Wednesday, 8 May 2013
Project Report on Cement Industry in India-Finance Topic
Cement sector has witnessed an impressive run over the past few years, with an improvement seen across key operational parameters such as operating rates, prices and profitability. Housing sector is the single largest consumer of cement in India. Over the last 5 years, India has witnessed a real estate boom, especially in the metros and tier I cities. This has been the primary driver for cement demand, which has grown at a healthy CAGR of 9.3 per cent over the past 5 years.
Going forward, CRISIL Research expects cement demand growth from housing segment to slow down. However, this will be offset to an extent by an increase in cement consumption from the infrastructure sector. In addition, an increase in independent housing projects in semi-urban and rural areas will provide support to cement demand. As a result, we expect cement demand to register a CAGR of 7.8 per cent over the next 5 years.
Within infrastructure, we believe that road projects will be a key driver for cement demand. Cement consumption in road projects will grow significantly on account of an increase in expenditure on road projects as well as an increase in cement intensity for the construction of roads. Increase in use of paver blocks, construction of flyovers and bridges, and increasing proportion of concrete roads as compared to bituminous roads will lead to an increase in cement intensity in roads construction.
While cement demand growth is expected to slow down marginally, we expect significant capacity additions in future (around 90 million tonnes of cement capacity to be added over the next 5 years). Majority of the capacity additions are expected in south India (around 45 per cent of total capacity additions). Unlike previous capex cycles where a number of new companies set up cement capacities, this time around majority of the capacity additions will be by existing cement players.
Due to significant capacity additions over the next 2 years, we expect cement operating rates to fall form 88 per cent in 2008-09 and bottom out at 77 per cent in 2010-11 before recovering to 87 per cent 2013-14. In terms of regions, south and east will face the maximum decline in operating rates; they are expected fall below 75 per cent. For the other regions - north, west and central, the decline in operating rates will be lower.
Due to a fall in operating rates, we expect cement prices to fall by around 5 per cent in 2009-10 and 8 per cent in 2010-11. As a result, player profitability will be negatively impacted and we expect a 50-100 bps dip in operating margins in 2009-10 and 500-700 bps dip in 2010-11. A decline in power & fuel and freight cost will help arrest a decline in operating profits in 2009-10 to an extent.
Going forward, cement consumption in road projects will increase significantly on account of:
· Increasing spends on roads projects due to greater private sector participation on account of build-operate-transfer (BOT) projects.
· Increased cement intensity in construction of roads due to the following factors:
- Increase in proportion of concrete roads compared to bituminous roads.
- Use of paver blocks and concrete tiles
- Construction of flyovers
As a result, we expect the share of roads in infrastructure demand to increase from 31 per cent over the past 5 years to 35 per cent over the next 5 years.
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