Mumbai: Cement companies pin hopes on govt spending to revive growth


Updated Tue, 30 Dec 2014 09:55:50 GMT

After a year in which hopes raised by elections came crashing soon after, cement makers are looking for deliverance from state spending in the year ahead. 

2014 was a year of consolidation for the sector, even as companies continued to struggle with weak demand, excess capacity and falling prices. The year began with hopes that demand could rise if infrastructure growth picked up. But those dreams unravelled and now, the industry expects the environment to see a change for the better only in 2015. According to a Mint analysis, India’s top three cement manufacturers—UltraTech Cement Ltd, ACC Ltd, and Ambuja Cement Ltd—posted tepid year-on-year revenue growth of 10% up to 30 September in 2014— which was still better than the 4% drop seen the previous year. Prices fell towards the end of 2014. In November, cement prices fell by up to Rs.20 per 50kg bag, or down 1-7%, in all regions except western India, as demand remained weak and producers fought for volumes, according to a 4 December report by IIFL Institutional Equities. “In the first half of 2014, the pre-election demand for cement was good and the momentum continued till July but after that, the demand and prices fell,” said H.M. Bangur, managing director of Shree Cements Ltd. Bangur, who says the sector has seen negative growth in recent months, is hopeful of a pick-up next year. “A lot of demand growth is dependent upon new contracts by the government,” he said. To be sure, an expected pick-up in economic growth in fiscal 2015 and fiscal 2016 could buoy core sector industries, including cement. India is expected to grow at 5.5% in fiscal 2015, the government said in its mid-year economic review on 19 December. The government is also trying to kick-start stalled infrastructure projects, which could trigger demand for commodities such as cement.

JK Cement Ltd is one of the companies betting on government spending: “Although 2014 was an average year, we are expecting 2015 to be much better, as the government will start delivering,” special executive Madhavkrishna Singhania said. Building roads, highways and a rail freight corridor as well as lakhs of toilets across the country under the Swachh Bharat Abhiyan sanitation campaign will be major demand boosters next year, Singhania said. The housing sector consumes 67% of cement in India, followed by infrastructure and commercial construction with 13% and 11% respectively, according to data from Invest India, an official agency dedicated to investment promotion and facilitation. Against the backdrop of weak demand, the industry saw significant consolidation in 2014 not just domestically but also globally. Holcim Ltd of Switzerland and Lafarge SA of France agreed to merge in April, which will create the world’s largest cement manufacturer with more than $40 billion in sales. In India, Holcim’s two units— ACC Ltd and Ambuja Cements Ltd—have a combined annual capacity of 45 million tonnes (mt), making it the country’s second biggest maker of the building material. Lafarge has a total capacity of 8 mt in India. The combination of the two will bring the new entity within striking distance of UltraTech Cement Ltd, India’s top cement maker owned by the Aditya Birla Group, which has a capacity of 62 mt. Domestically, consolidation was led by asset sales by companies deep in debt. In March, Jaiprakash Associates Ltd sold its stake in a cement joint venture in Jharkhand to Dalmia Cement (Bharat) Ltd for about Rs.690 crore. In August, Shree Cement agreed to buy a 1.5 mt cement grinding unit of Jaiprakash Associates at Panipat in Haryana for Rs.360 crore. UltraTech, too, is in talks to acquire some of Jaiprakash’s plants. Some smaller cement makers are looking to exit. In September, the board of Hyderabad-based Sagar Cements Ltd gave an in-principle approval to buy 100% stake in the privately-held BMM Cements Ltd. Many other smaller cement makers including Bhavya Cements Ltd, Parasakti Cement Industries Ltd and JSW Cement in the country are also trying to find buyers for their assets, Mint reported in April. “The phase of consolidation in the cement industry will continue, but fundamentally, there is not much going in favour of the sector,” said Phani Sekhar, fund manager at Angel Broking Pvt. Ltd, adding that industries that use cement are not picking up and volume growth remains sluggish. Despite the optimism expressed by company executives, Sekhar expects the ground realities for the cement sector to remain largely unchanged next year. “2015 will be similar in terms of asset sales, and we may see some big companies gulp the smaller ones, in a bid to expand their capacities,” Sekhar said. “There is not much economic activity happening on the ground and I don’t see how the sector will be different in 2015,” Sekhar added. Not everyone shares that pessimism. After three lacklustre years, cement firms are hoping that demand will rebound in the next two-three years, with the Bharatiya Janata Party-led central government focusing on economic and infrastructure recovery, according to an October report by Ambit Capital Pvt. Ltd. “Indeed, pickup in the capex cycle will drive cement consumption growth (on a suppressed base), but we believe that significant cement demand will be visible with a lag of 12-18 months (as observed historically) and hinges largely on effective implementation of economic policies of the government,” Ambit analysts Nitin Bhasin and Achint Bhagat wrote in the report. “The impetus on infrastructure could be a key driver of volume growth but needs ironing out of concerns around land acquisition and more importantly the funding deficit of infrastructure developers in India,” the report said. For the 2015 and 2016 fiscal years, Ambit estimates cement demand growth of 7-10%, primarily led by public infrastructure. Kamlesh Bagmar, senior research analyst at broking firm Prabhudas Lilladher Pvt. Ltd, adds that while earnings growth of cement companies in 2014 was weak due to low demand, some pickup can be expected next year. “The government’s disinvestment plans and other reforms should increase the planned expenditure; so, the capital investment cycle resumes, resulting in a demand growth in the cement sector,” said Bagmar. Apart from demand revival, other uncertainties have come up as well. Among them is the recent cancellation of coal blocks based on a Supreme Court order in September. The coal block allocation is also a huge determinant of how cement companies will perform next year, Singhania of JK Cement said. Coal is a key input in making cement. On the flip side, the fall in crude oil prices will be beneficial for the industry, as it will pull down raw material costs.