Key Sector Data   Market Cap (Rs Crore) 210608 Market Cap (USD million) 31833 P/E        30.3 P/BV          3.4 Debt/Equity          0.5 ROA (%)          6.9 ROE (%)        11.2 EV/Sales          2.7 EV/EBITDA        14.6

The Indian cement sector is set to witness heightened merger and acquisition (M&A) activity with global majors like CRH, Heidelberg and LafargeHolcim looking to expand their presence in the country.

The LafargeHolcim combine with a cement capacity of around 68 million tonnes per annum (mtpa) in India has overtaken Kumar Mangalam Birla's UltraTech, which was the largest cement manufacturer in India with a capacity of 65 mtpa. However, the Aditya Birla Group company seeks to expand its capacity to 71 mtpa by 2016 with projects underway.

There were two major deals in the last 7-8 months: Holcim-Lafarge and then Heidelberg and Italcementi. Globally, the ticket size in cement will be 100 million tonne, and in India it will be 20 million tonne. Here, the number of big players is increasing and, going forward, more consolidation will take place.

This consolidation is happening at a time when new players like Anil Ambani-led Reliance Group and Sajjan Jindal-led JSW Group have big plans in the cement sector. Reliance Cement, with capacity of 5.8 million tonnes, is looking at almost a three-fold increase in capacity to 15 million tonnes in the next three years with new cement plants being planned in Maharashtra and Madhya Pradesh. JSW Cements is setting up 10 grinding units in the country to triple its cement and clinker capacities to 20 mtpa in the next three years. Jindal Steel and Power is also contemplating to foray in the cement sector in a big way.

The industry expert expects demand growth between 6.5% and 8% would outpace supply additions at 6.7% in FY16 as cement capacity utilization, which was around 71% in FY14, is likely to improve to 73-75% in FY16, as was last seen in FY11.

Cement firms hike price in Aug

Cement firms hiked prices by Rs 15-20 per bag in August 2015 in the northern region and plan to hike another by Rs 15-20 per bag in October on demand pickup hopes. The cement industry is hoping for better days as the government has announced a series of steps to accelerate infrastructure development especially roads. For FY16, the government targets to award highway projects worth Rs 3.5 lakh crore within the first six months.

Apart from stepping up high building, Prime Minister Narendra Modi has put on the fast track the ambitious Bharat Mala project to build 5,000 km of border and coastal roads for an estimated Rs 55,000 crore. In June, the National Highways and Infrastructure Development Corporation of India (NHIDCI) have invited bids for detailed project reports for 2,100 km stretch of roads. Bids were invited for DPR in Assam, Manipur, Meghalaya, Sikkim and Tripura. The DPRs will identify technical, economic and financial viability of the projects.

After coming to power, the Modi government has stepped road construction by 400 per cent in a year. Earlier, Transport Minister Nitin Gadkari said construction of highways has gone up to 13 km per day in the last one year compared with just 3 km per day during the last year of previous UPA regime. The target is to step it up further to 30 km per day within two years.

The PM is periodically reviewing the progress on infrastructure projects. In its last meeting, the PM discussed ways of streamlining road dispute settlement mechanism and possibilities of satellite monitoring of road projects to ensure timely completion. 

The Indian Cement Industry has an installed capacity of ~360 million tonnes and the domestic consumption in the calendar year 2014 was ~264 million tonnes. Cement and cementitious materials are critical for meeting society's needs of housing and basic infrastructure such as bridge, roads, water treatment facilities, school, hospitals, airports, ports, factories and many other facilities.

The operating environment for the cement industry was no different from that of the macro economy. For the cement industry, 2014 was year of consolidation. Most companies continued to struggle with weak demand, excess capacity and falling prices. Cement consumption grew at the rate of ~6% in the calendar year 2014.

The overall cement demand is estimated to grow at the rate of 6% in CY 2015 with the beginning of an economic turnaround. The consumption growth expected to go beyond 6% if investment is made in the infrastructure segment. With the gradual reduction in fiscal deficits and Consumer Price Index, it is expected that the interest rates would gradually come down which would stimulate demand in the housing sector.

Groundwork to expedite the growth prospects of all end-use segments of cement-housing, infrastructure, commercial-are being worked upon by the Central Government. All these along with the policy push for good governance augur well for the future of the cement industry.

The future for the cement industry looks positive with the new government's focus on development of infrastructure and housing. Moreover, a rise in GDP from these initiatives would provide an additional impetus for the cement industry, given the strong correlation between GDP growth and India's per capita cement consumption, which still ranks below the world average.

