July

2017

Cement Sector Coverage Report

PRESENTED BY -
ALPHA – THE INVESTMENT AND RESEARCH CLUB
FMS DELHI

Ankit Agrawal | Senior Analyst |+917415757788| alpha@fms.edu

Table of Contents
1. Indian economy overview .................................................................................................................. 2
1.1 Evolution of Global economy ............................................................................................................ 2
1.2 Evolution of Indian economy ............................................................................................................ 3
1.3 Importance of manufacturing sector and infrastructure development ........................................... 4
2. Indian Manufacturing Industry .......................................................................................................... 5
3.Cement Industry .................................................................................................................................. 7
3.1 Gradation of cement ......................................................................................................................... 7
3.2 Cement manufacturing process ........................................................................................................ 9
4.Global cement industry ..................................................................................................................... 11
5. Indian cement industry .................................................................................................................... 12
5.1 Northern Region ............................................................................................................................. 18
5.2 Southern Region.............................................................................................................................. 20
5.3 Eastern Region ................................................................................................................................ 22
5.4 Western Region............................................................................................................................... 24
5.5 Central Region ................................................................................................................................. 26
6.Cost elements of cement industry .................................................................................................... 28
6.1 Raw Materials cost .......................................................................................................................... 29
6.2Energy Cost ...................................................................................................................................... 30
6.3. Freight & Transportation cost ........................................................................................................ 31
7.Demand drivers of cement industry ................................................................................................. 33
7.1Housing Sector ................................................................................................................................. 34
7.2. Infrastructure ................................................................................................................................. 36
7.3.Commercial ..................................................................................................................................... 37
8.Impact of GST .................................................................................................................................... 39
9.Consolidation..................................................................................................................................... 41
10.Key Issues ........................................................................................................................................ 42
10.1. Cyclicality and Seasonality ........................................................................................................... 42
10.2 Shortage of Domestic Coal............................................................................................................ 43
10.3. Rising input costs ......................................................................................................................... 43

1
1. Indian economy overview
India has emerged as one of the fastest growing economies. In GDP terms, it
currently is 7th largest economy with a nominal GDP figure of 2.263 trillion USD. It is
projected to become 3rd largest economy by 2030. The country with a population of
over 1.2 billion people has over 51% people working in the primary agriculture
sector, 22% in manufacturing sector and 25% in service sector. However it is
astonishing to note that contribution to GDP is maximum from service sector (60%),
followed by manufacturing sector (28%) and just 12% by farming industry. Over the
six and half decades since independence, the country’s economy has evolved
drastically from 100.85 Trillion INR to 1 lac trillion INR.

Year 1950 1960 1970 1980 1990 2000 2010 2015

GDP( 100.85 174.07 462.45 1380.33 5542.70 21774.3 36933.7 100020.6
trillion
INR)
Source: Wikipedia; IMF database

1.1 Evolution of Global economy

Since the early 19th century, the developing economies have gradually been involved
in the industrialisation process with the manufacturing sector growing at faster pace
than primary sector, involving mining and agriculture. This has led to rapid structural
transformation of their economies, featured by shift from primary sector to
manufacturing sector. With urbanisation, labour-intensive manufacturing activities
grow faster than primary activities, generating new jobs, income and demand.
Capital accumulation leads to a more sophisticated manufacturing structure
and the economy gradually moves to skill and technology intensive sectors.

WORLD ECONOMY COMPOSTION BY SECTOR

2
 WORLD ECONOMY COMPOSTION BY SECTOR REGIONWISE

1.2 Evolution of Indian economy

Almost all countries that have managed the transition from low to high income have
undergone industrialization, diversifying and upgrading their production structure,
relinquishing dependence on agriculture and natural resources. The evolution history
of any country’s economy transforms through majorly 3 stages. The first stage is
primary stage when major contribution is from agriculture and farming sector, then
the second stage is secondary stage where manufacturing and industries is one
major sector on which majority of population is dependent. The third stage is tertiary
stage where country’s GDP is majorly dependent on services sector like IT,
transportation, tourism, banking, finance etc. The evolution of Indian economy is a
fascinating chapter. From primarily dependent on primary sector at the time of
independence, the country directly jumped to tertiary stage where it is majorly
dependent on services. The missing stage is the reason why India still has been a
laggard in providing world class infrastructure facilities and employment to its
population.

3
1.3 Importance of manufacturing sector and infrastructure
development

Productivity growth and technological advancement lie at the root of economic

development, which is why manufacturing is so important. Most technological
breakthroughs have been associated with the manufacturing sector, such as the
steam engine, the internal combustion engine, aeroplanes, steel ships and
semiconductors.Manufacturing also related to infrastructure development. The
construction of residential properties, factories, roads and railway networks, airports
is essential to support the rising industrial activities. Infrastructure development has
been considered as the key to economic growth in any country. Economic growth in
China is somewhat the outcome of infrastructure development that took place
during 90s. Manufacturing is also important for creating good jobs. Macroeconomic
importance of manufacturing is that large volume of employment is to be created to
provide sustainable living opportunities to the expanding population. The high
income nations are perfect example of those nations where high share of employees
in industry tend to have more people in wage employment, rather than in informal,
vulnerable jobs. Infrastructure development is critical for economic development. It
has a domino effect on the other sectors of the economy as it helps improve
productivity by removing infrastructural bottlenecks, which impedeeconomic
growth. Infrastructure typically includes projects done in a host of sectors. It includes
sectors like roads, railways, airports, ports, dams, electricity, irrigation, telecom,
water supply, sanitation systems, cross country systems and inland waterways etc.
Any industry cannot function profitably without its proper availability of
infrastructure facilities. India's urban population is larger than the entire United
States, and is second only to China's. It is clear that India's urban population will
continue to grow, probably doubling in the next couple of decades. The scale and
potential is enormous. To meet the challenges of this inevitable and rapid
urbanization, India needs well-performing cities and the integrated infrastructure
development will be the key.We will have to build new cities to accommodate the
surge and shift of population.
India needs 31 trillion INR to be spent on infrastructure development over the next
few years, with 70 percent of funds needed from power, roads and infrastructure
segments.The way ahead for the infrastructure sector would entail working together
of the public and the private sector as well as states and centre to lessen the
infrastructure deficit that presently ails India.

