CHAPTER 2

INDUSTRY PROFILE
Cement Industry in India is on a roll at the moment. Driven by a booming real
estate sector, global demand and increased activity in infrastructure development such
as state and national highways, the cement industry has witnessed tremendous growth.
Production capacity has gone up and top cement companies of the world are vying to
enter the Indian market, thereby sparking off a spate of mergers and acquisitions.
Indian cement industry is currently ranked second in the world after China.

The origins of Indian cement industry can be traced back to 1914 when the first
unit was set-up at Porbandar with a capacity of 1000 tonnes. Today cement industry
comprises of 125 large cement plants and more than 300 mini cement plants. The
Cement Corporation of India, which is a Central Public Sector Undertaking, has 10
units. There are 10 large cement plants owned by various State Governments. Cement
industry in India has also made tremendous strides in technological up gradation and
assimilation of latest technology. Presently, 93 per cent of the total capacity in the
industry is based on modern and environment-friendly dry process technology. The
induction of advanced technology has helped the industry immensely to conserve
energy and fuel and to save materials substantially. Indian cement industry has also
acquired technical capability to produce different types of cement like Ordinary
Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace
Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate
Resisting Portland Cement, White Cement etc. Some of the major clusters of cement
industry in India are: Satna (Madhya Pradesh), Chandrapur (Maharashtra), Gulbarga
(Karnataka), Yerranguntla (Andhra Pradesh), Nalgonda (Andhra Pradesh), Bilaspur
(Chattisgarh), and Chandoria (Rajasthan).

Cement industry in India is currently going through a consolidation phase.

Some examples of consolidation in the Indian cement industry are: Gujarat Ambuja
taking a stake of 14 per cent in ACC, and taking over DLF Cements and Modi
Cement; ACC taking over IDCOL; India Cement taking over Raasi Cement and Sri
Vishnu Cement; and Grasim's acquisition of the cement business of L&T, Indian
Rayon's cement division, and Sri Digvijay Cements. Foreign cement companies are
also picking up stakes in large Indian cement companies. Swiss cement major Holcim
has picked up 14.8 per cent of the promoters' stake in Gujarat Ambuja Cements
(GACL). Holcim's acquisition has led to the emergence of two major groups in the
Indian cement industry, the Holcim-ACC-Gujarat Ambuja Cements combine and the
Aditya Birla group through Grasim Industries and Ultratech Cement. Lafarge, the
French cement major has acquired the cement plants of Raymond and Tisco. Italy
based Italcementi has acquired a stake in the K.K. Birla promoted Zuari Industries'
cement plant in Andhra Pradesh, and German cement company Heidelberg Cement
has entered into an equal joint-venture agreement with S P Lohia Group controlled
Indo-Rama Cement.

Issues concerning Cement Industry

 High Transportation Cost is affecting the competitiveness of the cement

industry. Freight accounts for 17% of the production cost. Road is the preferred
mode for transportation for distances less than 250km. However, industry is
heavily dependent on roads for longer distances too as the railway
infrastructure is not adequate.
 Cement industry is highly capital intensive industry and nearly 55-60% of the
inputs are controlled by the government.
 There is regional imbalance in the distribution of cement industry. Limestone
availability in pockets has led to uneven capacity additions.
 Coal availability and quality is also affecting the production.

Outlook
Outlook for the cement industry looks quite bright. Given the sustained growth in the
real estate sector, the government's emphasis on infrastructure and increased global
demand, it looks as if the juggernaut of cement industry would continue to roll on the
path of growth.

Indian Cement Industry on Growth Trajectory…….

The Cement industry has continued its growth trajectory over the past seven
years. Domestic cement demand growth has surpassed the economic growth rate of
the country for the past couple of years. The growth rate of cement demand over the
past five years at 8.37 % was higher than the rate of growth of supply at 4.84% as also
the rate of growth of capacity addition during the same period. Demand for cement in
the country is expected to continue its buoyant ride on the back of robust economic
growth and infrastructure development in the country.

The key drivers for cement demand are real estate sector, infrastructure
projects and industrial expansion projects. Among these, real estate sector is the key
driver and accounted for almost 55% in FY 07.
During the period FY 03 – 07, capacity additions in the country (30.6 mn tonnes)
were at a slower rate compared to demand growth leading to higher average capacity
utilization rates from 81.3% to 93.8% during the same period. This has exerted
pressure on average prices which have increased from Rs. 156 per bag in FY 03 to Rs.
216 per bag in FY 07. In December 2007, prices stood at Rs. 245 - Rs. 250 per bag.
Low capacity addition coupled with higher utilization rate also led to increase in
proportion of production of blended cements in product mix. Blended cement
accounted for 68% of product mix in FY 07 as compared to 49% in FY 03.

Cement is a bulky commodity and cannot be easily transported over long

distances making it a regional market place, with the nation being divided into five
regions. Each region is characterised by its own demand-supply dynamics. The
Southern region dominated the cement consumption at 44.5 mn tonnes in FY 07,
accounting for about 30% of total domestic cement consumption. During FY 03-07,
Southern region has witnessed highest CAGR of cement demand growth at 10.4%
followed by Northern and Eastern regions at 8.9% and 9%, respectively.

Over the past five years, cost of cement production has grown at a CAGR of 8.4%.
Also, the producers have been able to pass on the hike in cost to consumers on the
back of increased demand. Average realizations have increased from Rs. 1,880 per
tonne in FY 03 to Rs. 3,133 per tonne in FY 07, at a CAGR of 13.6%, which has been
reflected in higher profit margins of the industry.

To reduce the cost of production, the industry has focused on captive power
generation. Proportion of cement production through captive power route has
increased over the years. Also, cement movement by rail has increased over the years.

Market share of top five players in the industry has increased from 42% in FY 02 to
56% in FY 07. In FY 07, Holcim group captured a leadership position with market
share of 22.6% followed by Aditya Vikram Birla group at 19.4%.

Domestic Cement industry is highly insulated from global cement markets.

Exports have been constant at about 6% of total cement demand for past few years.
With GoI intervention, making cement duty free, cement is being imported from
neighbouring countries. However, due to logistics issues and lack of port handling
capabilities, imports of cement will remain negligible and do not pose a threat to
domestic industry.

Cement demand is expected to remain buoyant driven by boost in construction

sector in the country. As per estimates, investment of USD 25 bn is required in urban
housing, USD 450 bn will be required in infrastructure related projects and industrial
expansion projects would witness investments of USD 88 over the next five years.

We estimate domestic cement demand to grow at a CAGR of approximately

10% for the next 5 years. The current tight demand - supply situation is expected to
extend up to end of calendar year 2008 owing to delays in capacity expansion
programmes by various companies. We expect prices to remain firm till the end of
CY2008 due to tight demand - supply situation and increase in input costs. Thereafter
as new capacities come in, we may witness a softening in prices in some regions.