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Overview of Cement Industry
At the outset we will be seeing the whole cement industry .So we begin with where our country stands in terms of cement industry. The Indian cement industry has a total capacity of about 200 million tonnes (MT) in 2008-09 and comes second in the world after China. Although in present scenario consolidation has taken place in the Indian cement industry with the top five players controlling almost 60% of the capacity, but still the balance capacity still remains pretty fragmented. Considering the fact that the Indian cement industry has clocked production of more than 100 MT for the last five years, registering a growth of nearly 9% to 10%, the per capita consumption of around 134 kg compares poorly with the world average of over 263 kg, and more than 950 kg production per capita in China market. This shows that there underlines the tremendous scope for growth in the Indian cement industry in the long term. Cement, a bulk commodity, is freight intensive industry and then transporting cement over long distances can prove to be uneconomical. This has resulted in the bifurcation of cement (being largely a regional play) industry and is divided into five main regions viz. north, south, west, east and the central region. The southern region had excess capacity in the past owing to the abundant availability of limestone, the western and northern regions are the most lucrative markets on account of higher income levels. However, with the capacity addition taking place at a much slower rate as to be compared with growth in demand, recently the demand supply equality had also been restored to some width in the Southern region. Considering also the pace at which infrastructural activity is taking place in different regions, the major players in the market have lined up there expansion plans accordingly. Given the high potential for growth, quite a few foreign transnationals are seeing the opportunity in the Indian markets and are also planning to acquire the domestic companies. Already, companies like Lafarge, Heidelberg and Italicementi have made some of the acquisitions, Holcim has acquired stake in the domestic companies. Ambuja Cements and ACC are increasing its stake gradually to gain full control. After acquiring stake in big companies, transnationals had now eyes on the median capacity producers. Italcementi acquires hundred percent stake in Zuari Cement and 95% stake in Shree Vishnu. Cimpor, the Portugese cement manufacturer, has acquired the stake of Grasim (53.63%) in Shree Dig Vijay. However, it must be taken into consideration that the transnationals will find the going tough since cement is the game of volumes of cement produced and with the median capacity of these fragmented players on which they are banking upon, they will have to acquire capacities piecemeal and this route is filled with lots of uncertainties. The global players, putting all of them together, accounts for quarter share of the domestic market. Further, turning around the few of the companies at a time when the cycle is at its peak would be a very difficult task. Considering the long term growth story, fairness in valuations, fragmented structure of the industry and low gearing, another wave of consolidation would not come upon us as a surprise. Some of the Keypoints that will make the picture clear about the cement industry in India has been analysed as below Supply:-The demand supply situation is tightly balanced with supply marginally higher than the demand. Demand:-Housing sector has also carried as a principal market for the manufacturers of cement. Industrial and infrastructure are also emerging out fast as good market of cement industry. Barriers to entry:-High capital costs and long gestation periods and access to the limestone reserves has been a major obstacle in the growth of the cement industry. Bargaining power of suppliers:-Shortage of fuel and coal prices have always remained a concern. Licensing of coal and limestone reserves ,the cement transport by the railways, power from the state grid supply remains a concern for the cement industry. Bargaining power of customers:-In cement industry branding is coming up as due to quality perception becoming heavy on the supply of the cement in the minds of the customer. Competition:-Due to presence of larger number of companies in the market, there is intense fight for survival in the market
Current state of Cement Industry