4
2. Indian Manufacturing Industry
Manufacturing has emerged as one of the prime growth sectors of India. The
Government of India has set an ambitious target of increasing the contribution of
manufacturing output to 25 per cent of Gross Domestic Product (GDP) by 2025, from
16 per cent currently. This will also lead to estimated domestic job creation of 90
million by 2025. With the help of Make in India drive, India is on the path of
becoming the hub for hi-tech manufacturing.

Manufacturing industry in India, mainly consist of following industries.

 Oil & Gas

 Construction
 Mining
 Automobile and other transportation
 Power
 Textile
 Pharmaceuticals
 Food & Beverages

5
Oil & Gas Industryis among the six core industries in India. It is one of the largest
contributor to non OECD petroleum consumption. With a refining capacity of 232.1
MMTPA, it is 2nd largest refiner in Asia. India is also 4th largest energy consumer. It is
estimated that the country’s share in global energy consumption is to double by
2035.
Construction sector contributes approx. towards 8% of the Indian GDP. Investments
in urban infrastructure is estimated over 650 Billion USD over next 20 years. Growth
rate of the industry is approximately 8.1%. Construction sector in India will remain
buoyant due to increased demand from real estate and infrastructure projects.he
construction sector accounts for second highest inflow of FDI after the services
sector and employs more than 35 Million people.
Mining sector is one of the core sectors of economy. It contributes around 2.4% of
the Indian GDP. India is a mineral rich country and has favourable geological milieu
which is yet to be fully explored, assessed and exploited.The demand for various
metals and minerals will grow substantially over the next 15 years.
Automobile and Auto components industry of India is one of the largest in the
world. It accounts for 7.1% of GDP. Two wheelers account for 81% lion share in the
industry and it is growing at a CAGR of 16%. Passenger vehicle production to increase
from 3.4 million in FY16 to 10 million in FY20E. India is also a prominent auto
exporter and has strong export growth expectations for the near future.
Power industry accounts for 25% of all the investments amongst all the
infrastructure sectors. With a production of 1108 TW, India is the world’s fifth largest
producer and consumer of electricity with a total demand of 1905 TW expected by
2022.
Textile industry of India is 2nd largest fibre producing in the world. India produces 9
Million tonne of fibre annually. Textile and apparel sector contributes 14% to
industrial production, 4% to India's Gross Domestic Product (GDP) and constitutes
15% of the country's export earnings. It is the second largest employment provider in
the country employing nearly 51 million people directly and 68 million people
indirectly in 2015-16.
Pharmaceuticals industry of India is the third largest in terms of volume and
thirteenth largest in terms of value. India is the largest provider of generic drugs
globally with the Indian generics accounting for 20 per cent of global exports in terms
of volume.The market is expected to grow to US$ 55 billion by 2020, thereby
emerging as the sixth largest pharmaceutical market globally by absolute size.

6
3.Cement Industry
Cement is one of the basic materials used in construction. It holds a universal
acceptance as one of the most popular materials to be used for any construction
purposes. Since construction forms the foundation of any industry, cement is
quintessential product for the growth of human civilization. Major end usage of
cements are in construction of housing, real estate and infrastructure development.

3.1 Gradation of cement

 Ordinary Portland cement
PORTLAND  Moderate heat Portland cement
CEMENT
TYPES OF CEMENT

 Rapid hardening cement

 Portland blast furnace slag

BLENDED
Cement
CEMENT
 Portland pozzolona cement

 Super high strength cement

SPECIAL  Sulphate resistant cement
CEMENT
 White cement

 Ordinary Portland cement (OPC) is the most common type of cement used in
general concrete construction. It is also popularly known as Grey cement. Due
to high heat of hydration released, this type of cement is not used for complex
construction like multi storied buildings, dams, bridges etc. This accounts for
70percent of cement consumption in India.
 Moderated heat Portland cement is the type of Portland cement containing a
lower content of alite (C3S) and tricalciumaluminum phase (C3A) to suppress
the heat of hydration. The Moderate Heat Portland Cement is particularly
suitable for mass concrete used in dam construction. It has excellent long
term strength, minimal dry shrinkage and great resistance to chemicals
 Portland blast furnace slag cement is a Portland cement mixed with a
designated amount of ground granulated blast-furnace slag. The latent
hydraulic property of the blast-furnace slag gives excellent long-term strength.
Due to high chemo resistance, this type of cement is particularly suitable for
rivers, ports, roads and tunnels.
 Rapid hardening cement is similar to Ordinary Portland cement but with
higher tri-calcium silicate (C3S) content and finer grinding. It gains
7
 strengthmore quickly than OPC, though the final strength is only slightly
higher. This type of cement is also called as High-Early Strength Portland
Cement. The one-day strength of this cement is equal to the three-day
strength of OPC with the same water-cement ratio. Generally used for under
water concrete casting works.

 Portland Pozzolana Cement is a kind of Blended Cement which is produced by

either intergrinding of OPC clinker along with gypsum and pozzolanic
materials in certain proportions or grinding the OPC clinker, gypsum and
Pozzolanic materials separately and thoroughly blending them in certain
proportions.The pozzolanic materials commonly used are volcanic ash,
calcined clay, fly ash and silica fumes. This cement is ideally suited for
construction of hydraulic structures, mass concreting works, marine structures
etc.
 Suphate resistant Cement is a type of portland cement which contains less
than 5% of tricalcium aluminate and other chemical constituents similar to
OPC. It is used for marine construction.

