What has been the growth of cement industry over the last three years and how it is expected to pan out in the next three years?
Indian cement industry, the second largest in the world, has witnessed a revival for demand during FY19. The industry reported a positive growth of 4.8 per cent and 6.5 per cent in FY16 and FY18 respectively and a marginally negative growth in FY16. The demand now seems sustainable, and the recovery in demand has happened much faster in FY19 than expected. We the expect the demand to be above 6 per cent y-o-y for the next two to three years. Housing and infrastructure segment would support this demand over this period.
How do you see growth in demand for cement by 2025 and what kind of capacity addition do you expect by then?
The previous two to three years have been difficult for the industry due to tepid demand and excess capacity. There has been a sudden spurt in demand in FY19, from the infrastructure and housing segment.
The capacity addition during the next two to three years may remain low (10-12 MTPA), as the current trend is more towards consolidation. There is enough opportunity in the market for large players to grow inorganically instead of adding new capacity; which makes economic sense as well.
We expect demand growth to grow in line with economic growth of the country. The key to next phase of major capacity expansion lies in the improvement in capacity utilisation, which has to improve to 74-76 per cent from the current sub-70 level. At the moment, it still remains two to three years away. A back of the paper calculation suggests, total installed capacity could should ideally be between 540-550 million tonne by 2025.
What is the present level of expected capacity utilisation of the industry in 2019? At what level it is expected to settle by 2025?
The present capacity utilisation is around 69-70 per cent and we expect it to remain in the same range during FY19. As we expect moderate expansion over the next few years, a 75-77 per cent capacity utilisation looks achievable for the industry by 2025.
Mergers and acquisitions are happening at a higher pace in the cement industry since 2014. What are the triggers that will drive M&As in the sector in the next few years?
Cement business largely depends on regional demand-supply. In the Indian context, this is significant, because transporting cement over a long-distance becomes uneconomical, more so for the producer. We have already witnessed considerable amount of consolidation and going forward, we expect the trend to continue as producers look to strengthen regional capacity. Three factors which could trigger M&A in the sector are:
- Growing regional market share, which is also important with a pricing perspective
- Product mix: Premium products, pre-mixes are finding traction in terms of demand.
- Consolidation may happen on these lines where product specific players with expertise in premium products could get acquired by larger players.
- Other factors like mining rights for key raw materials like limestone could trigger M&A.
How these M&As have and are expected to reshape the composition of the industry?
For the industry, volume is the key for long-term sustainability. We can expect 8-10 dominant large cement producers pan-India with three to four dominant producers in each region going forward.
What has been the general profitability of the industry recently?
Profitability has declined and pricing pressures are quite evident. All key input prices have increased in the range of 10-20 per cent over the last one year, which includes raw material used for producing clinker like limestone, power and fuel inputs costs (pet coke, imported coal and currency) and transportation costs (diesel). On an industry level, this has brought down the operational profitability by 275-325 bps to 12-14 per cent from 15-17 per cent in FY18. Given the competition in the sector, producers have found it difficult to pass on the entire costs to consumers.