them from forming cartels and exchanging information. To fight with the high inflation, government wants to import more cement from Pakistan .However cement prizes are not very much high as other items but still they are increasing. And the reason of high prize is surging cost of raw material and transportation cost.

Apart from this government also discussed with cement industry not to have increase in prizes and keep consumer interest in mind.

Cement industry in India has also made tremendous strides in technological up gradation and assimilation of latest technology. Presently, 93 per cent of the total capacity in the industry is based on modern and environment-friendly dry process technology. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially. Indian cement industry has also acquired technical capability to produce different types of cement like Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement etc. Some of the major clusters of cement industry in India are: Satna (Madhya Pradesh), Chandrapur (Maharashtra), Gulbarga (Karnataka), Yerranguntla (Andhra Pradesh), Nalgonda (Andhra Pradesh), Bilaspur

(Chattisgarh), and Chandoria (Rajasthan).

Cement industry in India is currently going through a consolidation phase. Some examples of consolidation in the Indian cement industry are: Gujarat Ambuja taking a stake of 14 per cent in ACC, and taking over DLF Cements and Modi Cement; ACC taking over IDCOL; India Cement taking over Raasi Cement and Sri Vishnu Cement; and Grasim's acquisition of the cement business of L&T, Indian Rayon's cement division, and Sri Digvijay Cements. Foreign cement companies are also picking up stakes in large Indian cement companies. Swiss cement major Holcim has picked up 14.8 per cent of the promoters' stake in Gujarat Ambuja Cements (GACL). Holcim's acquisition has led to the emergence of two major groups in the Indian cement industry, the Holcim-ACC-Gujarat Ambuja Cements combine and the Aditya Birla group through Grasim Industries and Ultratech Cement. Lafarge, the French cement major has acquired the cement plants of Raymond and Tisco. Italy based Italcementi has acquired a stake in the K.K. Birla promoted Zuari Industries' cement plant in Andhra Pradesh, and German cement company Heidelberg Cement has entered into an equal joint-venture agreement with S P Lohia Group controlled Indo-Rama Cement.

Today, cement from Andhra is going all over India, including Assam, Meghalaya, Jharkhand, Orissa, West Bengal, Chattisgarh, Gujarat and Maharashtra. More cement is likely to flow into Tamil Nadu from the state in view of cut in sales tax. Any further increase in demand in the South India will benefit the cement industry here. Cement movement from Gujarat to Mumbai is also coming down due to exports while cement movement from Orissa into Andhra has stopped and, in fact, cement is flowing into Orissa as well.

MAJOR COMPANIES IN THE INDUSTRY

Associated Cement Companies Ltd (ACCL) Associated Cement Companies Ltd manufactures ordinary Portland cement, composite cement and special cement and has begun offering its marketing expertise and distribution facilities to other producers in cement and related areas. It has twelve manufacturing plants located throughout the country with exports to SAARC nations. The company plans capital expenditure through expansion of existing units and/or through acquisitions. Non-core assets are to be divested to release locked up capital. It is also expected to actively pursue overseas project engineering and consultancy services. Birla Corporation Ltd.

Birla Corp's product portfolio includes acetylene gas, auto trim parts, casting, cement, jute goods, yarn, calcium carbide etc. The cement division has an installed capacity of 4.78 million metric tonnes and produced 4.77 million metric tonnes of cement in 2003-04. The company has two plants in Madhya Pradesh and Rajasthan and one each in West Bengal and Uttar Pradesh and holds a market share of 4.1 per cent. It manufactures Ordinary Portland cement (OPC), Portland pozzolana cement, fly ash-based PPC, Low-alkali Portland cement, Portland slag cement, low heat cement and sulphate resistant cement. Large quantities of its cement are exported to Nepal and Bangladesh. Going forward, the company is setting up its captive power plant to remain cost competitive.

Century Textiles and Industries Ltd (CTIL) The product portfolio of CTIL includes textiles, rayon, cement, pulp & paper, shipping, property & land development, builders and floriculture. Cement is the largest division of CTIL and contributes to over 40 per cent of the company's revenues. The company has an installed capacity of 4.7 million tonnes with a total cement production of 5.43 million tonnes in 2003-04. CTIL has four plants that manufacture cement, one in Chhattisgarh, two in Madhya Pradesh and one in Maharashtra. Going forward, the company has scripted a three-pronged strategy closing down its shipping business, continuing with its chemicals and adhesive division, and focusing on cement, rayon and paper as its long-term business plan.