 White cement White cement is basically OPC - clinker using fuel oil (instead of
coal) with an iron oxide content below 0.4 per cent to ensure whiteness. A
special cooling technique is used in its production. It is used to
enhance aesthetic value in tiles and flooring. White cement is much more
expensive than grey cement.

8
 3.2 Cement manufacturing process

Production of cement completes after passing of raw materials from the following six
phases. These are
 Raw material extraction/ Quarry
 Grinding, Proportioning and Blending
 Pre-heater Phase
 Kiln Phase
 Cooling and Final Grinding
 Packing & Shipping

Phase 1: Raw Material Extraction

Cement uses raw materials like limestone, clay and sand. Limestone is combined
with much smaller proportions of sand and clay. Generally cement plants are fixed
where the quarry of limestone is near bye. This saves the extra fuel cost and makes
cement somehow economical. Raw materials are extracted from the quarry and by
means of conveyor belt material is transported to the cement plant.

Phase 2: Proportioning, Blending & Grinding

Now cement plant grind the raw mix with the help of heavy wheel type rollers and
rotating table. Rotating table rotates continuously under the roller and brought the
raw mix in contact with the roller. Roller crushes the material to a fine powder and
finishes the job. Raw mix is stored in a pre-homogenization pile after grinding raw
mix to fine powder.

Phase 3: Pre Heating Raw material

After final grinding, the material is ready to face the pre-heating chamber. Pre-
heater chamber consists of series of vertical cyclone from where the raw material
passes before facing the kiln. Pre-heating chamber utilizes the emitting hot gases
from kiln. Pre-heating of the material saves the energy and make plant
environmental friendly.

9
Phase 4: Kiln phase

In the kiln, raw material is heated up to 1450 ⁰C. This temperature begins a chemical
reaction so called decarbonation. In this reaction material (like limestone) releases
the carbon dioxide. High temperature of kiln makes slurry of the material.The series
of chemical reactions between calcium and silicon dioxide compounds form the
primary constituents of cement i.e., calcium silicate.

Phase 5: Cooling and final grinding

Final process of 5th phase is the final grinding. There is a horizontal filled with steel
balls. Clinker reach in this rotating drum after cooling. Here, steel balls tumble and
crush the clinker into a very fine powder. This fine powder is considered as cement.
During grinding gypsum is also added to the mix in small percentage that controls
the setting of cement

Phase 6: Packing & Shipping

Material is directly conveyed to the silos (silos are the large storage tanks of cement)
from the grinding mills. Further, it is packed in bags of 50 kg bags. Another
proportion of cement is shipped in bulk quantities by mean of trucks, rails or ships

10
4.Global cement industry
China produces the most cement globally by a large margin at estimated 2.35 billion
metric tons in 2015, followed by India at just 270 million metric tons in the same
year. China currently produces over half of the world’s cement. Global cement
production is expected to increase from 3.27 billion metric tons in 2010 to 4.83 billion
metric tons in 2030. In China, the cement and concrete industry accumulated 968.35
billion yuan in sales value and 949.57 billion yuan in revenues. The global cement
industry is expected to grow at CAGR of 9% till 2020. India is the 2 nd largest cement
producer, with production capacity of 390 MT(as of June 2017). US (86MT), Turkey
(77MT) and Brazil (60 MT) are the next big cement producers.The production of
Cement is highly skewed with top ten countries together accounting for close
to 70% of total cement production. These countries account for close to 70% of
total population.
The purchasing capacity of people in emerging economies like India and China has
been the major force behind growth of cement industry. This increase in the
purchasing capacity of the populace coupled with a rise in urban population has led
to the augmented demand for a number of residential projects worldwide. This
increase in the number of residential construction projects will drive the global
construction industry, which in turn will spur the demand for cement during the
forecast period.

Global cement consumption

China India Europe

Asia(excluding india,china) USA Central&South America
Africa

11
5. Indian cement industry
History
The cement industry is one of India’s sectors. The country’s first cement plant was
set up in Porbander, Gujarat in 1914. Earlier, the government regulated the industry
with licensing, price and distribution controls. A gradual removal of these controls
resulted in rapid capacity creation. Following this, the country moved from a cement
scarcity situation to a surplus position.

Sector Dynamics
Currently, India is the 2nd largest cement producer with manufacturing capacity of
390 MT and consumer in the world. Cement production in India accounts for more
than 6.7% of global cement output.The country is also among the leading exporters
worldwide. Since cement is a cyclical commodity, the dynamics of production are
highly dependent on the overall economic activity in India. Thus, the recent slow-
down in GDP growth and especially the unstable situation in the construction sector
have resulted in decreasing demand and excess capacities.

Demand
Cement sector in India is poised to grow due to government’s push for large
infrastructure projects, leading 45 MT of cement needed in next 5 years. India's
cement demand is expected to reach 550-600 Million Tonnes Per Annum (MTPA) by
2025. The housing sector is the biggest demand driver of cement, accounting for
about 67 per cent of the total consumption in India. The other major consumers of
cement include infrastructure at 13 per cent, commercial construction at 11 per cent
and industrial construction at 9 per cent.

Market Segmentation
Fragmented industry with more than 160 players.However, the sector is rather
oligopolistic in nature as the top 10 producers control about 70% of the domestic
market. There is a trend of consolidation in market, visible by multiple mergers &
acquisitions on the recent past.

