It is sharing no great secret to say that being primarily an infrastructure industry,

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the cement industry's growth is directly linked to the growth of infrastructure facilities in a fast-growing economy — housing, roads, highways, power plants and hydel projects. In reality, therefore, it is GDP growth, which has always regulated and driven the growth of the industry. By the thumb rule, it is estimated that growth in the cement industry should be roughly 1.2 times that of infrastructure.

In a period of global economic turmoil, the cement industry, like some other sectors, has had no option but to shift its goalpost. For the 11th five-year-plan (2007-08 to 2011-12), the optimistic GDP growth had been pegged annually at 9.5 per cent. The corresponding growth of the cement industry has been computed at 11.5 per cent in the report of the working group on cement industry for the 11th plan period. The economic slowdown has brought down the GDP target for 2009-10 to 7.1 per cent. So, the industry should have annual growth of 8.5 per cent this year.

Growth pattern

In actual terms, the industry’s growth has been 8.1 per cent in 2007-08, 7.9 in 2008-09 and 12 per cent for the first six months of this financial year. Says NA Vishwanathan, secretary general Cement Manufacturers Association, Noida, “If we consider an annual growth of 10 per cent plus as the boom period, and less than 5 per cent growth as slump, then the industry has been facing several alternating cycles of boom and slump. A logical analysis will show that boom time are periods when the industry, spurred by growing demand, has been adding greenfield capacities, whereas non-realisation of these expectations resulting in surplus capacity is what leads to the slump.''

What has sustained the industry is the increase in construction activities. “There has been a heightening of construction activities, particularly from tier II towns. With demand, particularly from rural areas, sharpening, the industry is not expected to see any major price rises in 2010,'' managing director of Shree Cement HM Bangur, told FC Invest.

Most facts corroborate this. According to some estimates, between 2002- 2009, construction contributed 7 per cent to GDP while the real estate industry's pitch was 7.5 per cent. Between them, they jointly contributed over 15 per cent to GDP. One of the main reasons for this upbeat sentiment has been the increasing emphasis on private-public partnership (PPP) in infrastructure development. In the words of an analyst, PPP has transformed pure construction contractors into industrial entrepreneurs, where financial engineering has played a major role. Many contractors went into real estate through subsidiary companies or a special purpose vehicle (SPV). This is no surprise. The Indian construction industry comprises more than 200 firms in the corporate sector. In addition, there are 120,000 class A contractors registered with various government construction bodies. There are thousands of small contractors that compete for small jobs or work as sub-contractors of prime realty firms. Most analysts say that with growing government investment in infrastructure projects, the construction industry has seen real growth.

A former president of the Builders Association of India Shriprakash Goel, says that “the industry has recorded a consistent double digit and is expected to grow at 25-30 per cent this year. The key drivers of this growth are government expenditure on infrastructure projects and real estate demand in the residential and industrial sectors. The industry is experiencing increasing polarisation between large and small players. These players are increasing their market share through large scale contracts, joint ventures and foreign operations.''

Pricing fear

Of course, pricing remains an issue. But market leaders such as Bangur say that there has been as much price rise as the inflation and not more. President of Cement Manufacturers Association (CMA) and managing director, JK Lakshmi Cement Vinita Singhania, told FC Invest that “decisions on issues such as pricing, production, and distribution are business decisions of individual manufacturers and their distribution networks and the CMA has no role in these matters. Having said that, as a cement manufacturer myself, I am aware that cement prices are a direct offshoot of the demand supply situation and that market forces determine the prices in a particular market at a particular time. Many a time, the manufacturers may not even have a say in retail prices as there are multiple layers of distribution channels. Even short-term surplus and deficit in a particular market can affect the prices.”

Adds director of consulting firm Techno Com Ashish Mukherjee, “The drop in prices are natural. The economy has got past its worst phase and the demand for cement is increasing. As a result, prices have bottomed out. I think there is reason to be optimistic.''

Stock performance

The proof of the pudding is in the eating. The pickup in cement demand from infrastructure and the housing sector has influenced market sentiments in the past few months. The recovery in cement prices in the southern region in December, after witnessing a downturn in the previous four months, also added to the sentiments. In the past quarter, cement stocks soared as much as 40 per cent against the BSE Sensex, which registered a marginal rise of 0.42 per cent during the same period.

“We are positive on cement stocks. The recent rally in cement prices may continue further. We don't see any dampening effect of capacity expansion on the demand scenario because we believe the capacity of cement companies will increase by the second-half of 2011. Demand will stay firm after a boost in infrastructure activities and the realty sector, which has recovered from its worse,” says Kishor P Ostwal, CMD at CNI Research. Among the major gainers, Shree Cement, Chettinad Cement, Mangalam Cement and JK Cement have climbed 38.67 per cent, 36.48 per cent, 30.06 per cent and 26.84 per cent, respectively, during the past three months. Scrips of ACC, UltraTech Cement, Ambuja and JK Lakshmi, on the other side, have also surged 19.88 per cent, 17.56 per cent, 17.47 per cent and 10.73 per cent, respectively, during the same period.

Cement prices in northern India were under pressure in the first half of financial year 2010 on lacklustre demand along with crop failure and unreasonable price levels. Brokerage house Prabhudas Lilladher expects the trend to continue. “We see deeper price cuts in the north, motivated by intense competitive rivalry with the arrival of much-delayed Japyee’s plant at Himachal Pradesh, Ambuja’s Himachal Pradesh unit and Grasim- Kotputli unit,” Kamlesh Bagmar and Archit Singhal of Prabhudas Lilladher wrote in a research note.

Dalmia Cement, Madras Cements, Prism Cement and India Cements, though they remained the sector’s underperformers, with 16.69 per cent, 10.35 per cent, 9.13 per cent and 0.04 per cent, respectively, outperformed the broader indices. “We prefer stocks of cement companies from the southern region such as Madras Cements and India Cements over companies in the northern region because the former have not gained as much in the past few months. Tough competition in the north may be another reason for a positive bias toward southern cement makers” Ostwal says.

Of course, there is the sobering realisation that exports have declined, but as industry watchers point out, it is in sync with the overall global economic scenario. Says Bangur, “With the Dubai financial crisis, certainly our exports to West Asia have declined, as have exports to some of the countries in South Asia. But they would pick up along with the global upturn.'' Certainly, no wishful thinking at this stage.