Cement

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Cement Construction industry profile
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A primer on the Indian cement industry

• Highly fragmented (low entry barriers)
• Cyclical industry
• Highly capital energy intensive
• Heavily taxed sector
• High bulk (volume) low value product
• Heavy dependence on 3 sectors viz. coal, power
  and transport

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Indian cement industry Major players in 2006
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Market consolidation

• Flurry of consolidation in the last couple of
  years. Notable ones include
• Gujarat Ambuja picking up 14 in ACC
• Grasim acquiring cement business of
• L T forming Ultratech
• Holcim taking minority stake in GACL and 67
  stake in ACC
• Heidelberg Cement acquiring 50 in Indorama Cement

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Financial performance

• Returns dependent on vibrancy of the economy as a
  whole
• High returns during boom times (1994-96 and
  2004-06) and low returns during lean periods
  (1997-01)
• Returns dependent on sales realisation and
  capacity utilisation

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Financial performance Cost structure

• The 2 major costs in cement industry are
• (i) Energy costs
• (ii) Freight costs
• Over the years, the share of energy costs have
  gone up marginally while that of freight costs
  has declined
• Other costs more or less stable

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Financial performance - Margins

• Industry margins very sensitive to sales
  realisations
• On the whole (except 2003 due to low sales
  realisations), margins firming up due to
  consolidation, capacity utilisation and higher
  sales figure

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Margins over the years (Source ICRA)
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Recent performance (2005-06)

• Lower interest costs
• Higher infrastructure spending
• Higher sales reported
• Increase in fuel prices offset by higher prices
• All these translated into higher profits for
  cement companies

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Recent performance (..continued Source ICRA)
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World cement production

• World cement production is about 2.27 billion
  metric tonnes (Source www.researchinchina.com)
• China (40 of world production)
• India
• USA

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Global bigwigs in cement

• La Farge, France
• Holcim, Switzerland
• Cemex, Mexico
• Italcementi, Italy
• Heidelberg Cement, Germany

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What is in store for 2007?

• GDP growth expected to fuel the boom
• Increased spending on roads and housing expected
• Bharat Nirman and concomitant rural development
  also can push up the figures
• On the whole infrastructure spending expected to
  drive growth in cement and construction
  activities
• 8 growth rate in 2007 and 2008

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A primer on Indias construction industry

• Worth USD 50 billion p.a. and accounts for 6 of
  Indias GDP
• Industry status granted only recently
• 100 foreign investment permitted since last year
• USD 4 billion per annum set to flow into this
  sector
• Employs 40 million people
• Unorganised low-skilled workforce

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Construction industry Drivers of growth

• Booming Indian economy
• Growing housing and commercial space (like malls,
  multiplexes) requirements
• Govt. thrust on infrastructure, GQ project,
  infrastructure outlay etc.
• Airport modernisation projects

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Indian construction industry - Players

• Companies like L T, GMR Infrastructure, HCC,
  Gammon which undertake huge projects.
• Companies like IVRCL, Nagarjuna, DLF, Omaxe
  dealing in flyovers, pipelines, apartments and
  housing/office spaces
• Other smaller companies

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Performance figures (all 2005-06 figures in mn
INR Source Edelweiss capital)
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Indian construction industry (Source Edelweiss)

• Aggregate order book for 2006-07 at Rs. 50,000
  cr.
• Y-o-Y revenue growth at 48
• Y-o-Y earnings growth at 62

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Construction industry growth Global trends

• Overheated housing market starts cooling off in
  the USA
• Fall in sales coupled with higher mortgage rates
  make the going tough.
• Europes housing market cooling off after the
  steep rise in 2005
• China and India remain the primary drivers.

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Global outlook for cement construction industry

• Annual cement demand to grow 4.7
• Construction boom in China (Olympics) India
  (housing, infrastructure) to drive projects till
  2010
• Half the worlds concrete production and a third
  of the steel production goes into China for her
  construction projects.

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Global outlook for cement construction industry

• Reasonable growth in construction sector in
  Brazil, Argentina, Mexico and the Middle East
• All in all, a great decade ahead for the cement
  and construction industry fuelled by massive
  Govt. spending and private infrastructure
  investments

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References

• www.edelcap.com
• www.pinsentmasons.com
• www.icra.in
• www.hinduonnet.com
• Survey of Indian industry, 2006 published by The
  Hindu

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