12
 Growth of Indian cement industry
12%
300 12.00%

250 10%
10.00%

200 8%
8.00%

150 6.00%
6%
100 4.00%
4%
50 2.00%
2%
0 0.00%
2008 2009 2010 2011 2012 2013 2014 2015 2016 0%
Production(MT) Growth

The Indian cement industry can basically be broadly classified as pan- India players,
regional players and standalone players.

 Pan India players include large players like Ultratech cement, ACC,Ambuja,

 Regional players are those presence is restricted to one or two regions, with a
stronghold in their respective market territories. Key examples include India
cement (South), Shree cement (North), Dalmia cement (South). Jaypee
cement had a large share in north, until July 2016 when it sold its cement
plants to Ultratech.

 Standalone Players like Panyam cement, Penna cement etc. are concentrated
in few states within a region.

13
 Variety wise cement production of India

14
15
Porter’s Five Forces Analysis
Bargaining power of buyers: moderate
In the cement industry, the bargaining power buyers is moderate because the
majority of buyers are bulk buyers. For example, big construction firms, corporate
who want to build their own offices, etc. These buyers can bargain with the cement
companies. However, their bargaining power is not very high as their purchases form
a small part of the total production of the companies. Hence, they cannot exert much
influence on the manufacturers. Moreover, one potential bargaining power with the
buyers is the threat of importing cement. However, this threat is limited to an extent
as the cost of import will increase the overall cost of the project.

Bargaining power of Suppliers: High

In this industry, the suppliers exert a very high power. This is so because the raw
materials form a very large part of the process in the manufacturing of cement.
Shortage in supply of raw materials can cripple the whole plant and can lead to huge
losses. When the suppliers demand something, the negotiations have to be
completed quickly and the result is more or less in favour of suppliers. For example, if
the coal suppliers stop supplying coal to the plant, it cannot function and
production will come to a standstill. The supply of coal has to resume as quickly as
possible. Hence, the suppliers exert a great amount of influence in the decisions of
the cement manufacturing companies.

Threat of substitutes: Low

In India, cement is the ultimate material used for almost all type of construction
work. Bitumen is one of the substitutes of cement but these days cement is even
replacing bitumen. Another substitute for cement is engineering plastic. This also
cannot replace cement in many areas of work. Hence, there is practically no material
to substitute cement.

Threat of new entrants: Low

Cement industry is a highly capital intensive industry with long gestation period. Also,
the market is experiencing the problem of over-capacity in recent times. The existing
players are alsoexpanding their production capacity to meet future demand. All
these factors act as a deterrent to new entrants even though labour and manpower
is freely available.

16
Inter-Firm Rivalry: High
Cement industry is one of the highly competitive markets in India. Many players in
this industry are large scale players with huge capital invested in setting up the
production units. This factor raises the exit barrier for the companies. Hence, they
stay in the industry and start aggressive competition. Also, the differentiation in
types of cement is marginal, hence the switching cost to customers is not high, so
firms compete intensely to gain market share. Also, sometimes problem of
overcapacity comes into play. This leads to a price war and competition intensifies.

17
Regional Scenario

5.1 Northern Region

Production, Consumption and Capacity utilisation(%)

100 85.00%
90
80 80.00%
70
60 75.00%
50
40 70.00%
30
20 65.00%
10
0 60.00%
2011 2012 2013 2014 2015 2016 2017E

Plant Capacity Cement Production Utilisation %

Rajasthan accounts for approx. 80% of the cement production in the northern region.
It is also the largest cement producer state in the country.
Key Markets
Rajasthan, Punjab, Delhi and Haryana are the key markets in the northern region.
These states typically account for more than 85% of the overall cement consumption
in the region. Demand is mainly driven by increase in the construction of roads,
projects like concretisation and interlinking of village roads and rural housing project.
Key Players
Holcim group ( ACC&Ambuja) is the market leader. Next in line are the Shree cement,
Ultratech cement and Binani cement. The top five players account for around 8
percent of the market share in the region.

18
 Northern region market share breakup

ACC+Ambuja
19% 30% Shree cement

ultratech
7%
jaiprakash
9% binani cement

17% 18% Others

North Indian cement manufacturers reported better profit numbers for FY17 vis-à-vis
FY16 because of the significant increase in cement prices. The price rise to Rs 305-
345/ bag in April 2016 from Rs. 225-240/bag in Jan 2016 was majorly due to the
increased demand of cement. This price hike coupled with lower power and fuel
costs resulted in healthy growth in the profit of cement manufacturers. Good
monsoon supported demands in the rural sectors.

Price Trends (Rs/bag)

Prices
310
305
300
295
290
285
280
275
270
265
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

19
5.2 Southern Region

Production, Consumption and Capacity

utilisation(%)
140 70.00%
120 60.00%
100 50.00%
80 40.00%
60 30.00%
40 20.00%
20 10.00%
0 0.00%
2011 2012 2013 2014 2015 2016 2017E

Plant Capacity Cement Production Utilisation %

South India enjoys the largest share of cement capacities in India, owing to abundant
raw material availability, i.e. large limestones reserves available in the region. It also
accounts for the lion’s share in terms of cement consumption in India. Over the past
few years, cement demand in the region has grown with a CAGR of 4-5 percent.
Growth in the IT sector in the southern region has led to an increase in residential
and commercial construction activities, thereby boosting the demand for cement in
the region.

