India’s cement industry is the backbone of its growing real estate and infrastructure sector. With an annual production capacity of around 550 mn ton, we have the second largest cement industry in the world after China.

Over the last ten-year period (FY13-22), demand has grown at a CAGR of around 5% to 375 mn MT. After remaining subdued on account of the Covid-19 pandemic in FY20 and FY21, demand grew by 8.5% YoY in FY22.

Short term outlook

While demand remained resilient last year, the challenge for the cement industry was the unprecedented inflation on all its key inputs.

Power and fuel costs rose on the back of a sharp increase in thermal coal and pet coke prices. Freight expenses jumped on the back of higher diesel prices. Packaging costs rose as polymer prices raced ahead.

Key raw materials like gypsum, slag and fly ash became more expensive. The industry tried to overcome the situation by cutting down on operational costs and gradual price hikes.

However, the overcapacity situation in the industry did not make it easy as a result of which operating margins took a knock. There is good news around the corner. Pet coke prices have corrected by around 30% from their peak in Jun-22 following the recent correction in crude oil prices.

Domestic bulk diesel prices have recently seen a modest correction and have remained steady since. Since Apr-22, we have also had polymer prices retracing from their recent peaks. This correction in input costs will coincide with a seasonal pickup in demand during the second half of FY23.

In Sep-22, cement prices across India have also risen by 2-3% on average after declining steadily since May-22.

 

Thus, in our assessment, operating profitability for the industry is set to recover going into the second half of FY23 (H2FY23).

Corporate developments

The most talked about development in the domestic cement industry was the acquisition of Holcim’s stake in ACC and Ambuja Cement by the Adani Group in May-22.

The acquisition brings in 70 mn MT of capacity and catapults Adani to the second largest position after Ultratech. The Adani Group will first acquire Holcim’s 63.1% stake in Ambuja and a 4.5% stake in ACC for US$ 6.5 billion.

Ambuja already holds a 50% stake in ACC. Thereafter, the Adani Group will make a mandatory open offer for acquiring up to 26% of the share capital of Ambuja and ACC which will require another nearly $ 3.5 bn.

Thus, the total spend on the buyout will be around US$ 10 bn. The transaction was debt funded with the group raising $5.25 billion.

The news of this acquisition initially sent jitters through the industry and for good reason. As is well known in the case of Adani’s, size does matter and it will be not surprising if they announce plans for further expanding capacity.

This will not be difficult as they already have environmental approval for setting up a 10 mn MT per annum plant in Gujarat. This will force peers to respond as many will not want to be felt left out in the race to gain market share.

The Board of Ambuja Cement is meeting on 16th September 2022 to decide on fundraising plans which is another indicator of how things will pan out in the coming days.

Secondly, with an Indian promoter at the helm and no royalty payouts, both ACC and Ambuja’s operations will become more efficient. This will further sharpen their competitive edge in an already intensely competitive industry.

However, the flip side to this argument is that the acquisition has been debt funded which logically should lead to a more rational market behaviour.

Analysts also suggest that capacity utilization at both ACC and Ambuja’s units is close to optimum and aggressive pricing will not bring in much additional volume.

Given the significance of this transaction, all future developments will be keenly watched as it has the potential to shape the industry’s future.

Demand in line with long-term GDP trend

Whatever Adani may have up its sleeve, at least when it comes to long-term cement demand in India the prospects seem bright. Even if a part of the government’s National Infrastructure Plan is implemented over the next few years, it bodes well for cement demand growth.

The last few years have seen a pickup in road construction activities at the national and state levels. Many Tier I and Tier 2 cities are also seeing the implementation of metro rail projects.

Investments in new capacities have been announced in sectors like oil and gas, renewable power, chemicals and pharmaceuticals.

The PLI scheme is likely to bring in new capacities in sectors like textiles, electronics, consumer durables, chemicals, pharmaceuticals, etc.

On the real estate front, the sector has come out of a long rut and demand currently is strong in key urban clusters. In the long term, given the government’s plans to increase farmer incomes, cement demand should benefit from growth in rural housing.

Conclusion

If demand growth remains in the 7-8% per annum range, which in our view should be the case over the next decade, then the current overcapacity in the industry will be gradually absorbed.

However, industry profitability will also depend on how leading players shape their future growth strategies and this is where all eyes will be on the Adani Group and Ultratech which today control around one-third of the industry’s capacity.