Grasim-UltraTech Cemco Grasim's product profile includes viscose staple fibre (VSF), grey cement, white cement, sponge iron, chemicals and textiles. With the acquisition of UltraTech, L&T's cement division in early 2004, Grasim has now become the world's seventh largest cement producer with a combined capacity of 31 million tonnes. Grasim (with UltraTech) held a market share of around 21 per cent in 2003-04. It has plants in Madhya Pradesh, Chhattisgarh, Punjab, Rajasthan, Tamil Nadu and Gujarat among others. The company plans to invest over US$ 9 million in the next two years to augment capacity of its cement and fibre business. Its also plans to focus on its international ventures, ramping up the capacity of Alexandra Carbon Black in Egypt to 1,70,000 tonne per annum (from 1, 20,000 tpa) and raising the capacity of the carbon black plant in China from 12,000 tpa to 60,000 tpa.

Gujarat Ambuja Cements Ltd (GACL) Gujarat Ambuja Cements Ltd was set up in 1986 with the commencement of commercial production at its 2 million tonne plant in Chandrapur, Maharashtra. The group has clinker manufacturing facilities at Himachal Pradesh, Gujarat, Maharashtra, Chhattisgarh, Punjab and Rajasthan. The company has a market share of around 10 per cent, with a strong foothold in the northern and western markets. Its total sales aggregated US$ 526 million with a capacity of 12.6 million tonnes in 2003-04. Gujarat Ambuja is India's largest cement exporter and one of the most cost efficient firms. GACL has a 14.45 per cent stake in ACC, making it the second largest cement group in the country, after Grasim-UltraTech Cemco. The company has free cash flows that it is likely to use to grow inorganically. The company is scouting for a capacity of around two million tonne in the northern and western markets. It has also earmarked around US$ 195220 million for acquisitions

India Cements India Cements is the largest cement producer in southern India with a total capacity of 8.81 million tonnes and plants in Andhra Pradesh and Tamil Nadu. The company has a market share of 5.4 per cent with a total cement production of 6.36 million tonnes in 2003-04. Its product portfolio includes ordinary Portland cement and blended cement. The company has limited its business activity to cement, though it has a marginal exposure to the shipping business. The company plans to reduce its manpower significantly and exit non-core businesses to turnaround its fortune. It also expects the export market to open up, with the Gulf emerging as a major importer.

Jaiprakash Associates Limited Jaiprakash Industries, now known as Jaiprakash Associates Limited (JAL) is part of the Jaypee group with businesses in civil engineering, hospitality, cement, hydropower, design consultancy and IT. It has an annual capacity of 4.6 million tonnes with plants located in Rewa & Bela (Madhya Pradesh) and Sadva Khurd (Uttar Pradesh). The company has a market share of 3.8 per cent with the cement division contributing US$ 172 million to revenue in 2003-04. The company is upgrading its capacity to 6.5 million tonnes through the modernizing of the existing units and the commissioning of a new grinding unit at Tanda (Uttar Pradesh) with an investment of US$ 163 million. Jaiprakash Associates has decided to concentrate on its core business of construction and engineering and leave its cement plant to its subsidiary Jaypee Rewa Cement

Ltd. The company manufactures a wide range of world class cement of OPC grades 33, 43, 53, IRST-40 and special blends of pozzolana cement.

JK Synthetics JK Synthetics, a Singhania Group company, started manufacturing nylon at Kota in 1962. Subsequently, it diversified into PSY/PFY, nylon tyre-cord, cement (in 1975), acrylic and white cement (in 1984). The company has a market share of 2.7 per cent. JK Synthetics Limited is restructuring its business divisions into two separate entities- JK Cements and JK Synthetics. After the restructuring, it will be left with a cement plant at Nimbahera in Rajasthan, with a capacity of 3.26 million metric tonnes and manufacturing white cement.