Key Markets
Tamilnadu, Andhra Pradesh and Karnataka are the key consuming markets. Cement
manufacturers are expecting an increase in demand in Telangana and Andhra
Pradesh. The Polavaram project and new capital construction in Andhra Pradesh are
expected to boost demand while in Telangana, general spurt in construction and
housing schemes for the weaker sections will be a positive differentiator for industry.
According to government estimates, NTR Housing Scheme, launched by Telangana
government, requires 19 lakh tonnes. An additional 16 lakh tonnes will be needed for
infrastructure projects such as ‘Chandranna Roads’.
Key Players
The southern region is more fragmented than other regions, with top five players
accounting for around 52 percent of total market share. The top players are

20
Ultratech Cement, India Cement, Madaras cement, Dalmia cement and Chettinad
cement.

Southern region market share breakup

India cement
Ultratech cement
12%
32% Madras cement
12% Dalmia cement
Chettinad cement
11%
Kesoram Cement
7%
9% Penna cement
9%
8% Others

Price Trends (Rs/bag)

320

310

300

290

280

270

260
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

21
5.3 Eastern Region

Production, Consumption and Capacity

utilisation(%)
70 100.00%
60
80.00%
50
40 60.00%
30 40.00%
20
20.00%
10
0 0.00%
2011 2012 2013 2014 2015 2016 2017E

Plant Capacity Cement Production Utilisation %

The eastern region has large reserves of raw materials. The cement demand in the
region has grown in the past few years, largely spearheaded by government focus on
housing and infrastructure projects. This is the only region in India where
consumption outstrips production.

Key Markets
The eastern region has registered high growth in cement consumption due to a good
demand from states of Orissa, Bihar, Jharkhand and Chhattisgarh.

Key Players
Holcim Group companies (ACC &Ambuja) enjoy the largest market share in the
region, followed by Ultratech Cement. Lafarge, Century Textiles and OCL are the
other key players. The eastern region demonstrates relatively higher level of
consolidation as compared to other regions, with the top five players
accounting for almost three fourth of the market share.

22
 Eastern region market share breakup
ACC+Ambuja
22%
25% Ultratech

Lafarge

Century
8% 18%

OCL India
10%
17%
Others

Price Trends (Rs/bag)

300

295

290

285

280

275

270

265

260
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

23
5.4 Western Region

Production, Consumption and Capacity

utilisation(%)
60 120.00%
50 115.00%
40
110.00%
30
105.00%
20
10 100.00%

0 95.00%
2011 2012 2013 2014 2015 2016

Plant Capacity Cement Production Utilisation %

Cement demand in the western region grew at a robust rate, largely driven by
spurt in housing, especially in semi-urban and urban areas, as well as
augmented infrastructure spending , especially in the urban areas
companies. Despite consumption growth outpacing capacity additions, average
cement operating rates stood at around 88 per cent over the past five years.
This was mainly on account of the excess cement supply to the West
from other regions, especially from the South (which suffers from significant
overcapacity).

Key Markets
Maharashtra and Gujarat are two big consumers of cement in the western region.
This is largely due to high infrastructure spending from the state governments.

Key Players
Ultratech Cement and the Holcim group have large presence in the
western market, with collective market share of almost 52 per cent. Other key
players in the western market are Kesoram Industries, Jaiprakash Industries and
Orient Cement.

24
 Western region market share breakup
ACC+Ambuja

31% 24%
Ultratech

Kesoram

Jaiprakash
28%
5% Orient cement
6%
6% Others

Price Trends (Rs/bag)

290

285

280

275

270

265
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

25
5.5 Central Region

Production, Consumption and Capacity

utilisation(%)
50 100.0%

40 95.0%
90.0%
30
85.0%
20
80.0%
10 75.0%
0 70.0%
2007 2008 2009 2010 2011 2012

Plant Capacity Cement Production Utilisation %

Madhya Pradesh has huge deposits of limestone in Satna district and most cement
plants are located here. In UP, there are no major cement plants, the state is a big
market for cement, in the region. Over the past few years, cement demand in the
central region has grown primarily due to increased infrastructure spending,
especially on road projects.
Key Markets
UP is the second largets cement consuming state in the country, with a market share
of almost 10-12 percent.
Key Players
Holcim Group (ACC and Ambuja) is the largest player in the region with a market
share of almost 18 per cent, closely followed by Jaiprakash Associates with a market
share of around 16 per cent. Other prominent players in the region are Ultratech
Cement, Prism Cement and Shree Cement. The top five players in the region account
for over 65 per cent of the total market share.

26
 Central region market share breakup
ACC+Ambuja

Ultratech
18%
33% Prism cement
14%
Jaiprakash

9% 10% Shree cement

16%
Others

Price Trends (Rs/bag)

310

305

300

295

290

285

280

275

270

265
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17

27
6.Cost elements of cement industry

Cost
Components

Selling, Freight
Raw
Energy( Power & & Other Operating
Materials(Limest
Fuel) Transportation cost (10%-15%)
one) 25%-30%
25%-30%

Electricity (48%-
Fuel ( 50%-52%)
50%)

Grid power Captive power Coal Alternate fuel Pet coke

28
6.1 Raw Materials cost:
Raw materials such as limestone, chalk, alumina, fly ash, gypsum is the major cost
constituent in cement industry. It costs around INR 460 per tonne. This also includes
royalty charged on limestone by Government of India. Typically, all the companies in
India have raw material cost as 23% of total cost component.

Raw Material cost

480
460
440
Cost (INR per ton)

420
400
380
360
340
320
300
FY12 FY13 FY14 FY15 FY16 9MFY17

Year

Cement plants are generally located near limestone quarries as limestone cannot be
transported over long distances. Limestone is essentially found in 10 clusters, i.e.
Satna, Gulbarga, Chandrapur, Bilaspur, Chanderia, Nalgonda, Yerraguntla,
Saurashtra, Himachal Pradesh and Thiruchirapalli.

While limestone costs increased in FY2016 on account of royalty contribution to the

District Mineral Foundation (DMF)/National Mineral Exploration Trust (NMET)
resulting in higher input costs, the international coal and pet-coke prices declined in
FY2016, which, coupled with higher pet-coke consumption, resulted in lower power
and fuel costs in FY2016 for the cement plants.

