The Adani Group has concluded the acquisition of Ambuja Cements and ACC by purchasing Holcim's stake in the two companies. The entry of Adani group in the Indian cement industry through the acquisition of Holcim group entities viz. ACC and Ambuja Cements has sparked new optimism about the long awaited consolidation.

The Adani Group is infusing Rs 20,000 crore into Ambuja Cements through a preferential allotment of shares. The existing cash on Ambuja Cements' books, as on June'22 stands at Rs 8500 crore, which coupled with the equity issuance, has created a significant ware chest for the company to aggressively grow in the market. The funds seek to "further strengthen" Ambuja's balance sheet and meet the capital requirements for capacity enhancement, acquisitions and investments in technology.

The capital infusion and the mention of acquisitions sparked talk of further consolidation in the cement sector. The impact of the same on the cement industry depends on whether the Adani group goes for organic growth or inorganic growth. If majority of the growth plan is achieved through inorganic route, then it will be beneficial to the industry.

There will be an estimated ~150-160 MTPA of capacity over the next five years. The Adani group is planning to double the combined cement manufacturing capacity of Ambuja Cements and ACC to 140 MTPA over the next five years from the present 70 MTPA. The Aditya Birla Group's UltraTech Cement is also aiming to significantly increase its capacity to almost 160 MTPA by 2030 from about 120 MTPA at present.Shree Cement, which has a production capacity of 47.4 MTPA (including overseas), intends to add another 80 MTPA by 2030.Dalmia Bharat is planning to expand cement capacity to more than 48 MTPA by the end of FY24 from the current 35.9 MTPA via both organic and inorganic modes.

Consolidation is likely since the top four players will be adding around 60% of the incremental capacity, implying market share will be concentrated, with these four holding 51%.

Meanwhile, positives are also expected to accrue from declining input costs with a correction in commodity prices. International pet coke prices down by about 40% in the past four months to $175 a tonne and likely to decline further with a fall in crude oil prices The end of monsoon season may mean a pickup in construction activities and cement manufacturers are attempting price hikes now. Both factors are favourable for margins and earnings growth of cement companies.

India is the second-largest producer of cement in the world, our per capita consumption is just 250 kg compared to 1,600 kg of China. This is almost seven times headroom for growth. Furthermore, as several of the government programmes gather momentum, the long-term average growth in cement demand is expected to be 1.2-1.5 times the GDP.

With the monsoons receding and construction activities being put back on track, cement firms plan for price hikes by mid-September in eastern India and early October across certain other regions.Cement companies hiked prices by Rs15-20 per bag in eastern and western India (in the non-trade segment), effective September 6, with the possibility of a further hike of Rs 15 per bag across the east by mid-September. They are likely to hike prices across the north and central regions from October's first week.

Pan-India average prices corrected by about 2% MoM in August, the steepest fall being in north and east India by 3% and 4%, respectively, followed by 1.5% dip in south India. Generally for the industry, the demand has picked up substantially well after the monsoons in September.

Cement Industry Scenario

India is the world second largest cement producer (after China) and accounts for over 8% of the global installed capacity. The three most common cement types produced in India are OPC, PPC, and PSC.

The current capacity of the Indian cement industry is ~500 million tonne per annum (MTPA) and average capacity utilization ranges between 65-70%. India's cement industry will add 80-100 million tonnes (mt) of capacity by 2024-25 (FY25), driven by increased spending on housing and infrastructure. India's cement demand is expected to reach 550-600 MTPA by 2025, due to the increasing demand in various sectors such as housing, commercial construction and industrial construction,

India's cement industry is a vital part of its economy and employs over one million people, directly or indirectly. The industry plays a crucial role in the development of the housing and infrastructure sector of the economy.

The accommodative stance of RBI to push economic growth is incentivising businesses with higher credit offtake and business activities. A benign interest rate policy coupled with "work from home" practice adopted by businesses has led to increased housing construction activities. Also, focus on infrastructure sector and housing for all scheme, shall be the drivers of the demand.