Cement WPI ups

The Cement & Lime Wholesale Price Index (WPI), with a weight of 1.39 in the WPI, increased 3.9% to 172 in June 2015 over a year but down by 0.5% over May 2015. The Cement & Lime WPI grew 5.7% in April-June 2015 compared with over a year ago period. The average Cement & Lime WPI rose 1.6% in FY 2015 compared with FY 2014.

Meanwhile, the Grey Cement WPI, with a weight of 1.26 in the WPI, gained 4.5% to 172.4 in June 2015 over the year but lower by 0.2% over the month. The Grey Cement WPI grew 6.3% in April-June 2015 compared with over a year ago period. The average Grey Cement WPI rose 1.7% FY 2015 compared with FY 2014.

Output ups in June

All-India cement production (proxy for demand), as reported by the Office of Economic Advisor, Ministry of Commerce and Industry, improved 2.6% to 235.67 lakh tonnes in June 2015 over a year, but down by 2.9% over May 2015.

Cement Production Month FY16 FY15 FY14 Apr 23420 23984 22353 May 24261 23654 21822 Jun 23567 22963 20244 Jul   22683 19478 Aug   20576 18656 Sep   21704 21028 Oct   20385 20598 Nov   20920 18789 Dec   23151 22305 Jan   23809 23700 Feb   22556 21945 Mar   23838 24797 Apr-Jun 71248 70601 64419 Apr-Mar   270223 255715 Numbers in Th. tonnes

Cement production was up 0.9% to 712.48 lakh tonnes in April-June 2015 compared with over a year ago period. Cement production increased 5.7% to 2703.17 lakh tonnes in the fiscal ended March 2015 (FY 2015) from FY 2014.

June Quarter Earnings Performance

Ambuja Cement Profitability hurts by lower realisation

Ambuja Cement, the Holcim Group Company which follows January-December period as its accounting year, reported 8% drop in standalone total income from operations at Rs 2510.49 crore for the quarter ended June 2015, on account of decline realisation partially offset by gain in cement sales volume. The combined domestic cement and clinker sales improved 1.6% to 5.88 million tonne but realization shrank 9.3% to Rs 4239 per tonne due to decrease in cement selling price by approximately 10%. OPM trimmed by 630 bps to 15.3%, resulting a 35% shrink in OP to Rs 383.79 crore. Further, with surge in interest and depreciation outgo but drop in taxation expenses, the net profit declined by 45% to Rs 226.35 crore.

ACC, which follows January-December period as its accounting year, has posted 45% drop in its consolidated net profit at Rs 133.46 crore, on net income falling 1% to Rs 3015.29 crore for the quarter ended June 2015, on account of challenging market conditions and subdued demand. The combined domestic cement sales declined 2.4% to 6.20 million tonne (MT) but realization rose by 0.8% to Rs 4776 per tonne. The Operating Margin (OPM) trimmed by 370 bps to 11.1%. As a result, the operating profit (OP) declined 26% to Rs 335.16 crore.

UltraTech Cement sales ups 7%

UltraTech Cement, an Aditya Birla Group Company, consolidated revenue increase by 7% to Rs 6432.15 crore for the first quarter ended June 2015, boosted by both sales volume and realization improvement. The combined domestic cement and clinker sales improved 4.8% to 13 million tonne (mt), while realization advanced by 1.5% to Rs 4901 per tonne.

Operating profit margin (OPM) of the company escalated 80 bps to 18.7%. As a result, the operating profit gained 11% to Rs 1200.83 crore. With drop in other income but with rise in interest cost, and depreciation, the net profit softened by 6% to Rs 591.13 crore.

Shree Cement net profit falls 62%

Shree Cement, Country's most efficient cement manufacturer which follows a July-June financial year, has posted 62% dip in net profit to Rs 104.11 crore for the fourth quarter ended June 2015 hit by surge in operating expenses, depreciation, and written-off in exceptional item.

The total income from operation was up 4% to Rs 1724.59 crore on the back of surge in revenue from power business segment by 28% to Rs 398.43 crore (21% of total revenue). The cement segment revenue gained 2% to Rs 1515.28 crore (79% of total revenue), as 16.9% rise in cement sales volume largely offset by 13% drop in realisation. Operating margin declined by 580 bps to 20.7%, due to jump in raw material, freight, and power & fuel cost, thus, operating profit dipped by 19% to Rs 356.77 crore. With drop in interest outgo by 14% to Rs 26.36 crore, but spike in depreciation by 55% to Rs 238.25 crore and an exceptional item of Rs 23.99 crore (written off assets constructed at others premises), thus, the PBT after EO dropped 65% to Rs 107.40 crore.