In financial year 2009 the cement industry has maintained its growth to 10%. The industry added 30 tonnes and has taken the production to 212 MTPA.India due to its locational advantage has been seeing the requirements of the cement requirements of the Middle East and the South East Asian nations. However, the exports were cut out in 2009 financial year to contain inflation and to meet the domestic demand. The overheated real estate sector is cooling off now. Considering the financial turmoil witnessed globally, financial institutions have also tightened their credit policies. This cautious view has led to a credit crunch and the same has an effect on the upcoming projects. On the pretext of general economic slowdown and these issues, the demand for cement has moderated. However, thanks to the stimulus packages announced by the government and agricultural income that has given a fillip to the demand for the commodity. The industry volumes and realizations which were higher during the course of FY09 has boosted top line growth. However, still the cost of operation also witnessed upward movement that exerted pressure on margins. The trend is that cement industry on an average maintains two months inventory of fuel and such costs. The crude prices have only started to get down November 2008 onwards, the benefit of which will start flowing in starting quarter which began on the end of March 2009 onwards. Smooth supply of state grid power is another problem. So as to ensure the smooth functioning of the plants and to cut costs, industry has opted to set up captive power plants based on coal. This has resulted in the increase in the demand of the coal. But still coal linkages for the industry are poor. Recently the ratio has dropped below 50% of coal likages. So the players will either have to purchase it from open market or import it. This has led to an increase in the cost of operation. The industry had lined up huge capex plans with that depreciation costs have moved up. All of this has led to a dent in profitability. Future prospects of cement industry analysis:- In the recent past, as the demand has overtaken supply, resulting in high and healthy cement prices across the country. However, this scenario will reverse as the industry is lining up for huge capacity expansion plans. With the growth in the cement sector and shortening demand supply gap, cement producers are lining up there capacity expansion plans either by brownfield or greenfiled expansion route. The fresh capacities announced till date has added up to 60 MT to the existing capacity (200 MT), and is expected to go on this way by FY10. As the capacities will become operational, which has already started taking place, supply may once again exceed demand putting downward pressure on margins. Having said that, temporary relief can be provided if there are further any delays in any of the proposed expansion plans. While infrastructure spending had been a great boon and there is a strong support from the steady growth of the construction sector also , Recently the demand has slowed down as real estate and construction activities in the urban areas have taken a slowness with economic slowdown. The importance of the housing sector in consumption of cement can be gauged from the fact that it consumes almost 60%-70% of the country's cement. If this support disappears or reduces, it would impact the growth in consumption of cement, leading to demand supply mismatch. Also, the rise in prices of coal and petroleum products could have an impact on cement companies' margins.
Cement Industry and Budget
As cement tracks GDP growth, the sector is impacted by ups and downs or doldrums of the economic cycles. While the medium term growth prospects has been impacted by the economic slowdown, the long term growth story remains intact. This is mainly due to initiatives taken up by the government in the infrastructure and housing sectors that are likely to be the main impetus to growth for the industry in the long run. Budget Measures:- A slew of incentives have been put up for end users of cement such as the housing sector and development of infrastructure. Some of them compromise of Housing and provision of basic amenities to the urban poor enhanced to approximately Rs 40 billion. Rs 20 billion has been provided for Rural Housing Fund (RHF). Allocation towards the National Highway Development Programme has increased by 23% over Financial year 2009(FY09) budgeted estimates.Customs duty exemption on concrete batching plants of capacity 50 cubic metres per hour or more has been withdrawn. Such plants will now will be levied with customs duty of 7.5%. Fringe benefit tax (FBT) has been abolished. Rate of minimum alternate tax (MAT) on booking profits has been increased from 10% to 15%, but it has came with a provision of carrying forward the tax credit on MAT to ten years from the current seven years. Impact of Budget on Cement Industry: The government has increased budgetary allocation of money for roads under NHDP. Further, with more incentives being doled out for the infrastructure and housing sector, cement manufacturers will continue to benefit from it. Imposition of 7.5% customs duty tax on concrete batching plants is likely to negatively impact the ready mix concrete manufacturers. However, it won't have a severe impact on the industry as a whole because as RMC constitutes not more than 5% of total cement consumption.
Impact of Budget on Company
The increased focus which is now being shown to infrastructure development and housing sector is expected to raise demand for cement, which is the key construction material, and hence volumes of cement manufacturers such as ACC, Ambuja Cements and Madras Cements. RMC(ready mix cement) manufacturers like ACC, UltraTech, would be impacted with the imposition of custom duty.
