Survival of new entrants is challenging
In the last few years, many new corporates have entered the cement arena. Even the entities, which have no synergies with steel or power, are trying to get a foothold in the cement industry. The new entrants include diversified industrials as far apart as oilseeds, fast-moving consumer goods and shipyards.
For companies like JSW Steel Ltd, venturing into the cement sector and expanding capacities could be a strategic call, but what about the others? The Government's thrust on infrastructure and allied activities along with schemes like "Housing for All" is anticipated to boost cement demand significantly and that seems to have attracted many players to jump on the bandwagon.
According to Elara Capital (India) Pvt Ltd, incremental demand from housing and infrastructure is expected to boost cement growth to 7-8 per cent in fiscal year 2018. Region-wise, south India will show the biggest rise in demand from infrastructure followed by north India, it added. However, what could make survival challenging for new entrants is the fact that demand revival has taken longer than expected and costs are escalating.
However the survival of some of these new entrants is becoming tough in the years ahead. Cement makers will have to incur additional cost on product promotion compared to the established players. Auctioning of limestone mines, funds spent on setting up new plants are some other factors which one will have to consider.
Earlier this month, Adani Cementation Ltd, JSW Cement Ltd and Shree Cement Ltd won bids for three limestone mines via an e-auction in Gujarat, thus fetching their State Government an enormous sum of Rs 16,201 crore, stated a media report. This is almost 2.5 times the revenue the State would have earned had it followed the traditional allotment process, the report added.
Meanwhile, cement prices across the country have seen a seasonal correction and are expected to remain under pressure given the slump in demand. In such a scenario, it will be certainly difficult for newer entrants into the industry to pass on increased costs to consumers, especially given that even established companies have not been able to do so.
To conclude, some new entrants may have deep pockets, but the delayed demand recovery coupled with surging costs means longer gestation, thus impacting business viability. This could lead to some more mergers and acquisitions.
In the last two years, 42 MTPA capacity has changed hands out of which 22 MTPA is in central India. Operating at low capacity utilizations could lead to lower earnings under current cost-realisation parameters, while aggressive market share gains could hamper pricing discipline. The Street is pricing in lower profitability and capacity utilisation parameters, while one may not get the benefit of both in a modest demand environment. After the aggressive capacity build-up over the last decade, cement companies appear to be taking a breather with only 11 companies looking to add close to 26 MTPA of cement capacity over the next few years. However, acquisition activity had increased substantially over the past two years, with continued capacity under utilisation forcing several players to put up capacities for sale It was highlighted that during FY2013-15, Ultratech had grown at a pace lower than the industry, to allow continued price discipline and improved realisations. In FY2016, when Ultratech grew at a pace faster than the industry, it came at the cost of weaker realisations for the industry. It was highlighted that the acquired capacities are large relative to the market that they cater to, and a more moderate capacity ramp-up may be in order, unless industry growth surprises meaningfully, to keep price competition in check.