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Indian Cement Industry 2009
Credit Analysis & Research Limited, April 2009
Indian Cement Industry: Break-even Cushion to anchor fall in cement prices .....
The Indian cement industry has witnessed a phenomenal capacity addition to the tune of about 52 mn tonnes in the last two financial years which accounted for about 24% of the industry' s capacity of 218 mn tonnes at the end of FY09. In the last two financial years, the cement industry has registered a double-digit growth in capacity addition compared to moderate growth of 3-7% registered during period FY 03-07. As a result, industry' s capacity utilisation rate which showed a rising trend upto FY07, has dropped to a level of 83% in FY09.
In FY09, the GDP growth slowed down to 6.7% compared to the 9% growth reported in FY08. However, cement consumption growth in FY09 at 8.4% has been able to maintain its multiplier factor with GDP growth at 1.25 times.
In FY09, all the regions except the Western and the Northern region have outperformed the industry in consumption growth. The Eastern region continued its buoyant performance and registered the highest cement consumption growth of 11.3% on yoy basis. The Southern and Central regions also reported impressive double-digit growth of 10.4% in cement consumption. But, the Northern region has registered the lowest growth in the cement demand on yoy basis. Comparatively, poor demand growth registered by the Western region was on account of high base of the last year and also slightly subdued demand.
With focus on capacity addition, many small/medium players have been able to capture more market share and consolidate their position in the industry in the last two years. Market share of top five individual companies taken together show a decline to a level of 44.3% in FY09 from 46.3% in FY08.
Even though the utilisation rate dropped, average cement prices in FY09 rose by about 5% on yoy basis. But, the growth in cement prices remained slightly subdued compared to 21% and 14%, registered in FY07 and FY08, respectively.
On the regional front, prices in the Southern region were firm and ruling consistently at the highest level amongst all the regions in FY09. However, due to slowdown in the cement off take and relatively low operating rate, prices in the Northern region remained at the lowest levels compared to other regions.
In FY09, the cement industry witnessed a fall in profitability. Even though, average realisation for the industry increased by about 4% on yoy basis, cost of production has increased by 18.5% on yoy basis. Power and fuel cost for many cement companies increased in FY09 mainly on account of substantial increase in coal prices. As a result, the operating profit margin of the industry dropped by about 8- 9% in FY09. Also, higher interest rates and depreciation provided on expanded capacities took its toll on the net profit margin of the industry which witnessed a decline by about 5% in FY09.
Going forward, cement companies would be benefited by their focus on captive power generation which would help them to reduce power & fuel cost. With reduction in coal prices, the authors have estimated that per tonne power & fuel cost of the industry will decline by about 12% in FY10 on yoy basis.
The authors have estimated that break-even cushion (defined as the ratio of overall capacity utilisation rate of the industry to the utilisation rate at the breakeven point in a particular year) of the industry has notably increased to 2.4 times in FY09 compared to an average level of 1.1 times in the period FY 02-05. With comfortable break-even cushion value, the cement industry is in better position to operate at lower utilisation rate and avoid substantial price cuts. The authors do not foresee a notable drop in average realisation of the industry in FY10.
The authors have estimated the domestic cement demand to grow at a CAGR of about 8.8% in the next two years. Cement demand in the next year would largely be driven by low-cost housing segment in rural & semi-urban regions and government' s focus on infrastructure development in the country.
The level of consolidation in the cement industry had slowed down in the last couple of years. However, one analysis suggests that the Net Present Value (NPV) of a Greenfield plant is still higher than the NPV of an acquired unit, leading us to the conclusion that further consolidation in the industry is still away.
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