Madras Cements Madras Cements Ltd is one of the oldest cement companies in the southern region and is a part of the Ramco group. The company is engaged in cement, clinker, dolomite, dry mortar mix, limestone, ready mix cement (RMC) and units generated from windmills. The company has three plants in Tamil Nadu, one in Andhra Pradesh and a mini cement plant in Karnataka. It has a total capacity of 5.47 million tonnes annually and holds a market share of 3.1 per cent. Madras Cements plans to expand by putting up RMC plants. As Karnataka is a promising market, the company is further expanding its capacity from the present 1.5 million tonnes to 3.4 million tonnes through an investment of US$ 9 million.

Holcim Holcim, earlier known as Holderbank, has a cement production capacity of 141.9 million tonnes. It is a key player in aggregates, concrete and construction related services. It has a strong market presence in over 70 countries and is a market leader in South America and in a number of European and overseas markets. Holcim entered India by means of a long-term strategic alliance with Gujarat Ambuja Cements Ltd (GACL). The alliance aims to strengthen their clinker and cement trading activities in South Asia, the Middle East and the region adjoining the Indian

Ocean. Holcim also intends to use India as an additional base for its IT operations, R&D projects as well as a procurement sourcing hub to generate additional synergies and value for the group.

Italcementi Group The Italecementi group is one of the largest producers and distributors of cement with 60 cement plants, 547 concrete batching units and 155 quarries spread across 19 countries in Europe, Asia, Africa and North America. Italcementi is present in the Indian markets through a 50:50 joint venture company with Zuari Cements. All initiatives in southern India are routed through the joint venture company, while Italcementi is free to buy deals in its individual capacity in northern India. The joint venture company has a capacity of 3.4 million tonnes and a market share of 2.1 per cent.

Lafarge India Lafarge India Pvt Ltd, a subsidiary of the Lafarge Group, has a total cement capacity of 5 million tonnes and a clinker capacity of 3 million tonnes in the country. Lafarge commenced operations in 1999 and currently has a market share of 3.4 per cent. It exports clinker and cement to Bangladesh and Nepal. It produces Portland slag cement, ordinary Portland cement and Portland pozzolana cement. The Indian cement plants are located in Chhattisgarh and Rajasthan. Lafarge Cement has become the largest cement selling firm in the Indian markets of West Bengal, Bihar, Jharkhand and Chhattisgarh.

BANK OF BARODA IN THE CEMENTINDUSTRY

YEAR Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13

INDUSTRYEXPOSURE

BANK EXPOSURE

PERCENTAGE

134348.91

25385381.59

0.529237321 #DIV/0!

166686.00 177709.10 220476.30

2,06,88,896.79 34407702.67 37933183.74

0.805678532 0.516480565 0.581222762

STRUCTURE OF THE INDIAN CEMENT INDUSTRY

It is a fragmented industry. There are 56 cement companies in India, operating 124 large and 300 mini plants, where majority of the production of cement (94%) in the country is by large plants.

One of the other defining features of the Indian cement industry is that the location of limestone reserves in select states has resulted in its evolving in the form of clusters. Since cement is a high bulk and low value commodity, competition is also localized because the cost of transportation of cement to distant markets often results in the product being uncompetitive in those markets.

Another distinguishing characteristic comes from it being cyclical in nature as the market and consumption is closely linked to the economic and climatic cycles. In India, cement production is normally at its peak in the month of March while it is at its lowest in the month of August and September. The cyclical nature of this industry has meant that only large players are able to withstand the downturn in demand due to their economies of scale, operational efficiencies, centrally controlled distribution systems and geographical diversification.

SWOT ANALYSIS a) Strengths: Second largest in the world in terms of capacity: In India there are approximately 124 large and 300 mini plants with installed capacity of 200 million tonnes. Low cost of production: due to the easy availability of raw materials and cheap labour. b) Weakness: Effect of global recession on real estate: The real estate prices are stabilizing and facing steady slowdown especially in metros. There are approximately one hundred thousand completed flats without occupancy in Bangalore. There has been drastic reduction in property prices due to reduced demand and increased supply.

Demand-Supply gap, overcapacity: The capacity additions distort the demand-supply equilibrium in the industry thereby affecting profitability. Increasing cost of production due to increase in coal prices.

