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Earlier this week, in a move that has significance for the Indian cement sector, the Adani Group announced its acquisition of Switzerland-based cement major Holcim’s Indian assets. In one shot, the Adani Group will catapult to the second spot in a sector that has historically demonstrated an oligopolistic character, with a handful of companies at the top controlling nearly half the capacity, and more. Here’s how that has played out in the last two decades or so, when the sector has grown faster than the economy and delivered market-beating returns.
1. Capacity control
Between them, ACC and Ambuja have 65 million tonnes of annual cement manufacturing capacity. As a combine, this is next only to the 120 million tonnes of UltraTech, from the Aditya Birla Group. This troika has shaped the sector and led consolidation in it. Over 1999 and 2000, the Tata Group sold its stake in ACC to Ambuja. In 2005, Holcim entered Ambuja. In between these two transactions, Grasim (an Aditya Birla company) acquired the cement operations of L&T, which is UltraTech today. That was the initial consolidation in the sector at the top, one that has stuck.
The top five cement manufacturers account for about 48% of the industry capacity of about 550 million tonnes and the top 10 about 63%. Their share in production will be higher, as their capacities usually operate at above-industry levels. While the industry has been languishing in the low-60% range, for instance, Ambuja did 86% utilization in calendar 2021 and UltraTech 70% in 2020-21.
2. Shareholder returns
Prior to this deal, the Adani Group had no capacities in cement manufacturing. But it is a significant consumer, with large operations in infrastructure sectors such as airports, ports, logistics facilities and power plants. It is also expanding at a frenetic pace. Such business synergies apart, cement as a business has delivered market-beating returns in the past two decades.
Between January 2003 and May 2022, the bellwether BSE Sensex grew at a compounded annual growth rate (CAGR) of 16.3%. That’s doubling in roughly four-and-a-half years. During the same period, leaders UltraTech, ACC and Ambuja all delivered a CAGR above 17%, with Ambuja leading at 19.1%. Further, while they have experienced a post-pandemic spike in returns, over a longer period of time, the returns delivered by them have been steady. One reason for this is the oligopolistic nature of the industry, which has a few firms dominating production and market share.
3. Profitability leader
But neither of these three companies leads in shareholder returns delivered by top cement manufacturers. That mantle goes to Shree Cement, the largest cement manufacturer in north India, whose stock price has grown at a CAGR of 38% during this period, though amid very thin trading volumes. On a standalone basis, Shree has the second-largest capacity, at 43 million tonnes. In the past decade, it has expanded its capacity three-fold, primarily in the north and east.
The latest full financial year data shows Shree to also have the highest profitability among the leading set. Among the top five cement manufacturers by capacity, other than Dalmia, the other four reported an operating margin above 15%. Shree posted an operating margin of 23.1% and a net margin of 17.6% in 2020-21, a year that also saw the most stringent of lockdowns being imposed on account of the covid-19 pandemic.
4. Growth linkages
Cement is also a business that is inextricably tied to economic growth, especially in a developing economy like India. It is an indispensable commodity for the building of capital goods and key infrastructure such as highways, ports, airports and real estate, which have a multiplier effect on the economy. A mapping of cement production levels along with economic growth over the past three decades shows that cement manufacturing has indeed risen in tandem with economic growth.
Between 2006-07 and 2016-17, which was generally a high-growth period for the economy and also saw a real estate boom, growth in cement production outpaced GDP growth. An ambitious infrastructure push from the Indian government can drive cement demand. It can also lift capacity utilization, which according to a December 2021 submission in Parliament by the finance ministry was a middling 63% in 2018-19, 62% in 2019-20 and 55% in 2020-21. This is a far cry from the 86-89% in 2006-07 to 2008-09
5. Pricing power
Cement prices have seen a steep rise in recent months, on the back of rising costs of inputs such as power and fuel due to the ongoing Russia-Ukraine conflict. A combination of increased demand following the pandemic and supply bottlenecks have put further pressure on cement prices. Pan-India cement prices have risen from ₹369 per 50-kg bag in January 2022 to ₹395 in March, a 7% increase.
In spite of increasing demand, the oligopolistic nature of the cement sector gives manufacturers the ability to calibrate prices by controlling supply. The presence of large unutilized capacity also reinforces supply not being fully responsive to demand. Over the past decade, cement prices have mostly fluctuated along with global commodity cycles, with increased input costs translating to higher prices. However, there has been a secular increase in cement prices since 2019, with prices at a consistently higher level. There’s plenty going for cement as a business.
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