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									                                Cement Industry


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                                          RR Sector Analysis
Cement Industry
Indian Cement Industry

August 2007




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RR Information & Research   1   Industry Research
                                                                                                          Cement Industry




                                Indian Cement Industry
INDUSTRY SNAPSHOT ..............................................................................................5
OVERVIEW ...................................................................................................................6
INDUSTRY ANALYSIS................................................................................................8
   LIFE CYCLE ANALYSIS ..................................................................................................8
   TYPES OF CEMENT ..........................................................................................................8
     Different Types Of Cement........................................................................................8
     Low but Rising Share of Blended Cement in India ...................................................9
   MANUFACTURING PROCESSES .......................................................................................9
     Dry process .............................................................................................................10
     Wet process .............................................................................................................10
   LICENSING POLICY OF THE GOVERNMENT ....................................................................10
     Government Policies ...............................................................................................10
     Government Controls ..............................................................................................11
     Tax Structure ...........................................................................................................11
   INDUSTRY STRUCTURE AND NATURE OF COMPETITION................................................11
     Installed Capacity ...................................................................................................11
     Capacity Clusters ....................................................................................................11
     Strong Correlation with Economic Growth............................................................12
   COMPETITION ..............................................................................................................13
     Recent Buyouts Of Indian Cement Companies .......................................................13
     Annual Capacity of Cement Companies .................................................................14
     Market Share of Major Companies.........................................................................15
COST ANALYSIS........................................................................................................16
   POWER & FUEL............................................................................................................16
     Coal .........................................................................................................................16
     Power ......................................................................................................................17
   TRANSPORTATION ........................................................................................................17
   RAW MATERIALS .........................................................................................................17
     Limestone ................................................................................................................18
     State-Wise Status of Cement Grade Limestone Reserves in India as on mar 06....18
     Gypsum....................................................................................................................19
     Granulated Blast Furnace Slag (GBFS).................................................................19
     Maintenance And Stores Requirements ..................................................................19
   MAJOR COST PER TONNES OF PRODUCTION .................................................................20




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NATURE AND PROSPECTS OF DEMAND...........................................................21
   END USERS ..................................................................................................................22
   CONSUMPTION DISTRIBUTION ......................................................................................22
   EXPORTS ......................................................................................................................23
     Total Exports ...........................................................................................................23
     Country Wise Cement Exports ................................................................................24
   DEMAND SOURCES .......................................................................................................24
     Demand from residential housing sector................................................................25
     Demand from industrial and commercial sector ....................................................26
     Demand from infrastructure sector.........................................................................28
NATURE OF SUPPLY................................................................................................29
   CURRENT SCENARIO ....................................................................................................29
   CAPEX PLAN ................................................................................................................29
DEMAND-SUPPLY MISMATCH.............................................................................31
   POSSIBLE BUNCHING UP OF CAPACITIES IN FY09 .........................................................32
PRICES .........................................................................................................................33
MARGINS & PROFITABILITY...............................................................................35
   OPERATING PROFIT PER TONNE ...................................................................................35
   OPM & NPM..............................................................................................................35
STRATEGIC ANALYSIS...........................................................................................36
   SWOT ANALYSIS ........................................................................................................36
     Strengths..................................................................................................................36
     Weakness .................................................................................................................36
     Opportunities...........................................................................................................36
     Threats.....................................................................................................................36
   INDUSTRY ATTRACTIVENESS .......................................................................................37
   STRATEGIC ANALYSIS OF PLANT LOCATION ................................................................37
RISK & CONCERNS ..................................................................................................41
   RISING INPUT COSTS.....................................................................................................41
     Power & Fuel ..........................................................................................................41
     Transportation cost .................................................................................................41
   LOWER THAN EXPECTED GROWTH IN DEMAND .............................................................41
   LARGE SCALE CAPACITIES ADDITION IN GULF COUNTRIES ............................................41
   MRTPC ALLEGES ON 14 CEMENT MANUFACTURERS ...................................................41
   ACCESS TO FINANCE ....................................................................................................41



