Mergers and acquisitions, growing precast construction, and a slew of housing and infra projects bode well for the cement industry.
A spate of mergers and acquisitions has marked the Indian cement industry in the past couple of years. News reports peg the volume of capacity that has changed hands at 47 million tonne, valued at over Rs 36,000 crore.
Lafarge and Holcim have merged. Heidelberg Cement has bought a stake in Italcementi. UltraTech bagged Jaypee´s 5 million tonne capacity in Madhya Pradesh. Birla Corp bought over the 5 million tonne a year (mtpa) capacity Reliance Cement.
The big question: Should cement end-users take an interest in these mergers and acquisitions (M&As)? And, the answer is ´yes´.
How M&As impact cement end-users
Consolidation activity impacts end-users of cement by usually enhancing the merged company´s potential to invest in performance and process improvements and quality control, which in turn impacts product quality.
Performance measured in terms of improved operating parameters like power and fuel consumption is predominantly a key industry objective - especially in a difficult, low-price environment - for contributing to company profits. But process improvements and quality control have a major impact on end-users.
¨Both process investments (in the plant) and investments in testing methodology help check the consistency of cement quality, which is essential to make high-performance concrete with the required workability, compressive strength and durability,¨ says Anil Kumar Pillai, Deputy General Manager, Technical Services, The Ramco Cements. Manufacturers who have made investments in R&D are capable of taking on requests for customised concrete mixes, which may be mandated for projects in special areas (marine area or polluted environments), projects needing to be completed very fast and projects for special uses, according to Pillai. Investments in R&D also spur new product development. The properties of cement influence the properties of the concrete mix. For instance, blended cements Ramco Supergrade and Ramco Supersteel, products of The Ramco Cements, are widely accepted for being environment-friendly and enhancing the longevity of concrete structures, as reflected through the durability test (RCPT) conducted regularly at the Ramco Research and Development Centre. And, Ramco Superfast is rapid hardening cement as per IS 8041, hence well suited for precast applications and block casting units. In Bengaluru, Brigade is using precast elements cast from Ramco Superfast cement for its Brigade Orchids residential project.
Precast in housing vs commercial construction
Precast technology offers plenty of scope for cement application. Mixing both cement and fly-ash in concrete furthers the concept of green buildings. So far, precast has become popular for affordable housing, where it helps developers save time and cost. ¨Precast mass housing construction costs less than conventional methods by about 5-10 per cent, if the factory is within the project site,¨ says Ujwal Shetty, Chief General Manager, BCC Infrastructures, which is constructing 40 towers spanning 55 lakh sq ft built-up area with precast technology. ¨Waste control, speed of construction, high quality with virtually no repair or reworking cost and a superior finished product are other reasons why we have adopted precast technology.¨ But precast technology is equally applicable in the high-end construction segment, where Teemage has applied it with great success, effectively cutting development time to a third.
¨We´ve executed about 3 million sq ft of precast construction in the past three years, over 80 per cent of which is commercial real estate,¨ shares Dinesh Kumar, Technical Manager, Teemage Precast India. ¨On an average, it takes 75 days to complete 100,000 sq ft of commercial construction. Commercial real estate is more profitable than residential and institutional real estate to execute with precast technology because it involves bigger spans, so the concrete saving is more, and the services are all worked into the false ceiling. Pre-stressing cuts the need for reinforcement.¨
Opportunity: Shortage of centralised precast factories
A key difference between Teemage´s modus operandi for precast-based, high-end commercial construction and typical precast-based housing projects is that, ¨To execute more sophisticated commercial projects, Teemage has installed a Weckenmann centralised plant in Tirupur, near Coimbatore,¨ says Kumar, adding that site-based plants are well suited for the repetitive construction involved in housing projects.
Contrary to conventional table-shifting site plants, centralised plants feature fixed tables and moulds with the concrete being transported using distribution systems. Centralised plants offer greater flexibility than site-based plants. ¨In addition to walls and slabs, we can manufacture pre-stressed members, staircases, beams and column systems, all of which are transported to the site by trailers,¨ adds Kumar.