29
6.2Energy Cost:
This component typically included power cost derived from coal, electricity or other
fuels. A large section of cement plants consume coal as major source of energy. It is a
bulky commodity with regional concentration of deposits. Cement plants which are
located close to coal pit heads use it. Newly cement plants which have commissioned
recently use electricity as major source of electricity. They require 90-100 KWH per
tonne as against 115-120 KWH per tonne consumed by their older counterparts. To
offset the power shortage, thus rising power prices, many cement plants have set up
installations for captive power generation. Government has also permitted 100% FDI
in captive coal blocks in cement sector being used for captive power. Energy cost also
constitutes one of the major portion of total cost structure for a cement plant, i.e.
almost 25%.

Energy Cost
1200
1000
Cost ( INR/Ton)

800
600
400
200
0
FY12 FY13 FY14 FY15 FY16 9MFY17

Year

Coal Petcoke Others Total Cost per MT

.
As observed, overall energy cost decreased from 979/t in FY15 to 824/t in FY16. This
was influenced by softening in prices of coal and petcoke, increase in petcoke
consumption and reduction in energy consumption norms. In 2014-15, energy cost
increased from 951/t to 979/t due to increase in freight cost of coal from the
railways. The prices of imported coal prices declined, but this was negated by higher
domestic coal and petcoke price coupled with rising railway freight.

30
6.3. Freight & Transportation cost
Accounts for 18-20% of the variable cement production cost. With big clusters
typically located far away from the major consumption centres cement has to be
transported over very long distances. Indian railways has been typically most
favoured form of transportation for all cement companies. However, Cost conscious
manufacturers have attempted to use sea route for transportation (Gujarat Ambuja
Cement uses 2 jetties). Logistics typically cost Rs. 1100 per tonne.

Logistics cost
1200
1000
Cost (INR per ton)

800
600
400
200
0
FY12 FY13 FY14 FY15 FY16 9MFY17

Year

Rail Road Sea Total Cost per MT

Logistic cost increased marginally in FY16 by 2% from 1075/t in FY15 to 1099/t in

FY16. Although diesel prices softened which aided in controlling logistics cost, the
industry also faced problems in wagon availability and higher rail freight cost.
The weight/to price ratio make transportation cost very high. The
competitive radius of a typical cement plant for most common types of cement
extends no more than 300 kilometres. Thus, thelocation of a cement plant and
the cost to transport the cement it produces through its distribution terminals
bear significantly on the plant’s competitive position and the prices it may charge.
Although rail transportation is moreeconomical for distances beyond 250-300km,
cement companies havestarted preferring road transportation even for longer
distances because of several reasons. Rising railway trafficcoupled with insufficient
investments by the railways for increased wagon supplies and the fact that the
cement industry is not an important customer of the Railways (cement cargo
accounts for just 7-8% of the total railway freight) have resulted in a shortage of
wagon supply to the cement industry. The railways had launched the "Own Your

31
Wagon" scheme where companies could buy wagons and lease it to the railways and
the railways would in turn operate these wagons and ensure their availability to the
owner. But the unfavourable terms and conditions of this scheme prevented its
successful commercialisation. The railways have alsoincreased their tariff on a
regular basis(often higher than the increases in the road sector), making them
uneconomical vis-à-vis road tariffs even for longer distances.

Just recently, the Indian Railways hiked the cost of freight by 7-14% for distances
between 200 km and 700 km and imposed a Rs. 55/Ton extra charge on both loading
and unloading for distances beyond 100 km. At the same time, it reduced the freight
for long-lead traffic by 4-13%. The tariff hike will increase the fuel costs of cement
units closer to the mines, while units far away from coal mines could see their
fuel/input costs decline. Most likely, the extra fuel/input costs will be passed on to
the end-consumers by cement firms while those who see their freight costs coming
down as a result of the railways’ latest decision might improve their margins.

32
7.Demand drivers of cement industry

The demand for cement is a derived demand, as it depends on industrial activities,

real estate and construction works. Major demand sectors for cement are thus
Housing, infrastructure, commercial and industrial.

Demand Sectors

Commercial Industrial
Housing Infrastructure
construction segments

Breakup of Demand drivers

Rural Housing
15%

40% Urban Housing

20%
Infrastructure

25% Commerical

33
7.1Housing Sector
The housing segment accounts for a major portion of total domestic demand for
cement in India. Real estate market is expected to grow at a CAGR of 11.6% over
2011-20, with market expected to reach 180 billion USD by 2020. Growing
urbanisation, an increasing number of households and higher employment are
primarily driving the demand for housing, accounting for 65% of total cement
consumption. Initiatives are taken by government to provide an impetus to
construction activity in rural and semi urban areas through large infrastructure and
housing development projects lately.
 URBANIZATION
o Smart City Initiative of Government of India
o Urban Population expected to 500Mn by 2020
o Development of towns closer to district headquarters
o Average age of borrowers has decreased from 35 to 30
 DEMAND FOR HOUSING
o Urban Housing demand to grow by 15Mn units by 2020
o Top 8 cities to contribute 4.2Mn units to the demand
o Low Income Group/Non Salaried segment of the population to be the
most underserved segment
o Medium Income Group segment to demand around 14.57 lakh housing
units by 2020
 RISING INCOME
o India's per capita income, a gauge for measuring living standard, is
estimated to cross Rs 1 lakh in 2016-17, up from INR 93,293 in 2015-16
o Rising Income Levels of low income households leading to availability of
investable surpluses
o The housing sector has grown with a CAGR of 11.2% in previous years
 LOW COST OF BORROWING
o Interest rates on Home loan have decreased from 10.10% in 2013 to
8.6% in 2016
o Government initiatives like Pradhan MantriAwaasYojana has been
launched to ensure affordable housing for all
o Interest subsidy of up to 4 percent on loans taken under PMAY

34
 Market size of real estate in India ( Billion $)
200
180
160
140
120
100
80
60
40
20
0
2008 2009 2010 2011 2013 2015 2020E

Future scope
The urban housing shortage is estimated at 18.78 million in 2015. Total rural housing
shortage in India stood at 14.8 million. In order to cater to this housing shortage,
government has taken various initiatives.