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CONCLUSION.............................................................................................................42
  SENSITIVITY ANALYSIS................................................................................................43
MAJOR PLAYERS IN THE INDUSTRY ................................................................44
  ACC ............................................................................................................................44
    Background .............................................................................................................44
    Latest Results...........................................................................................................44
    Key Points ...............................................................................................................45
  ULTRA TECH ................................................................................................................45
    Background .............................................................................................................45
    Latest Results...........................................................................................................46
    Key Points ...............................................................................................................46
  AMBUJA CEMENT LTD .................................................................................................46
    Background .............................................................................................................46
    Latest Results...........................................................................................................47
    Key Points ...............................................................................................................47
  INDIA CEMENT .............................................................................................................48
    Background .............................................................................................................48
    Latest Results...........................................................................................................49
    Key Points ...............................................................................................................49
  JK LAXMI CEMENT ......................................................................................................50
    Background .............................................................................................................50
    Latest Results...........................................................................................................50
    Key Points ...............................................................................................................50
  MADRAS CEMENT ........................................................................................................51
    Background .............................................................................................................51
    Latest Results...........................................................................................................51
    Key Points ...............................................................................................................52
  COMPARISON BETWEEN TOP PLAYERS ..........................................................................52
PICK OF THE INDUSTRY........................................................................................53
  JK CEMENT .................................................................................................................53
    Management ............................................................................................................53
    Latest Results...........................................................................................................53
    Future Expansion Plan ...........................................................................................53
    Valuation .................................................................................................................54
    Projected Financials ...............................................................................................55




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                                                                                                            Cement Industry




                                       INDUSTRY SNAPSHOT
                                                     August - 2007

OUTLOOK                                                       KEY INDICATORS
Buoyed with strong demand and better price realization,       P/E                11-12   NPM %             >21%
Indian cement industry has been witnessing stupendous         CAGR %             >20%    Key Inputs        Limestone & coal
growth over the past few years.
                                                              No. of                     Critical          Price, Power Cost,
Going forward, driven by a strong residential housing                            52
                                                              cos.                       Factors           Housing demand
demand, growing industrial and commercial activities
and the continued momentum in infrastructure
                                                             INDUSTRY SCORE CARD
investment, the cement consumption is expected to
witness a CAGR of more than 12%. At the same time,
supply is expected to grow at a CAGR of more than             Growth Potential
11%.
 With, both demand and supply expected to grow neck                 Industry
to neck; cement industry will continue to operate at            attractiveness
close to 90% level and cement prices are expected to
remain firm. High growth in volumes coupled with firm        Current economic
                                                               environment
prices will drive the industry profitability to new highs.
                                                                                                Low              Medium    High




STRENGTHS                                                    WEAKNESSES
    High Entry Barriers.
                                                                         Dependence on government .
                                                                         Increasing dependence on imported coal.

OPPORTUNITIES                                                THREATS

      Growth from newer products - Ready to mix                          Rising input cost
      concrete                                                           Rising interest rate
      Growing Economy                                                    Substitutes




Industry Attractiveness                                                                Net
                                                                                                             %
                                                                  Company             Sales     Growth                P/E
Bargaining Pow er Of suppliers                                     2006-07            (Cr.)     (Y-o-Y) OPM NPM RONW Ratio
                                                              ACC                        4514         33    30      23    42      14
  Bargaining Pow er of Buyers
                                                              Ambuja Cem.                3215         57    37      30    35      14
                Entry barriers                                UltraTech Cem.             2642         41    28      15    4       11
          Threat of subsitutes                                India Cements              1542         33    32      22    41      6
                                                              J K Cements                668          43    28      15    63      4
       Rivalry among the firms
                                                              JK Lakshmi                 582          45    30      21    58      12
                                 Low    Medium      High      Madras Cement              1008         56    35      20    56      13




