Threat of New Entrants

Moderate

Threat of substitutes Low

Competitive Intensity Moderate

Bargaining Power of Suppliers High

Bargaining Power of Buyers Low

Threat of new entrants - LOW The cement industry is a highly capital intensive industry with long gestation periods involving the setting up of the regular plant, owning a limestone quarry in some cases and installation of a Captive power plant. According to estimates, Cement plants require a capital investment of INR 3,500 million for a 1-mtpa plant. 1 Also, the process of cement production, from selecting the factory location, production, and distribution is depended on economies of scale considerations. For an efficient operation, the distribution and production has to be massive. Thus, high capital costs, long gestation period and availability of raw materials like limestone and coal present substantial barriers to entry and to achieve economies of scale. Bargaining power of suppliers - HIGH Raw materials like coal, power and lime stone reserves are largely controlled by Government. It is estimated that the government controls more than 40% of the cost of raw materials for the cement industry. Government bodies, such as, State Electricity Boards, Coal Monopolies and the Railways, regulate all power, coal and freight costs. These factors have resulted in Suppliers enjoying high power.

(Emerging Markets Direct, 1H 2011)

Bargaining power of buyers LOW Substantial market concentration among large players, most of the buyers being retail in nature, and the relatively fragmented buyer market has constrained the bargaining power of buyers. Threat of substitutes LOW This is nonexistent as there is virtually no substitute to Cement.

Competitive Intensity MODERATE There are quite a few fragmented players in the market. The market share of the top 3 firms has fallen from 45% in 2007-08 to ~38% in 2011-12. 2
45%

Market Share of Top 3

40% 40% 40%

38%

2007-08

2008-09

2009-10

2010-11

2011-12E

Source: Macquarie Research

(Macquarie Research, 28 March 2012)

Second largest in world

Demand Supply gap Overcapacity Inrease in cost of production

Strengths

Weakness

Opportunities
Increase in Infrastructure project Growing Middle Class

Threats
Effect of Global recession on property market High Interest rates on housing

Strengths Second largest in the world India is the worlds second largest cement producing country after China. The large plants alone account for around 95% of the industrys total installed capacity and employ a workforce of 120 000 people, according to the Cement Manufacturers Association (CMA). Indias share in the worlds cement production is around 6%.

Japan Brazil US India China 0 500

Cement Production

1000 Lakh Tonnes

1500

2000

Source: US Geological Survey

Weaknesses Overcapacity The industry has witnessed capacity additions since the deregulation of the industry in 1989. The pace of capacity addition has picked up in the last 3 years and it is estimated that around 86mt of new capacity will be added between FY12-14. But the demand has slowed down from a CAGR of 10% seen in 2006-2010 and is more likely to grow at a CAGR of 8% in 2012-14.

Source: CMA, Macquarie Research, March 2012

Increasing costs of Production The major cost drivers of Cement industry are Raw Material (10%), Energy (30%) and Freight (15 20%). Raw Material (Limestone) costs have increased by around a CAGR of 25% over the last seven years. Scarcity of flyash, has led to flyash from being a free product to a product costing Rs 400-500/t.3

(Macquarie Research, 28 March 2012)

Source: Company Data, Macquarie Research, 2012

Fuel and Energy costs have also seen an increase of a 20% CAGR over the last seven years, largely due to Coal price increase due to reduced supplies from Coal India, rising freight costs and higher imported coal quantities.

Source: Company Data, Macquarie Research, 2012

Opportunities Increase in Infrastructure Projects With India moving on its path to become a developed economy, there is a greater emphasis to build the necessary infrastructure in the form of Roads, Airports etc. Thus, the increase in infrastructure projects is expected to fuel the demand for cement. As per CRISIL Research estimates, demand for cement from infrastructure industry is expected to increase from 20% in FY07-FY11 to 27% in FY12-FY16.
Source: CRISIL Research

Growing Middle Class The Indian population has seen an increase in per capita disposable income. This rise in the disposable income and growth of the middle class, has resulted in middle class demanding a better quality of life, which translates into better infrastructure and housing fuelling the demand for the cement industry. Also, a lot of rural population is still living in mud houses, which further provides a huge opportunity for the Cement Industry to look into.

Increase in per capita disposable income

43,964 33,026 37,260

25,731

29,149

2005
Threats

2006

2007

2008

2009

Source: Macquire Research, August 2011

Effect of Global recession on Economy: The cement industry has traditionally moved closely with the GDP - In the past 15 years, cement demand grew at an average of 1.2x GDP growth rate; cement demand posted a CAGR of 8.3% during FY97-11, while GDP grew by 7.1%. The global recession has had an adverse effect on economy and Indias GDP and if traditional trends continue the Cement Industry should also see a slowdown.

Source: Tata Securities Research

High Interest Rates on Housing: The monetary policy being followed by RBI has led to the rising of the Base Rate which in turn has resulted in higher interest rates on House Loans. This has led to a decrease in demand of house loans and thus a slowdown in the housing sector. Housing Sector is expected to demand 55% of the total Cement demand in the next 5 years.