The GoI’s ‘Housing for all’ initiative aims to provide houses to India’s entire
population by 2022. This implies building 200million houses in urban and 400 million
houses in rural areas. Given that housing accounts for 60% of cement consumption,
this initiative should provide significant incremental growth to cement demand
growth.

End User
Retail buyers are the main end users of cement in housing segment. They buy from
retailers as they have low requirements. Consequently, retail buyers have lesser
price flexibility than institutional buyers, who make bulk purchases. In case of retail
buyers, the mason decides the variety and brand of cement to be purchased.

35
7.2. Infrastructure

The government is strongly focused on infrastructure development to boost

economic growth. In the annual budget presented by the government for the year
2017-18, the government allotted INR 4 lac crores for infrastructure development.
GoI are listed below.
Dedicated Freight Corridor (DFC)
With an investment outlay of 13Bn USD, DFC is an Indian railways program to
expedite freight movement via dedicated freight lines. The eastern DFC moves across
Punjab, Haryana, Uttar Pradesh, Bihar, West Bengal and Jharkhand, while the
western DFC moves across Haryana, Rajasthan, Gujarat and Maharashtra. The
project is likely to be a key catalyst for infrastructure development in these cities.

Metro rail projects

Currently there are ongoing projects in 13 cities across the country. Most notable
among these are metro projects at Delhi, Mumbai and Bangalore. Total civil
construction work in these projects amounts to INR 969 Bn. Given that civil work
entails significant cement consumption, these projects could act as catalyst for
cement demand.

Road projects
The increase in budget allocation for roads and highways to Rs 64,000 crore from Rs
57,676 crore and earmarking of Rs 27,000 crore for rural roads in the Financial Year
2018 budget is supposedly a sign of improvement in infrastructure. The government
will develop roads in coastal areas in order to facilitate better connectivity with ports
and remote villages. The government has been able to achieve road construction at
the pace of 133km/day.

Smart City project

The urban population will increase from 31% in 2011 to 40% in 2030, contributing
75% of the country’s GDP. To address this rapid pace of urbanisation, the GoI has
launched its ‘Smart City Mission’ to establish 100 smart cities across the country. The
‘Smart City Mission’ is proposed to be operated as a central-government sponsored
scheme. The GoI proposes to give financial support of INR 480Bn over the next five
years. State governments have to match the contribution. Hence, the initialproposed

36
investment outlay is INR 1 trillion, but government agencies estimate the final
investment will be much higher. Grants from both central and state governments will
be leveraged to attract investment from internal and external sources.
End users
Government is main buyer of cement. It obtains cement at a very competitive prices
due to its purchase process. It buyscement through two routes: direct tenders, or
purchase through the Director General of Supplies and Disposals DGS&D).
The DGS&D receives cement rates from various cement companies, selects
the vendor, and distributes it among government agencies registered with
DGS&D. The government gets a significant portion of its total requirement through
the direct tendering process, and the remainder through the DGS&D.

7.3.Commercial

The commercial construction sector can be classified into space, malls and
multiplexes, hotels and other civil structures such as hospitals and institutions. Of
these, office space accounts for a considerable portion of commercial construction
demand.
Office space
Few large developers with a pan-India presence dominate the market. Typically, the
operating model has changed from sales to lease and maintenance. The growth in
this space is fuelled by rapid growth in IT/ITES, BFSI and telecom sectors. The total
prime office space absorption across seven leading cities in the country was about 28
million sqft.
Retail space
Booming consumerism in India has led to the growth of retail market. India’s
population below 30years age having exposure to global retail are expected to drive
demand for organised retail.
Hospitality sector
Robust domestic tourism and increasingly global nature of Indian businesses
boosting business travel are the main drivers of rapidly growing hospitality sector in
the country. Besides hotels, serviced apartments and convention centres also
contribute to hospitality market.

37
End user
Institutional buyers such as builders buy cement from either cement
companies or wholesalers. Bulk purchases cost lower than retail purchases.
Generally, civil engineers and contractors decide on the variety and brand of cement
to be purchased.

38
8.Impact of GST

Expectation: 18% Actual GST Rate: 28%

Overall Impact: Positive Price Impact: Short Term Price Rise
India ranks second in the world right after China in terms of cement producer. The
cement demand is expected to remain high in coming years thanks to the increased
focus of the Indian Government on developing infrastructure, affordable housing and
roads.
Here we try to analyse the impact of GST on the cement sector.
The Old System
Let us first look into the taxation system that was prevalent before the introduction
of GST
The tax rates till now for cement were extremely complex. Rates and duties would
vary depending on the type of cement or whether they were supplied in bulk form or
in packaged form or whether for industrial or trade purposes. The effective rates
including excise & VAT totals up to around 24-25%.
GST System
Cement will attract now 28% GST, i.e., a higher rate of tax which means increased
costs for the infrastructure sector which might hit the demand. The industry was
expecting a 18% rate which would have given a huge boost to the sector.
Apart from this:
 Concretes, Refractory cement, mortars will attract 18% tax.
 Cement Bonded Particle Board will attract 12%