High Interest rates on housing: The re-pricing of the interest rates in the last four years from 7% to 12% has resulted in the slowdown in residential property market. c) Opportunities: Strong growth of economy in the long run: Indian economy has been one of the stars of global economics in the recent years, growing 9.2% in 2007 and 9.6% in 2006. However, India is facing tough economic times in 2008.

Increase in infrastructure projects: Infrastructure accounts for 35% of cement consumption in India. And with increase in government focus on infrastructure spending, such as roads, highways and airports, the cement demand is likely to grow in future.

Growing middle class: There has been increase in the purchasing power of emerging middle-class with rise in salaries and wages, which results in rising demand for better quality of life that further necessitates infrastructure development and hence increases the demand for cement.

Technological changes: The Cement industry has made tremendous strides in technological up gradation and assimilation of latest technology. At present ninety three per cent of the total capacity in the industry is based on modern and environmentfriendly dry process technology and only seven per cent of the capacity is based on old wet and semi-dry process technology. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially and hence reduce the cost of production.

d) Threats: Imports from Pakistan affecting markets in Northern India: In 2007, 130000 tonnes in 2008, 173000 Metric tonnes of cement was exported to India. This was done to keep the price of cement under check.

Excess overcapacity can hurt margins, as well as prices

PORTERS FIVE FORCES ANALYSIS

Supply

The demand-supply situation is highly skewed with the latter being significantly higher.

Demand

Housing sector acts as the principal growth driver for cement. However, industrial and infrastructure sectors have also emerged as demand drivers.

Barriers to entry High capital costs and long gestation periods. Access to limestone reserves (key input) also acts as a significant entry barrier.

Bargaining power suppliers

Licensing of coal and limestone reserves, supply of power from the state grid of etc are all controlled by a single entity, which is the government. However, nowadays producers are relying more on captive power, but the shortage of coal and volatile fuel prices remain a concern.

Bargaining power customers

Cement is a commodity business and sales volumes mostly depend upon the of distribution reach of the company. However, things are changing and few brands have started commanding a premium on account of better quality perception.

Competition

Intense competition with players expanding reach and achieving pan India presence.

DEMAND DRIVERS

Infrastructure development to propel demand for cement Demand from the infrastructure segment is projected to grow at a robust CAGR of 10-11 per cent over the next 5 years, supported mainly by the government's thrust on infrastructure development. We expect this segment to account for about 23 per cent of total cement demand over 2012-13 to 2016-17. Between 2007-08 and 2011-12, infrastructure accounted for 20 per cent of total cement demand. During this period, demand from this segment registered a CAGR of 11-12 per cent. Breakup of cement demand by end-user segments

Infrastructure to give demand a big boost

Our analysis shows that Infrastructure should be the biggest growth driver for cement demand in the country. If we were to look only at order books of the top eight construction and manufacturing equipment companies in India, we find that their combined order book has virtually doubled over the last two years from INR1,000bn (USD25bn) to INR1,950bn (USD48.75bn) for completion over the next 24-30 months.

Key Drivers of Cement Industry

Buoyant real estate market Increase in infrastructure spending Various governmental programmes like National Rural Employment Guarantee Low-cost housing in urban and rural areas under schemes like Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and Indira Aawas Yojana

MAJOR FACTORS THAT WILL AFFECT INVESTMENT DECISION

UNION BUDGET IMPACT

The Union Budget 2012-13 has proposed to increase the ad valorem component of excise duty from 10 per cent to 12 per cent, while reducing the specific duty component from Rs 160 to Rs 120 per tonne for non-mini cement plants. This is likely to increase effective excise duty by 1.01.5 per cent for most cement companies. On the other hand, the proposal to exempt imported non-coking coal from basic customs duty (earlier at 5%) is expected to have a positive impact of 1-1.5% on the cement industry's operating profit.