Ambuja Cement on branding
Cement is a commodity, sold largely on price. Ambuja Cement was the first company that created a brand out of cement and has commanded a premium. It was also the first which introduced a special cell, that provided technical services to consumers and masons. Today, this has become a norm in cement marketing. The trick was to provide a high quality of cement on the consistent basis, backed by an excellent service. And this all was reinforced by the presence of strong dealer network. The result was, customers were ready to pay a 2-3% premium for Ambuja Cement for the value they received. Ambuja Cement is now the top brand in Western, Northern, Central and Eastern India.
Some Achievements of Ambuja Cement
1. Inventing a whole new way of transporting the cement:- In the early 1990s, almost all cement in India used to be travelled by rail or road. And it was transported in bags. A mode that involves deterioration of both, the quality and volume of the cement. In 1993, Ambuja Cement setted up a complete system of transportation of bulk cement via the sea route. This made it the first company of India to introduce bulk cement movement by sea. Others followed its steps and today, round about 10% cement travels by the sea route. The facility comprises of: A dedicated port present at the Gujarat plant, capable of having 40,000 Deadweight tonnage (DWT) vessels, three terminals present at Mumbai, Surat and Sri Lanka, and seven special bulk cement vessels. This capability has enabled it further to supply fresh cement to many coastal markets - domestic and international. 2.2.8 kilometer conveyor belt running through three hills was constructed in just 9 months. 3.Introduced a completely new system of transporting cement in India - the bulk cement transportation by sea. 4.Introduced complete blast free limestone mining by using the surface miner in limestone mining for the first time in India. 5.Created water reservoirs in used up mines and raised the water table in arid areas. 6.Our plants have achieved the lowest pollution levels - comparable with the most strongest norms present ,the Swiss standards.
Awards and Recognition
1.National Award for commitment to quality by the Prime Minister of India was given. 2.National Award for outstanding pollution control by the Prime Minister of India was given. 3.Eco-Gold Star by TERI. 4.Best Export Award by CAPEXIL. 5.Award for Corporate Social Responsibility by Business World - FICCI 6.International Award for Rural Development by Asian Management Institute (AIM) 7.ISO 9002 Quality Certification. 8.ISO 14000 Certification for environmental systems.
Environment of Ambuja Cement
From the outset, Ambuja has believed that a cement plant cannot flourish at the cost of the environment. This is the reason why it adheres to the most rigorous international environmental norms. The pollution levels at all its cement plants are comparably lower than the rigorous Swiss standards of 100 mg/NM 3. At Gujarat plants, surface miners have been employed to scrape the surface of the mines. Thus ensuring that all the mining is totally blast free. There is also no noise or air pollution. Similarly in the Himachal Pradesh plant, Ambuja has employed techniques for mining that have made the mining absolutely safe and pollution free. Not surprisingly then, the company has consistently won awards for its pollution free plants. Awards as prestigious as the National Award for Outstanding Pollution Control and The Eco-Gold Star of Tata Energy Research Institute (TERI).
Ambuja Cement exports almost 17% of its production in a very competitive international environment. For the last ten years, Ambuja Cement remains India's highest exporter of cement. This has been possible for two reasons One, the quality of cement matches the best in the world. Two, the dedicated bulk cement transportation capability at its Gujarat plant.
Performance during last five years
An analysis of above graph indicates that Ambuja cements has having a price which was always rising but in FY09 quarter due to economic slowdown and due to the vulnerability that supply has increased more than demand. Its dividends had been nearly constant over a period of time. However total earnings show a downward indication with earnings becoming low after a rise in previous year.
Corporate social responsibilities
In 1991, the Ambuja's set up Ambuja Cement Foundation to make an all-round development of the people possible around its cement plants. The Foundation decided to traverse the difficult but more productive path which was in helping the people so that they are able to help themselves. With greater dedication and commitment, the foundation made the local people to participate in the processes and thus own their development process. It became a facilitator and catalyst, rather than a one-time fund provider. It developed easily replicable and sustainable modules for water management, sustainable agriculture and healthcare. All this effort in discharging its social responsibility has earned the company recognition across Asia.