The tax rates on main raw materials used for the production of cement are as
follows:
 Limestone is taxed at 5%
 Coal is kept at 5% slab, a reduction from the earlier rate of 11.69%
 Electricity has been kept outside the purview of GST

Although there are still two input factors which have kept outside the purview of GST
and thus will be included in the cost of cement production:

39
  Royalty paid to state governments for quarrying limestone
 Clean energy cess which is levied on coal

Other Indirect Positives from the implementation of GST

One of the main cost components for a cement manufacturer is freight . With GST
impacting logistics industry positively, cement producers will also see a lot of
benefits
Warehousing
The taxation system in India before GST made companies keep multiple warehouses
to avoid a lot of redundant taxes such as the Central Sales Tax and and state entry
taxes(Octroi taxes). The major problem with such a model was that most of these
warehouses used to operate much below their capacity leading to operational
inefficiencies. With the introduction of GST which subsumes other taxes, cement
companies are expected to consolidate their warehouses and maintain them in
selected areas which would lead to most optimized model for them.
Transport Costs
Introduction of GST is a huge boon for the logistics industry. Before GST, state-border
checkpoints, which were required for the material scrutiny and location based
tax/entry tax , used to have a huge negative impact on the overall production &
logistics time. This process would on an average account for around 60% of a truck’s
transit time and thus would increase the overall cost associated with logistics. With
GST, the transit time is expected to decline as lesser time will be wasted at various
checkpoints. This will lead to lower freight costs.
Conclusion
The operating cost is expected to reduce given the decrease in taxes applicable on
raw material and savings from the logistics. The biggest long term positive takeaway
from the GST is definitely the its impact on the warehousing model and ease of cross
border sales. It is expected that for now the cement prices might remain high as the
increased tax rate of around 2% would be passed on to the customers, but we might
see producers passing on some of the savings as they start benefiting after improving
their warehouse models.

40
9.Consolidation

After the dismantling of government controls for the cement industry in 1989, the
rate of growth in capacity addition in the cement industry increased. Due to the
increased production and the lack of matching consumption, there was excess
capacity in the market which resulted in companies struggling to remain viable. Entry
of foreign players resulted in the consolidation of the fragmented industry.
The main reason why companies consolidate is that it takes considerable investment
to build a greenfield capacity and there is gestation period of 3-4 years before a
company breaks even. This makes acquisition of smaller players highly lucrative for
industry majors.
The consolidation in the cement industry is beneficial both for the acquiring
companies as well as for the cement industry. Some of the benefits that result from
consolidation are as follows:

Economies of scale

A large cement company enjoys the benefits of economies of scale. Mergers and
acquisitions bring about consolidation of capacities which adds up the benefits of
scale. The economies of scale enable the company to reduce the production costs so
that it can reduce the cement price to maintain an edge over the competitors.

Extended reach and increased revenues

When a company takes over the production and distribution facilities of another
company, it immediately extends its geographical reach and increases its market
share on account of expansion of the market for its product. The market expansion
helps in ramping up the revenues of the company within a short span of time. The
enhanced geographical reach may also result in substantial reduction in
transportation costs which are quite high as cement is a bulk commodity.

Technological upgradation

The new energy-efficient but capital-intensive “dry” production technology offers to

the companies efficiencies that provide vital edge over the companies not deploying
such technologies. Small manufacturers may not possess the requisite financial
resources or production volumes to be able to afford the most efficient technology,
which puts them at a competitive cost disadvantage. The entry of foreign players
leads to technological upgradation and innovation in Indian cement industry.
41
Main Cement sector M&A
Target Acquirer Deal Value(USD)
Jaypee associates Ultratech 2.41 billion
Lafarge Nirma 1.4 billion
ADAG Group Birla corp 710 million

Demand Supply trend

500 180
450 160
400 140
350 120
300
100
250
80
200
150 60
100 40
50 20
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E

Capacity Demand Excess capacity

From the above graph we can see that capacity has increased from 198MT in 2008 to
433MT in 2018. This is an increase of 235MT. However, the consumption has
increased only by 114MT from 2008 to 2018. As a result of this, excess capacity has
also increased for the players. This has resulted in stressed assets.

10.Key Issues

10.1. Cyclicality and Seasonality

A distinguishing characteristic comes from it being cyclical in nature as the market

and consumption is closely linked to the economic and climatic cycles. In India,
cement production normally peaks in the month of March while it is at
its lowest in the month of August and September. The cement consumption peaks in
Q3 of financial year. Since during Q2, entire country experience a season of
monsoon, cement consumption is at minimal. Cement consumption again dips in Q4
since at this stage, owing to closure of financial year. During this time, majorly all
companies face budget constraint and typically since, government is the main
consumer of cement, it tries to lower its budget deficit and The cyclical nature of
42
this industry has meant that only large players are able to withstand the
downturn in demand due to their economies of scale, operational efficiencies,
centrally controlled distribution systems and geographical diversification.

GDP GROWTH v/s CEMENT SECTOR

From the above graph, we can see that cement performs similar to GDP and has high
correlation to it. In 2012, when GDP achieved it local maxima, the cement sector also
performed very well.

10.2 Shortage of Domestic Coal

Shortage of domestic coal and increasing cost of imported coal would remain a major
area of concern. Use of alternative fuels, gas and Waste Heat Recovery could give
some relief to the cement industry.

10.3. Rising input costs

As discussed in the costs section of the report, we see a steep rise in almost all the
input factors in the manufacturing of cement. Pet Coke prices have almost doubled,
energy costs have shot up tremendously, diesel price hikes have led to increased cost
of logistics. Companies are trying to improve their operating efficiencies by reducing
consumption to tackle the issue. Apart from that, we can see increased focus on
increasing the use of WHRS and AFR to mitigate input cost rise.

43