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Research firm releases Indian cement industry report

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World Cement,

Demand growth in India’s cement industry has lagged behind expectations over the last few years. According to a new report from CARE Research, a division of CARE ratings, cement consumption grew at a CAGR of just 5.6% in FY11 – 13 compared to 9.9% in FY07-10. Infrastructure and industrial projects have been delayed by spiralling costs, land acquisition and environmental issues, and this has had a knock on effect on the cement industry.

CARE Research anticipates a turnaround, albeit a gradual one, as the government continues to focus on strengthening infrastructure and promotes low-cost housing. Economic growth is also expected to pick up, rising from its current level of 5% to about 7.8% in FY16, which should push cement demand to grow at a CAGR of about 7.9% in FY13-16.

Low cost housing

Real estate remains the largest cement consumer in the country, accounting for 55 – 60% of total cement demand. High interest rates and construction costs have weakened the real estate sector in recent years, but government measures to improve the availability of low-cost housing going forward could mean cement demand of 270 – 290 million t in the next three to four years, across both urban and rural regions.

Infrastructure development

Investment in infrastructure as a percentage of GDP has been steadily increasing over the last two Five Year Plan periods, rising from 5% in the 10th Plan to 7.2% in the 11th Plan. In the 12th, the government aims to increase that figure to about 9.1% of GDP, equal to an investment of about Rs.51 464 billion in FY13-17. CARE Research estimates that this will equate to cement demand of about 145 million t in the next three years.

Capacity addition will slow down

Between FY09 and FY13, capacity has increased at a CAGR of 10.4%, leaving the industry with an enormous surplus. Capacity utilisation currently stands at approximately 73%. (down from 93% in FY07). As the rate of expansion decreases and demand picks up, CARE Research estimates that the utilisation rate will improve to 76% in FY16. Capacity additions of 66 million t are expected during the period FY14-16.

Margins under pressure as costs rise

Power and fuel and freight costs currently make up 55% of total production costs. CARE Research anticipates that power and fuel costs will increase by 10% y/y in FY14. Though international coal prices are expected to remain stable, the coal shortage in India will leave the cement industry to procure coal through imports and open market purchases at higher rates.

Hikes in diesel prices and freight charges, meanwhile, have led to soaring freight costs, up 15% y/y this fiscal. This situation is anticipated to worsen in FY14 when CARE Research estimates that freight costs/tonne will again jump 15% y/y.

Despite rising costs, profit before depreciation, interest and tax (PBDIT) improved in FY13 as the cement industry was able to pass costs on to customers. The per tonne expenditure increased by 13% y/y, while the realisation improved by about 15% y/y, bringing PBDIT to 22.5% in FY13.

Breaking even

Cement prices are anticipated to remain elevated in FY14, but expenditure is set to rise by about 10% y/y due to increased power, fuel and freight costs. Accordingly, CARE Research expects the PBDIT margin to decline to 19%.

The ‘break-even cushion’ – defined as the ratio of capacity utilisation in the entire industry to the utilisation rate at breakeven point – is expected to increase over the next few years beyond its FY12 level of 1.5 times as cement demand picks up and capacity expansion slows.

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