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Rohan Sanghavi
Cement
The Indian cement industry is on a roll. Driven by a booming housing sector, global demand and increased activity in infrastructure development such as state and national highways, the cement industry has outpaced itself, ramping up production capacity, attracting the top cement companies in the world, and sparking off a spate of mergers and acquisitions to spur growth.
The recent boom in the housing and construction industry in India has worked wonders for cement manufacturing companies with capacity utilisation crossing the 100 per cent mark for the first time in January 2007.
According to Cement Manufacturers Association (CMA), the average monthly capacity utilisation during fiscal 2006-07 was 94 per cent. Also, cement despatches for the recently concluded fiscal was at an all-time high of 155 million tonnes (mt), up from 142 mt in the previous fiscal, thereby recording a growth of 10 per cent. More particularly, the despatches for March 2007 stood at 15.08 mt as against an installed capacity of 14.95 mt.
Production
Globally, India is the second largest producer of cement. 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. Of this, 9.3 million tonne of cement was exported.
The Indian cement industry comprises 130 large cement plants and 365 mini-cement plants, with installed capacities of 165 million tonnes per annum (mtpa). Large cement plants accounted for over 94 per cent of the total installed capacity.
Despite the growth of the Indian cement industry, India's per capita production of 115 kilograms per year lags the world average of over 250 kilograms and China's production of more than 450 kilograms per person. Clearly there remains room for growth in the industry in India.
The cumulative FDI inflows into the cement and gypsum industry has been US$ 989 million from August 1991 to March 2007 representing 2.26 per cent of the total FDI inflows into the country.
Financial Performance
Majority of the cement companies witnessed a surge in their sales volume, which was led by rising demand. The impact of high demand growth was evident in the continuous northward movement of prices. Concurrently, companies reported higher production, higher sales and higher profits. The net profit growth rate of cement firms was 85 per cent in the fourth quarter ended March 2007:
- Ultra Tech Cement reported a 76 per cent rise in net profit at US$ 56.65 million in the last quarter of 2006-07.
- Ambuja Cements grew by 43 per cent to US$ 144.23 million.
- ACC net profit rose 54.5 per cent to US$ 88.82 million.
- Sanghi Cement recorded a 75 per cent growth at US$ 34.89 million in net profit in 2006-07.
Mergers and Acquisitions
The booming demand for cement, both in India and abroad, has attracted global majors to India. In 2005-06, four of the top-5 cement companies in the world entered India through mergers, acquisitions, joint ventures or greenfield projects. These include France's Lafarge, Holcim from Switzerland, Italy's Italcementi and Germany's Heidelberg Cements. While Lafarge is investing over US$ 500 million in India to expand capacities by six million tonne, Italcementi will invest US$ 174 million over the next two years in various greenfield and acquisition projects.
The Indian cement industry has also witnessed a flurry of mergers and acquisitions within the domestic players, bringing smaller players under the umbrella of larger companies, and larger companies coming under the umbrella of global players like Holcim and Heidelberg. The top two groups in the industry, Aditya Birla Group and Holcim Group, now control more than 40 per cent of total capacity in the country. Further, more than a quarter pie of total capacity is now being controlled by global majors.
Holcim
The Holcim Group entered India in January 2005 through a strategic alliance with Gujarat Ambuja Cement Limited (GACL). It acquired a further 67 per cent stake in the GACL group company Ambuja Cement India Limited (ACIL), the holding company of the Ambuja Group. ACIL in turn holds around 35 per cent stake in ACC and 97 per cent stake in Ambuja Cement Eastern Limited (ACEL). In January 2006, Holcim acquired 14.8 per cent stake in GACL following it up with another 3.7 per cent over the next few months. This took Holcim's total holding in the company to 18.5 per cent. Its holding further increased to 28 per cent when ACEL merged with GACL. Recently, Holcim acquired additional 11 per cent stake in ACIL taking its total shareholding in the company to 78 per cent.
Holcim has further increased its stake in Indian cement company ACC taking its total holdings in the company to 41.6 per cent. Holcim is now the largest shareholder in the company. Also, presently it holds 78 per cent of total share holdings in ACIL.
Holcim now commands around 25 per cent of the total market share with 34.2 mt capacity through ACC and Ambuja. India represents its single largest country exposure at about 18 per cent of its total country exposure. The other large group, Birla, controls another 31.2 mt of the country's cement capacity through group companies Grasim Industries and Ultratech Cements.
Lafarge
The French cement major, Lafarge, has acquired the cement plants of Raymond and Tisco in the recent past, and currently has an installed capacity of 6 mtpa. It plans to double its capacity to 12 mt over the next five years by adopting the greenfield expansion route.
Italcementi
Italy based Italcementi has acquired a stake in the K.K. Birla promoted Zuari Industries' cement plant in Andhra Pradesh, with a capacity of 3.4 mtpa.
Heidelberg
Heidelberg Cement has entered into an equal joint-venture agreement with S P Lohia Group controlled Indo-Rama Cement. Heidelberg Cement is expected to take a 50 per cent controlling stake in Indo-Rama's grinding plant of 0.75 mtpa at Raigad in Maharashtra. Heidelberg is also taking over Mysore Cement of S K Birla group at a consideration of US$ 93 million.
Demand Projection
Given the sustained growth in the housing sector, the Government's emphasis on infrastructure (at both the national and the state level) and increased global demand, the outlook for India's cement industry is exceedingly bright.
The demand growth for the current fiscal is expected to be in the region of 10 per cent, which will translate into a demand of 175 mt.
To meet this rising demand, many Indian companies are going for capacity expansion. Close to 54 mt of additional capacity is to come up in the next three years, with an investment of around US$ 5.31 billion.
According to a Deutche Bank report, close to 5.1 mt will be added by second half of 2007-08, while 11.46 mt will be added in 2008-09. Around 28.90 mt is likely to be added in 2009-10 and 2.87 mt in 2010-11.
A similar projection by National Council of Applied Economic Research (NCAER) for cement consumption, on a conservative basis, has placed cement demand at 225 mt by the fiscal year 2011. If the Government goes ahead with infrastructure projects as planned, consumption is likely to be much higher at 291 mt.