Indeed, tremendous scope exists for centralised precast factories in cities like Mumbai, Vijayawada, Chennai, Bengaluru and Delhi, according to Kumar. ¨India has only five to six centralised plants, much too few to service the mass market, especially smaller developers without the wherewithal to establish their own precast plants but who see the cost saving accruing from adopting faster precast technology.¨ Smaller developers are willing to pay the cost differential arising from transportation and the 14.5 per cent excise duty on factory-made precast elements, he adds. With about 60 per cent of the precast element cost being production cost, the latter amounts to a cost differential of around 9 per cent. Of course, GST might change this equation, and equalise the cost of precast from a centralised plant and a site-based plant.
Cement: Past, present and future growth
After posting single-digit growth for six years, Indian cement companies started to see signs of recovery in February 2016, ¨Although it lacks robustness,¨ says a senior official of a leading cement company in southern India.
Cement production during the last quarter of FY16 expanded at about 12 per cent across India, which is six times the meagre growth of 2 per cent during the first three quarters of FY16, and more than double the yearly average of 5 per cent. Even southern India, which registered de-growth of 4 per cent during the first three quarters, registered 11 per cent growth during the last quarter. During the quarter ended June 30, the cement industry grew 5.7 per cent.
¨Volumes across all our markets were 43 per cent higher in the quarter ended June 30 versus the corresponding quarter last year. However, volume growth slowed down,¨ says Deepak Khetrapal, Managing Director & CEO, Orient Cement.
How did different geographies perform? ¨In particular, lower volumes in Andhra Pradesh or Telangana and parts of Maharashtra were partially compensated by the rapid growth of volume into Karnataka, west Maharashtra and Madhya Pradesh or Chhattisgarh,¨ says Khetrapal.
In FY2017, total consumption is estimated to touch 300 million metric tonne, as per market research company RNCOS. ¨Of late, demand has been stable compared to the previous year. However, we expect FY17 to end on a positive note,¨ says Shushmul Maheshwari, Chief Executive, RNCOS. The company predicts that consumption will grow at a CAGR of 9 per cent until FY2020.
Opportunities to absorb supply
With a turnaround in sight, the industry is optimistic about the excess capacity created after 2010 being slowly absorbed over a five-year period. In the last quarter of FY16, capacity utilisation on an all-India basis was 73 per cent while it was under 60 per cent in southern India with a supply overhang.
Housing and infrastructure will both impact cement demand. Housing will lead the revival because it accounts for about 67 per cent of cement consumption, according to Shushmul Maheshwari, Chief Executive, RNCOS. ¨Rising disposable income and the expected clearance of the GST Bill will spur housing demand. Housing for All by 2022, involving 295 million new houses for rural areas, will also have a great impact on demand. Further, the Real-Estate Regulator Bill, which reduces the risk of delayed construction projects, may prove beneficial.¨ Other factors likely to boost urban consumption are the implementation of the 7th Pay Commission report with substantial arrears to be paid in August and one-rank-one-pension.
Infrastructure development will impact cement demand as well.
¨Speedier infrastructure development (both project award and execution) spanning concrete roads, elevated expressways and metro projects promoting innovative modular precast construction and the development of port infrastructure and inland waterways shore protection should boost cement demand to help utilise spare capacity,¨ says Sujit Ghosh, Executive Director, Innovations, Dalmia Cement (Bharat). ¨Cement roads, the industrial corridors (Delhi-Mumbai, Bengaluru-Mumbai, Chennai-Bengaluru, Visakhapatnam-Chennai and Amritsar-Kolkata), new airports (plans to make 250 airports operational by 2030), seaports (12 major and 12 non-major) and new special economic zones (SEZs) will boost demand as well,¨ adds Maheshwari. ¨Good rainfall is expected to provide a strong boost to cement demand in the post-monsoon months,¨ reasons Deepak Khetrapal, Managing Director & CEO, Orient Cement. ¨Government projects for low-cost housing, roads, irrigation and metros as well as initiatives like smart cities and Swachh Bharat are expected to improve demand for cement in Telangana, Andhra Pradesh and Maharashtra. The construction of the new capital of Andhra Pradesh at Amaravati is also expected to contribute to higher cement appetite in southern India.¨
Ghosh has another suggestion for addressing cement plant utilisation variances across northern and southern India: ¨Cost-friendly, efficient logistics supported by adequate rail-road and road-networks and a one-tax GST regime would make the cross-province movement of cement more efficient across the country, thereby helping even out capacity build-ups or shortfalls across India.¨
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