TAX STRUCTURE The Indian Cement industry is one of the highest taxed one. At the price level of Rs. 200 per bag, total tax burden, as a percentage of ex-factory realization works out to 45%. The cement industry has been continuously representing to the Government for more rational tax regime. The Central Government in its budget presented on 28th February 2007, for the first time, announced a dual excise duty structure for cement industry. Excise duty was increased to Rs. 600 per MT on cement with Retail Sale Price (RSP) exceeding Rs. 190. per bag and Rs. 350 per MT for cement with RSP of Rs.190 per bag and below as against specific excise duty of Rs. 400 per MT so far. This dual structure not only enhanced taxation burden further on the industry but also complicated its effective implementation. Government, however, having realized difficulty of the industry and the consequent burden to the consumer, has subsequently revised the structure w.e.f. 31st May 2007. It has now levied an advalorem duty of 12% on cement with. RSP exceeding Rs. 190 per bag while retaining specific duty of Rs. 350 per MT on cement sold Rs. 190 per bag and below.

DEMAND-SUPPLY MISMATCH Though India is the second largest cement manufacturer, it is among the lowest cement consuming countries. In India per capita cement consumption is 122 kg, which is far below the

world average of approximately 320 kg. Hence, the cement industry has been in a surplus position since a long time. There exist regional surplus/shortages in the Indian cement industry. The oversupply is largely in the Southern and Northern regions. By contrast, there is a supply shortage in Eastern and Western regions. There is significant inter-regional movement of cement, which plays a crucial role in the regional demand-supply dynamics. Most of the cement movement across regions takes place from North to Central (3.35 mt), South to West (5.20 mt), Central to North (2.45 mt), and Central to East (2.51 mt).

GOVERNMENT POLICIES Government policies have affected the growth of cement plants in India in various stages. The control on cement for a long time and then partial decontrol and then total decontrol has contributed to the gradual opening up of the market for cement producers. The stages of growth of the cement industry can be best described in the following stages: Price and Distribution Controls (1940-1981) During the Second World War, cement was declared as an essential commodity under the Defence of India Rules and was brought under price and distribution controls which resulted in sluggish growth. The installed capacity reached only 27.9 MT by the year 1980-81. Partial Decontrol (1982-1988) In February 1982, partial decontrol was announced. Under this scheme, levy cement quota was fixed for the units and the balance could be sold in the open market. This resulted in extensive modernization and expansion drive, which can be seen from the increase in the installed capacity to 59MT in 1988-89 in comparison with the figure of a mere 27.9MT in 1980-81, an increase of almost 111%. Total Decontrol (1989) In the year 1989, total decontrol of the cement industry was announced. By decontrolling the cement industry, the government relaxed the forces of demand and supply. In the next two years, the industry enjoyed a boom in sales and profits. By 1992, the pace of overall

economic liberalization had peaked; ironically, however, the economy slipped into recession taking the cement industry down with it. For 1992-93, the industry remained stagnant with no addition to existing capacity.

RISK & CONCERNS

1) RISING INPUT COSTS POWER & FUEL Prices and Quantity are regulated and are revised upwards regularly. Further, given the shortage of energy future de-regulation of coal sector could be a risk factor. Adding to this, electricity prices are also witnessing pressure.

TRANSPORTATION COST

Rising fuel cost resulting in higher road and rail transportation cost.

2) Lower than expected growth in demand Any lower than anticipated cement demand growth will result in overcapacity in the industry, thereby prices may head southwards. This will significantly affect earnings of cements manufacturers.

3) Large scale capacities addition in gulf countries Indias major cement exporting destination, Middle East, is adding huge cement capacities that are estimated to be around 70 mtpa. This will significantly affect Indias cement exports to gulf countries.

4) MRTPC alleges on 14 cement manufacturers India's trade practices regulator MRTPC had ordered a probe into the business practices of 14 leading cement manufacturers. The companies that are to be investigated include all the big guns like ACC, Ambuja Cement, India Cement, Ultra tech cement, Grasim and other smaller players like Sanghi Industries, Birla Corporation, Zuari Cement, Binani Industries, NCL Industries, Saurashtra Cement and JK Cement. The Director General of Investigation and Registration (DGIR) which is MRTPC's investigative wing submitted its preliminary report alleging that these manufacturers colluded to hike cement prices. The companies have time till October 25 2007 to reply to these charges.

5) Access to Finance Cement is a capital-intensive industry; Rs.3500/tonne is required for capacity addition. Cement industry has planned huge capex in the coming years, for which they will require huge capital. However, rising interest rates have created concern for the industry.