The strong cement realisation and all-round cost reduction initiatives aided the Ramco Cements to post 167% surge in consolidated net profit to Rs 94.67 crore for the quarter ended June 2015. The Ramco Cements has posted a consolidated net profit of Rs 94.36 crore for the fourth quarter ended March 2015, as against net profit of Rs 1.84 crore corresponding previous quarter. The consolidated total income from operations, however, declined 1% to Rs 952.78 crore, due to fall in cement sales volume and drop in windmill business revenue. The cement sales realization rose 17.7% to Rs 5177 per tonne, but cement sales volume (including exports) dropped 14.8% to 18.13 lakh tonne. OPM has expanded by 850 bps to 26.5%, due to all-round cost reduction initiatives and softening of fuel prices partially offset by increase in royalty on limestone.

Government plans to award 13000 km road projects- The government plans to award 13,000 km of highway projects spread across various states entailing investment of Rs 1,26,809 crore in the current fiscal (FY 2016). It had awarded or sanctioned highway projects worth Rs 45,295 crore last fiscal. The highest outgo, Rs 71,983 crore, is planned to be made in developing 5,160 km roads by the National Highways Authority of India followed by Rs 23,885 crore on developing 3,171 km of roads under NHDP-IV A. Under NHDP-IV, the government had envisaged to upgrade about 20,000 km of national highways to two lanes on a public-private partnership basis. Government also plans to develop 1,202 km of highways under the Special Accelerated Road Development Programme for the North Eastern Region at a tentative cost of Rs 13,903 crore. Also, the government plans to implement new mode of delivery under Public-Private Partnership (PPP) mode, namely Hybrid Annuity Model for awarding road projects. Under the Hybrid Annuity Model, 40% of project cost is being provided by the government to the concessionaire during the construction period in five equal instalments while remaining 60% is to be arranged in form of debt and equity to be compensated over 15 years as bi-annual annuities.

Cement body finalises wage settlement in 20 companies- The Cement Manufacturers Association has finalised a long-term wage settlement on 29 July 2015 covering employees working in 20 companies accounting for 65 per cent of domestic cement production. This is the seventh such national level settlement. According to an industry source, the four-year settlement from April 2014 to March 2018 covers workers in 85 cement factories producing about 189 million tonnes annually out of the total production of about 285 million tonnes. The settlement provides for a total hike of Rs 6,000 a month on the gross pay to be paid in two instalments – with a Rs 3,000 hike from April 2014 and the next in September 2016 — which translates into an increase of about 33 per cent in salary. It also provides for enhanced Dearness Allowance benefits. The arrears for 16 months will be paid in two instalments.

Outlook

The cement demand and pricing trend environment is at the cusp of a cyclical upsurge from 2HFY16E in the backdrop of expected pickup in infrastructure development especially roads and real estate activities across the country, which will also be supported by pick up in rural demand. Further, slowing capacity addition will aid in improving the fortune of the industry.

For FY16, the government targets to award highway projects worth Rs 3.5 lakh crore within the first six months. Apart from stepping up high building, Prime Minister Narendra Modi has put on the fast track the ambitious Bharat Mala project to build 5,000 km of border and coastal roads for an estimated Rs 55,000 crore. In June, the National Highways and Infrastructure Development Corporation of India (NHIDCI) have invited bids for detailed project reports for 2,100 km stretch of roads. Bids were invited for DPR in Assam, Manipur, Meghalaya, Sikkim and Tripura. The DPRs will identify technical, economic and financial viability of the projects.

Also south focused Cement manufacturers expected to receive a mega boost in demand as Andhra Pradesh and Telangana governments are set to procure about three million tonnes. The process is already on with the Governments asking the cement manufacturers to commit a quantity to be supplied. As per the Request For Proposals (RFPs), AP is looking at buying two million tonnes (mt), while the Telangana wants about one mt. The RFPs come almost three years after these volumes went missing. The Telangana government is seeking cement for its low-cost housing programmes, while in Andhra Pradesh, it is to meet the needs of Panchayat Raj, irrigation and housing programmes. However, as the RFPs were floated for the current year, it is likely that only a part of the intended purchase will happen this year. The industry is hoping that the two states will definitely take as much as they have indicated or reasonably close to that number in the next financial year.