Findings and recommendations
There is a tremendous scope of development in the case of cement industry as per capita consumption of cement is very low according to the world standard in India. And to add in cement industry regional competition comes into picture as it is difficult to transport cement over long distances as it becomes uneconomical. Although there is a transition in the view of the consumers as now they are going for quality perception but still lot needs to be done. Indian market is majorly differentiated into five regions north, south, east, west and central region. The southern region has an excess capacity in the past and present due to the availability of the limestone. The western and northern regions are still the most lucrative markets on the pretext of higher income levels population and also considering the pace at which infrastructure activity is taking place in the various regions, the players have planned up there expansion plans accordingly. And to add to this point Indian market is still being eyed up by the international companies like Lafarge etc. Budget has also given some kind of initiative to the cement industry this year by increasing the road under NHDP and in terms of housing and infrastructure sector. Imposition of custom duty tax on the concrete batching plants will have an effect on the cement industry but not as much, as ready mix concrete manufacturers account for only 5% of total revenue only.
Ambuja cement being topmost player in the cement industry in India needs to harness best out of these initiative. Now something about Ambuja cement as to where it stands in the market. It has set goals and achieved them with significant margins ,some of the key distinguishing points achieved are building of a cement plant in record 13 months,2.8 kilometer conveyor belt running through three hills was constructed in just 9 months, and introduction of a completely new system of transporting cement in India - the bulk cement transportation by sea, Introduced complete blast free limestone mining by using the surface miner in limestone mining for the first time in India, Created water reservoirs in used up mines and raised the water table in arid areas, plants have achieved the lowest pollution levels - comparable with the most strongest Swiss standards. From the beginning, Ambuja Cement has propagated a belief that a cement plant cannot flourish at the cost of the environment. That is the reason why it follows the most rigorous international environmental norms. The pollution levels at all its cement plants are even lower than the rigorous Swiss standards of 100 mg/NM 3.At the Gujarat plants, surface miners have been employed to scrape the surface of the mines. It ensures that all the mining is blast free. There is no pollution (noise or air). Being set up in 1986, a decade later, it has risen as one of world's most efficient cement companies producing the finest cement in the world at the lowest cost. While it adheres to the most stringent international pollution-control norms. Today, Ambuja is the 3rd largest cement company in India, with an annual plant capacity of 16 million tonnes including Ambuja Cement Eastern Ltd. and revenue in excess of Rs.3298 crores. More importantly, plants of Ambuja cement are the most efficient ones in the world. But the company's most distinctive attribute is its approach to the business. It believes its most valuable assets aren't cement plants. They are the people who run the plants. This unique vision is embedded in the company's homegrown philosophy of giving people the authority to set their own targets, and the freedom to achieve their goals. It's called 'I can''. This has created an environment where there exists no limits to excellence, no limits to efficiency. And is proving to be a powerful engine of growth for the company. And as a result, Ambuja has consistently raised the bar in all aspects of the cement industry. Be it transportation, plant efficiency, brand building or human resource development. Similarly at the Himachal Pradesh plant, Ambuja is employing techniques that have made mining absolutely safe and pollution free. Not surprisingly then, the company has won awards on consistent basis for its pollution free plants. Major awards that company has got includes the National Award for Outstanding Pollution Control and The Eco-Gold Star of Tata Energy Research Institute (TERI). Ambuja Cement is exporting almost 17% of its production in a very competitive international environment. For the last ten years, Ambuja Cement remains India's highest exporter of cement. This has been possible for two reasons -One, the quality of cement matches the best in the world. Two, the dedicated bulk cement transportation capability at its Gujarat plant. So there is a huge scope of development both in case of cement industry and Ambuja .