OPPORTUNITIES, THREATS, RISKS AND CONCERNS

The cement industry is going through its boom period with full capacity utilization. Powered by the GDP growth of 8-9%, the annual demand for cement in the country continues to grow at 810%. As per NCAER study, under high growth scenario, the demand for cement (including exports) is expected to increase to 244.82 million tonnes by 2010-11. As per the study, the demand is expected to be much higher at 311.37 million tonnes, if the optimistic projections of the road and the housing sectors are met. The industry has responded to this with substantial new capacity announcements. The materialization of these capacities, however, is likely to be delayed due to a number of factors including timely delivery of equipment and construction of the plant due to the heavy order book position of the suppliers. It is expected that demand growth will outstrip supply till the materialization of such new capacities. However, the current high level of international crude prices and its impact on the domestic prices of petroleum products is likely to make a dent in the profitability but its impact will have to be seen depending upon the ability of the economy to pass on such cost increase to the consumer. While the freight cost could be optimized on the imported coal through usage of companys own ships for part of the quantity, the international prices of imported coal and its volatility together with the strengthening of the dollar against rupee could derail this. This could impact the delivery prices of imported coal and also the cost of production. The Government has taken steps to increase the availability of indigenous coal for its expanded capacity across various plants which can mitigate the impact of such high cost of imported coal for the plants located near the coal fields in India.

The Governments continuing efforts to rein in cement prices by freeing imports and banning exports could artificially disable the normal market price mechanisms for determining the price.

The rise in the price of cement is because of the gap of demand & supply in the market. The demand for cement is much higher than its actual supply. But with the production maximization, which can be encountered in next few years, this gap may narrow down, that may ensure the market to be in equilibrium. Decreasing per capita consumption doesnt affect the total consumption for the cement. It means the infrastructure; contacted housing is using the bulk of the production. In spite of High price of the product, the hick of demand because of the increasing rate of infrastructural development.

Domestic price of cement is rising as well as the imported cement price is lowering. So altogether the supply of the cement, which is affordable, will increase. This may in decrease the gap between supply and demand.

Major Demand was from the housing sector, which may shift to infrastructure as lots of infrastructural development processes has already being taken up & due to the increased price, housing segment started showing a slowdown.

Key Points

Financial '12

Year

During the financial year 2011-12 (FY12), Indias cement production grew by 6.2% year-on-year. The mut growth was mainly attributable to slowdown in construction activities, extended monsoon, delay

infrastructural projects and the overall downturn in the economy. As such, the capacity utilisation levels sto lower at 73.7%.

The industry witnessed high operating costs, particularly those of energy and freight. The price of imported co

went up sharply. The steep depreciation of the rupee and hike in diesel prices further aggravated the concern However, the industry witnessed some recovery in demand from November 2011 onwards.

Prospects The growth of the Indian economy has slowed down in recent times on account of the rising inflation,high interest rates, high prices of commodities and fuels. The growth prospects of the cement industry are closely linked to the growth of the overall economy in general and the real estate and construction sectors in particular. The importance of the housing sector in cement demand can be gauged from the fact that it consumes nearly two-thirds of the countrys total

cement. If the slowdown in real estate persists for an extended period, it would impact the growth in consump

However, the long term drivers for cement demand remain intact. Higher infrastructure spending, robust growth in rural housing and peaking interest rates are likely to augur well for the cement industry. The government plans to spend US$ 1 trillion on infrastructure in the 12th five year plan period (2012-17). The same during the 11th plan period was US$ 514 bn. The focus on infrastructure development is expected to boost cement demand

CHALLENGES

EXCESS CAPACITY Cement industry in India is at a very critical juncture today. During the five year period of 20072012, the industry added around 150 million metric tonnes (MT) of capacity, taking the total capacity to over 300 mmt. However, demand has not been that strong during last couple of years due to general economic slowdown and lower infrastructure spending. In the short term, this is likely to continue as spending on infrastructure by Government will take some time to revive. Also, demand from real estate-industry's major user segment-is down due to lower affordability and higher home loan rates.

