Earlier this week, in a significant move for the Indian cement sector, the Adani Group announced the acquisition of the Indian assets of Switzerland-based cement major Holcim. All in one go, the Adani Group will move to second place in a sector that has historically exhibited an elite character, with a handful of companies at the top controlling nearly half that capacity, and more. Here’s how it’s been over the past two decades, when the sector has grown faster than the economy and delivered returns beating the market.
1. Capacity Control
Between them ACC and Ambuja have a cement manufacturing capacity of 65 million tonnes annually. As a combination, it is followed by 120 million tonnes UltraTech from Aditya Birla Group. This trio has shaped the sector and led to consolidation in it. In 1999 and 2000, the Tata Group sold its stake in ACC to Ambuja. In 2005, Holcim entered Ambuja. Between these two transactions, Grasim (an Aditya Birla company) acquired the cement operations of L&T, which is today UltraTech. It was the initial consolidation in the region at the top, which has stuck.
The top five cement manufacturers have an industry capacity of around 550 million tonnes and the top 10 have about 63%. Their share in production will be higher, as their capabilities usually operate at higher levels in the industry. The industry has been sluggish in the low-60% range, for example, Ambuja with 86% utilization in calendar 2021 and UltraTech 70% in 2020-21.
2. Shareholder Returns
Prior to this deal, the Adani Group had no cement manufacturing capacity. But it is a significant consumer, with large operations in infrastructure sectors such as airports, ports, logistics facilities and power plants. Its expansion is also happening at a rapid pace. Apart from such business synergies, cement as a business has delivered market-beating returns over the past two decades.
Between January 2003 and May 2022, the BSE Sensex grew at a compound annual growth rate (CAGR) of 16.3%. It is doubling in about four and a half years. During the same period, UltraTech, ACC and Ambuja all delivered a CAGR of over 17%, with Ambuja leading at 19.1%. Moreover, while they have experienced post-pandemic growth in returns, over the long term, the returns they have delivered have been steady. One reason for this is the elite nature of the industry, with few firms dominating production and market share.
3. Profitability Leader
But none of these three companies is ahead in shareholder returns given by the top cement manufacturers. This responsibility goes to Shree Cement, the largest cement manufacturer in North India, whose share price has grown at a CAGR of 38% during this period, albeit amidst very low trading volumes. On a standalone basis, Shree has the second largest capacity at 43 million tonnes. Over the past decade, it has tripled its capacity, mainly in the north and east.
The latest full financial year data shows Shree has the highest profitability among the leading set. Apart from Dalmia among the top five cement makers by capacity, the other four posted operating margins of over 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 lockdowns due to the Covid-19 pandemic.
4. Growth Linkage
Cement is also a business that is inextricably linked with economic development, especially in a developing economy like India. It is an essential commodity for the manufacture of capital goods and major infrastructure such as highways, ports, airports and real estate, which has a multiplier effect on the economy. Mapping of the level of cement production along with economic growth over the past three decades shows that cement manufacturing has indeed grown along 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 by the Indian government could boost demand for cement. It can also be lift capacity utilization, which was 63% in 2018-19, 62% in 2019-20 and 55% in 2020-21, according to the Finance Ministry tabled in Parliament in December 2021. This is a far cry from 86-89% in 2008-09 from 2006-07
5. Pricing Power
Cement prices have seen a sharp rise in recent months due to rising costs of inputs such as electricity and fuel due to the current Russia-Ukraine conflict. The combination of increased demand following the pandemic and supply constraints has put further pressure on cement prices. Pan-India cement prices hiked 369 per 50-kg in January 2022 to 395 in March, an increase of 7%.
Despite rising demand, the elite nature of the cement sector gives manufacturers the ability to keep prices in check by controlling supply. The presence of large untapped capacity also reinforces that supply is not fully responsive to demand. Over the past decade, cement prices have mostly fluctuated along global commodity cycles, with increased input costs translating to higher prices. Though cement prices have increased steadily since 2019, prices have remained consistently high. Cement as a business has a lot going for it.
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