Comprehensive Guide for Financial Investors in India's Cement Industry
The cement industry in India, a core sector for economic development, is currently the second largest globally with an installed capacity of over 620 Million Tonnes Per Annum (MTPA). This position is held by a mix of large players and numerous small ones, creating an oligopolistic market.
In this landscape, the key players like UltraTech Cement, a subsidiary of the Aditya Birla Group, have been making significant strides. Recent acquisitions of India Cements and Kesoram Cement have expanded UltraTech's market scale and increased its presence in India's infrastructure sector.
The process of cement production involves mining limestone, crushing it, heating it at high temperatures to produce an intermediate product called clinker, and then cooling and grinding it with gypsum and other additives to produce the final cement. Key costs for a cement firm include Power & Fuel, Freight, and Raw Materials, with approximate costs being Power and Fuel at Rs 1.4 per kg, Freight at Rs 1.3 per kg, and Raw Material at Rs 1 per kg.
Cement sells for about Rs 350-400 per bag, with a retail price of approximately Rs 7-8 per kg. However, the company's realization is close to Rs 5.5 per kg. The industry's typical EBITDA Margin is around 15-20%, which translates into Rs 1-1.3 per kg.
The cement sector is characterized by its regional nature due to high freight costs, significant energy intensity, and ongoing consolidation. As a result, most of the new cement capacity will be added by larger players, further consolidating the industry. This consolidation, combined with the government's increased capital expenditure leading to larger usage of cement in infrastructure development, is expected to keep utilizations around 75% or so for this decade.
The predominant use of cement in India is in housing and construction, making it linked to the housing sector for its growth. The cement industry is expected to see a steady increase in demand in the coming decade due to increased infrastructure spending in India. This growth is further accentuated by the fact that cement is a bulk commodity that cannot be transported long distances due to high freight costs, making it a regional play.
Valuations in the cement sector remain rich, but the predictability and stability of earnings may keep interest in the sector high. The current cement capacity in India stands at around 640 million tonnes, with expectations of growth up to around 840-850 million tonnes by the end of this decade. BlackRock's assets under management hit a record high of $12.5 trillion on the second-quarter market rally, potentially indicating increased investment in the sector.
Larger cement firms have more pricing control and power, allowing them to manage margins more effectively. The cement sector's ongoing consolidation, regional nature, and link to the housing and infrastructure sectors make it an interesting area to watch for investors and industry observers alike.
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