Currently, India consumes around 240 mmt of cement every year, which is far lower than capacity of 300 mmt. This makes it difficult for the cement companies to operate at more than 80% capacity. Also, big companies are already in process of adding 70 to 80 mmt more capacity, which would result in excess capacity scenario for another two to three years. Unless, there is higher infrastructure spending and revival in domestic demand, the industry's growth is likely to be restricted at around 8-10%.

Since there has been a slowdown in the GDP growth and a drop in the demand for cement, particularly in the period 2009-2012, this additional capacity has led to lower capacity utilization. Capacity utilization has come down from around 94% during 2006-07 to about 84% during 2009-10 and is expected at around 75% in 2011-12.

DEMAND SCENARIO The impact of economic slowdown is likely to be longer and deeper than previously thought, primarily due to the persistent high interest rates. Also, the recovery in industrial growth and subsequent revival will be gradual, unlike in 2009, as almost all the industries are heavily debtridden. For cement industry, revival in demand from real estate and public infrastructure will be crucial as their combined share is close to 80%.

Over the next five years, however, the scenario is likely to be positive for the industry, as

infrastructure spending gets a boost on the back of robust demand and lower interest rates. Going forward, cement demand will largely be driven by the increased focus of the government on the infrastructure development and promotion of low-cost affordable housing in the country which will continue to boost realty sector and in-turn cement demand.

During the Twelfth Five Year Plan (2012-17), the Government of India plans to increase its investment in infrastructure to US$ 1 trillion, which is nearly double of the US$ 514 billion expected to be spent on infrastructure development under the Eleventh Five Year Plan (2007-12). Projects such as the dedicated freight corridors, upgraded & new airports and ports are expected to enhance the scale of economic activity, leading to a substantial increase in cement demand.

The long term growth potential is huge as the per capita consumption of cement in India is a meager 250 kgs as against 1380 kgs in China (as of 2010-11) and the world average of 500 kgs plus. This huge potential is attracting all global cement majors either through establishment of new plant or through brown field acquisitions.

CHALLENGES AHEAD

High taxation, rising raw material & transportation costs and higher fuel costs are some of the major challenges faced by the Indian cement industry. The overall rate of tax on cement is around 30% in India compared to 19% in China and almost negligible in Thailand. Though, companies have tried to lessen transportation and fuel costs using various alternatives and technologies, the same are still too high.

In our assessment, costs for cement companies will keep rising over the next few years as coal prices will firm up further and freight costs go up due to rising crude prices. New cement capacities may face the additional problem of not getting assured captive coal linkages.

Apart from these operating costs, the industry is facing challenge of foreign players who are ready to tap the Indian market and so are on acquisition spree. Though, consolidation in the

industry is good in the long term as it will enhance competitiveness, efficiency and margins, it may also give them much of the untapped market and pricing power due to their size factor.

A slowdown in the real estate sector too is a challenge. If it persists for an extended period, it would impact the growth in consumption of cement. Most of the cement plants in India use latest technology, yet they are highly energy intensive in nature. Despite the fact that the technology used by Indian cement companies is among the best in the world, more innovation is required to ensure that cement plans are not only environment-friendly, but also low-cost in nature.

Industry experts believe industrial growth isn't likely to recover for at least couple of quarters as reforms are likely to take some more time before it can revive domestic demand. As high inflation persists, the Reserve Bank of India is likely to wait for some time before it goes for softening monetary policy.

Findings

The overheated real estate sector has cooled off now. Considering the financial turmoil witnessed globally, financial institutions have tightened their credit norms. This cautious stance has led to a credit crunch and the same has impacted upcoming projects. On account of general economic slowdown and these issues, the demand for cement has moderated. However, stimulus packages announced by the government and agricultural income gave a fillip to the demand for the commodity. The industry volumes and realizations were higher during FY09 that boosted top line growth. However, cost of operation did also witnessed northward movement that exerted pressure on margins. The cement industry on an average maintains two months inventory of fuel and such costs. The crude prices have only started cooling off November 2008 onwards, the benefit of which should start flowing in starting quarter ended March 2009 onwards. Smooth supply of state grid power is another problem. To ensure smooth functioning of plants and lower costs, industry has opted to set up captive power plants based on coal. This has resulted in increase in demand for coal. But coal linkages for the industry are poor. Recently the ratio has dropped

below 50%. So the players either have to purchase it from open market or import it. This has increased cost of operation. The industry had lined up huge capex plans with that depreciation costs have moved up. All of this dented profitability.