Cement demand is closely linked to the overall economic growth, particularly of the housing and infrastructure sector.Cement demand expected to grow by 7-8% in the current fiscal (FY23), driven by the government's continued thrust on rural and affordable housing, increased allocation to infrastructure projects, revival of urban housing and commercial segment post the impact of COVID-19 over the past two years. Cement demand would also likely be boosted by the pre-election government spending ahead of the general elections in May'24.

Factors likely to aid demand:

1. Urban and Rural Housing:

• Demand revival expected in real estate
• Positive momentum is likely in rural demand due to the promising rabi crop outlook
• The construction of nearly 8 million houses is likely to generate demand from the rural segment

1. Infrastructure:

• 25,000 kilometres of roads are targeted in FY23
• Positive momentum is expected in urban infrastructure, Bharatmala and Metro projects
• Positive infra outlay in state Budgets

1. Industrial and Commercial:

• Implementation of PLI scheme to boost the demand further
• Aggressive targets, coupled with the PLI scheme and the rising capital expenditure
• The increasing emergence of e-commerce and retail would likely push demand for warehouse
• The government's aim of 220 airports by 2025 would further boost the demand

Cement Industry output gains 2.1%YoYinJuly 2022

All-India cement production (proxy for demand), as reported by the Office of Economic Advisor, Ministry of Commerce and Industry, increased 2.1% to 301.09 lakh tonnes in July2022 over a year but lowerby 11.3% over June 2022.

Cement production increased by 13.26% to 1,283.51 lakh tonnes for Apr-Aug period of FY2023. Cement production increased by 21% to 3,564.35 lakh tonnes in FY 2022 as compared to decline of 11.9% to 2,945.22 lakh tones in FY 2021, de-growth of0.9% to 3,343.66 lakh tones in FY 2020, growth of 13.3% to 3,373.22 lakh tones in FY2019, and growth of 6.3% to 2,977.11 lakh tonnes in the FY2018.

Cement WPI for August 2022

The Cement, Lime and Plaster Wholesale Price Index (WPI), with a weight of 1.644 in the WPI, inclined 12.8% to 141.6 in August2022 over a year and up by5.4% over month.

Cement, Lime and Plaster WPI growth was up 4.7% for FY2022 as compared to growth of 1.1% in FY2021, growth of 4.6% in FY 2020, growth of 0.5% in FY2019, growth of 2.9% in FY2018, and growth of 0.6% in FY2017.

Meanwhile, the Ordinary Portland cement WPI, with a weight of 0.852 in the WPI, rose 15.2% at 142.1 in August2022 over the year and up by 8.7% over the month.

Ordinary Portland cement WPI grew 3.8% in FY2022 as compared to growth of 0.5% in FY2021, growth of 6.6% in FY2020, growth of 1.1% in FY 2019, growth of 3.3% in FY2018, and growth of 0.8% in FY2017.

Outlook

The entry of Adani group in the Indian cement industry through the acquisition of Holcim group entities viz. ACC and Ambuja Cements has sparked new optimism about the long awaited consolidation. The capital infusion and the mention of acquisitions sparked talk of further consolidation in the cement sector. Also, there will be an estimated ~150-160 MTPA of capacity addition over the next five years.

Meanwhile, positives are also expected to accrue from declining input costs with a correction in commodity prices. International pet coke prices down by about 40% in the past four months to $175 a tonne and likely to decline further with a fall in crude oil prices The end of monsoon season may mean a pickup in construction activities and cement manufacturers are attempting price hikes now. Both factors are favourable for margins and earnings growth of cement companies.

Cement demand expected to grow by 7-8% in the current fiscal (FY23), driven by the government's continued thrust on rural and affordable housing, increased allocation to infrastructure projects, revival of urban housing and commercial segment. Cement demand would also likely be boosted by the pre-election government spending ahead of the general elections in May'24.