ICRA LIMITED

September 2012

INDIAN CEMENT SECTOR
Challenging outlook due to over-capacity and rising input costs



ICRA Limited

ICRA LIMITED
Table of Contents










1. Demand Dynamics in the Cement Industry.......3

2. Supply Dynamics in the Cement Industry.......5

3. Regional Demand-Supply Balance.......6

4. Trend in Cement Prices..................................7

5. Trend in Input Costs.......9

6. Profitability Analysis of Cement Companies......10
7. Update on CCI Order.11
8. Outlook..........12

9. Company Section
ACC Limited Limited..........14
Ambuja Cements Limited..........16
OCL India Limited...................................18
Shree Cement Limited.......20
Ultratech Cement Limited......22
JK Cement Limited.......24
JK Lakshmi Cement Limited.......26
Prism Cement Limited.......28
The India Cements Limited........30
Madras Cements Limited........32



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Summary




INDIAN CEMENT SECTOR
Challenging outlook due to over-capacity and rising input costs

Industry Update September 2012











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Cement despatches have shown signs of weakening after reporting healthy growth in Q1 FY13. The domestic cement despatches had
increased by 9.8% in Apr-May 2012 as compared to corresponding period in previous year (YoY growth rate of 7% in Apr2012 and 13%
in May 2012). As per the index of eight core industries, the cumulative growth for cement production was 9.9% during Q1 FY13
compared to a growth of 0.1% in the corresponding period in previous year. This growth momentum was mainly attributable to low
base effect as well as continuation of construction activities due to delay in onset of monsoons. However, with the arrival of monsoons
in some parts of the country, the growth in cement production slowed down to 3.8% in July 2012. The despatches data released by ACC
Limited and Ambuja Cements Limited also shows weakening in demand trends in July-August 2012. Both these companies shave
reported de-growth in despatches during this period with ACC reporting a YoY decline of 6% and Ambuja Cements a YoY decline of 2%.

Most of the fundamental issues which affected cement demand in FY11 and H1 FY12 continue to persist. Infrastructure projects across
the country have been affected by issues pertaining to land acquisition; delays in securing the requisite approval s and problems in
achieving financial closure as well as sector-specific issues such as fuel security for power projects and delays in awarding contracts in
road projects. Further, lack of stable leadership in some PSUs and corruption-related investigations resulted in a slowdown in
government spending on projects, and consequently on cement demand. Further political instability in Andhra Pradesh due to
Telangana issue, security problems in North-East and ban on sand mining in Punjab, Haryana and Andhra Pradesh have affected
development projects in these states. ICRA expects that the long-term demand for cement would be supported by increasing demand
for residential and commercial space, huge investments planned in the infrastructure sector and government expenditure under
various schemes such as National Rural Employment Guarantee, Jawaharlal Nehru National Urban Renewal Mission and Indira Aawas
Yojana. However, since cement demand is highly correlated with economic development, the extent to which the issues affecting
investment in projects are addressed would be critical.

In the last two years, subdued demand and significant capacity addition had put pressures on capacity utilisation of the cement
industry with All-India capacity utilisation declining to around 76% in FY11 and FY12 as compared to 100% in FY07. The southern region
which witnessed one of the highest capacity additions (largely due to its highest share of cement-grade limestone reserves)
experienced the steepest decline in utilisation levels. The existing capacity has overhang forced the companies to go slow on capacity
expansion. For instance, in FY12, the industry has added ~10 MT of grinding capacity as compared to ~20 MTPA in FY11 and 50 MTPA in
FY10. Though the capacity expansion is expected to slow down, the existing supply glut will keep the overall utilisation at muted levels
and ICRA expects the utilisation level to remain close to FY12 level of 76%. Thereafter the utilisation levels will largely be a function of
demand prospects.



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Summary

Apart from unfavorable demand-supply scenario, the industry is also reeling under the pressure of rising input costs. The prices of key raw materials limestone and
gypsum have increased. The increase in domestic coal prices and non-availability of low cost linkage coal has increased the power & fuel cost for cement manufacturers. Off
late, cement companies depending on imported coal have seen some easing in cost pressures due to decline in price of imported coal. However, the benefit of declining
prices has been offset by rupee depreciation to some extent. The freight costs have also increased due to increase in surcharge and cess by Indian Railways in Oct 2011 and
increase in freight rates for some commodities in Mar 2012. The recent hike in diesel prices will further escalate the cost of production for cement companies. The cement
industry had passed on these cost increases to customers in Mar 2012 taking advantage of the healthy demand for cement in Q4 FY12 which is a seasonally strong quarter
for the industry. However, the demand in various regions showed resistance at these new price levels and cement prices reduced by Rs. 5-20 per bag across different
regions in May 2012. The prices have again increased in the month of July and have remained stable in some markets in Aug 2012. Going forward, with seasonal weakening
in demand during Q2 FY12, companies are likely to find it difficult to raise prices to pass on the costs.

In June 2011 CCI had imposed a penalty aggregating to Rs. 63.07 billion on 11 cement companies for violating the provisions of Competition Act, 2002 which deals with anti-
competitive agreements including cartels. These companies had contested CCIs order in Competition Appellate Tribunal (COMPAT) and had not made any provisions for the
penalty in their books. In September 2012, COMPAT has sent notices to CCI and Builders Association of India on whose complaint the penalty was imposed. It has also asked
CCI not to take any corrective measure in this respect until the next hearing. With the COMPAT order, cement companies have been able to defer the payment of penalty
and the associated impact on cash flows. However, post the CCI order, the industry participants will find it increasing difficult to maintain production discipline as they will
be under the scanner of CCI. This may impact the pricing dynamics of the industry, particularly when demand will come under pressure in the coming months due to
monsoons. The impact on pricing dynamics is likely to be most pronounced in Southern India which has witnessed significant increase in capacities in the last three years.


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