8.2 FUTURE OUTLOOK Despite apprehensions about the impact of inflation and a slowdown in industrial production and overall economic scenario, the outlook for the cement sector remains positive in respect of growth in demand in the foreseeable future. Infrastructure and housing are still moving apace. However what is of concern to the industry are staggering rise in input costs and pressures to cap selling prices at the same time. Unless the industry is able to recover cost increases, through suitable adjustments in selling prices through rational economic considerations, the cement industry will be under pressure. Buoyed by the strong demand from realty and infrastructure companies in India, cement companies have embarked on massive expansion plans for the coming years. Indias cement industry is expanding capacity to meet increasing demand. The industry plans to invest around Rs 50,000 crore in order to increase production from 198 MTPA to about 275 MTPA over next two to three years. These capacities, according to such announcements, are expected to be commissioned over threeyear period and may create an imbalance in demand and supply, resulting in impact on realization. A large number of foreign players are also expected to enter the cement sector in the next 10 years, owing to the profit margins, constant demand, and right valuation. Consolidation of the cement sector too will take place and cement plants producing less than 1 million tonnes will find it difficult to survive in this market. Cement companies will go for global listings either through the FCCB route or the GDR routes. The industry experts project the sector to grow by 9 to 10% for the current financial year provided India's GDP grows at 7%. With help from the government in terms of friendlier laws,

lower taxation, and more infrastructure spending, the sector will grow and will take Indias economy forward along with it.

CONCLUSION In the present scenario of hectic competition it has been seen that the biggest player in the market remains big and does not allow other companies to rise. The cement industry is expected to grow steadily in 2009-2010 and increase capacity by another 50 million tons in spite of the recession and decrease in demand from the housing sector. In the analysis it has been seen that the ACC LTD is over shadowing all other companies in terms of performance. During Financial year 2007 inflationary conditions enabled all to perform well and generate profits resulting in boom in share prices. In 2008 all companies underperformed comparatively due to economic downturn. During this period investors have an opportunity to gain by paying lower prices for shares and receiving high dividends in future. The effect of recession in 2008 could be seen in the year 2009 where the growth of the company has been decreased. But now slowly all the companies are picking up. So recommendations to other companies will include increasing their customer base and decrease their cost of productions and improve their performance with respect to credit sales, financial prudence and capacity utilization. The challenges mentioned above leave much uncertainty towards the optimization of Indias refining Industry. The pricing regime in particular needs to be addressed not because it is the only solution to the several challenges faced by petroleum refiners, but because it appears to be the most weighty with multifarious effects. The existing low petroleum prices in India are gravely affecting the investment returns and profitability of the national oil companies which invariably restrain investment to broaden and optimize refining capacity. A consequence of which is the supply-demand imbalance. In most instances, prices are set far below what prevails in the global crude oil market. Therefore, prices appeared to be inconsequential in the pattern of demand for oil products in India. These capped fuel prices also make financial losses inherent in the domestic market for private refiners who unlike the state-owned retailers have no support from government. An

indication that the right pricing signals are not sent to consumers and that governments pricing policy in practice has been a huge influence on the demand for petroleum products in India. Therefore, it is recommended that the government regulated pricing policy should be gradually reduced and eventually eliminated within the shortest time possible. In addition to this, should come a host of complementary remedies, such as encouraging energy conservation; further building regional cooperation, streamlining market supply and demand, etc. If this broad array of policy considerations is implemented, Indias refining industry could be healthy enough and well able to maximize its potentials.

indication that the right pricing signals are not sent to consumers and that governments pricing policy in practice has been a huge influence on the demand for petroleum products in India. Therefore, it is recommended that the government regulated pricing policy should be gradually reduced and eventually eliminated within the shortest time possible. In addition to this, should come a host of complementary remedies, such as encouraging energy conservation; further building regional cooperation, streamlining market supply and demand, etc. If this broad array of policy considerations is implemented, Indias refining industry could be healthy enough and well able to maximize its potentials.

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