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OVERVIEW
      The Indian cement industry is on a roll. Driven by a booming housing sector, global demand and
      increased activity in infrastructure development such as state and national highways, the cement
      industry has outpaced itself, ramping up production capacity, attracting the top cement companies in
      the world, and sparking off a spate of mergers and acquisitions to spur growth. Going forward these
      demand drivers will take the cement demand to new heights in the next five years. On an average
      India’s GDP is expected grow at a rate of 8-10%, thereby giving clear visibility of sturdy demand for
      cement.
      Cement production in India commenced in 1914. However, due to severe competition from imported
      cement, coupled with various governmental price and distribution controls, Indian cement industry
      grew at very slow rate with industry adding a meager 27 mn tones of cement capacity in 65 year.
      The fortunes of cement industry changed when in 1980s, GOI partially decontrolled the industry and
      lead to unprecedented growth in industry. Close to 30 mn tones were added in just one decade from
      1980 to 1990 which is considerably more than what is added during the last seven decades.
      Subsequent policy changes by GOI lead to spurt in production capacities.
      Second Largest Producer in the World
      At present India is the second largest cement producer in the world with 172 mn tones of cement
      capacity as on June 2007. In 2002, global cement production was reported at 1.7 billion tonnes, with
      China accounting for nearly 37% of the total output of cement in the world, India was the second
      largest producer with 6.7% of the total output of cement in the world closely followed by the United
      States at 5%. During 1998 to 2002, world cement production grew at a CAGR of 3.8%. However,
      demand during the same period remained inactive on account of crises faced by many countries.
      Conversely, during the same time, the Indian cement industry recorded a CAGR of more than 5.5% in
      cement production, largely due to hefty growth in economy and constructional activities.
      Currently, The Indian cement industry comprises 130 large cement plants and 365 mini-cement plants,
      with installed capacities of 172 million tonnes per annum (mtpa). Large cement plants accounted for
      over 94 per cent of the total installed capacity. The top two groups in the industry, Aditya Birla Group
      and Holcim Group, now control more than 40 per cent of total capacity in the country. Further, more
      than a quarter pie of total capacity is now being controlled by global majors. (India)
      Capacity clusters due to high cost of transportation of raw material
      Cement and its raw materials namely coal and limestone, are all bulky items that make transportation
      difficult and uneconomical. Given this, cement plants are located close to both, sources of raw
      materials and markets. Most of limestone deposits in India are located in Madhya Pradesh, Rajasthan,
      Andhra Pradesh, Maharashtra and Gujarat, leading to concentration of cement units in these states.
      This has resulted in ‘clusters’. There are eight such clusters in the country and account for 81% of the
      cement capacity. There is a trade-off between proximity to markets and proximity to raw materials due
      to which some cement plants have been set up near big markets despite lack of raw materials.
      The Indian cement industry has made significant progress upgrading and assimilating the latest
      technology. At present, more than 95% of the total capacity in the industry is based on modern,
      environment-friendly and energy efficient dry process technology.
      Low per Capita consumption
      Though India is the second largest cement producer in the world, it is amongst the lowest per capita
      consumer of cement. In India per capita cement consumption is 122 kg, which is far below the world
      average of approximately 320 kg.
      However, with growth in economy and increased construction activities, India has been witnessing
      hefty growth in cement consumption. India's cement consumption increased by more than 10.53%
      during FY07 to 148.41 mtpa compared to 134.27 mtpa in during FY06. On a decadal basis, India's
      cement consumption has increased at a 10-year CAGR of more than 8% during FY1997-07.




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      During the last two and half decades, the end-users fro cement industry has changed considerably. Till
      the early 1980s, Government used to be the biggest user (50% of total domestic consumption).
      However, with lifting of controls and privatization, private sectors’ share in total consumption has gone
      up radically. Currently, Government accounts for meager one-fifth share of total domestic cement
      consumption.
      Housing sector accounts for 60% of total cement consumption
      Housing sector has emerged as the biggest consumer of cement industry, accounting for 60% share
      of total domestic cement consumption. Infrastructure sector accounting for 20% and Commercial
      Projects with 20% consumption has emerged as the second and third largest consumers of cement
      industry.
      Regional disparity has been witnessed in the cement consumption and consumption growth. Southern
      region accounts for nearly 30% of total cement consumption followed by northern and western region.
      Although, there has been an year to year variation in the region-wise consumption growth rates, the
      relative shares of each region has more or less remain stable across the past few years.
      The major consumption states for cement in India include Maharashtra (18.19 mt in FY2006-07), UP
      (15.87 mt), Andhra Pradesh (12.35 mt), and Tamil Nadu (12.78 mt). Over the last three years,
      consumption growth has outpaced the national average in Andhra Pradesh, Haryana, Rajasthan, and
      Karnataka.
      Driven by a strong residential housing demand, growing industrial and commercial activities and the
      continued momentum in infrastructure investment, the cement consumption is expected to witness a
      CAGR of 12%.
      Due to slower economic growth and low per capita consumption, the cement industry has been in a
      surplus position since a long time. However, the surplus has been declining ever since from 2001.
      During 2001, cement industry had 29.49 mn tonnes of overcapacity, which has now got reduced to
      16.29 in 2006. This has lead to significant capacity utilization from 79.69% in 2001 to 93.57% in 2006.
      The oversupply is largely in the Southern and Northern regions. By contrast, there is a supply shortage
      in Eastern and Western regions. There is significant inter-regional movement of cement, which plays a
      crucial role in the regional demand-supply dynamics. Most of the cement movement across regions
      takes place from North to Central (3.35 mt during FY2005), South to West (5.20 mt), Central to North
      (2.45 mt), and Central to East (2.51 mt).
      Rising prices due to high capacity utilization
      Cement prices, the key driver of Cement Companies’ earnings, are on up trend due to narrowing gap
      of demand supply. Cement prices tend to move upwards as capacity utilization moves towards 90%
      mark. During the last four years i.e. from FY 2004 to FY 2007 cement prices gradually increased as
      the capacity utilization level approached and finally crossed the 90% mark. During FY06-07 when
      capacity utilization crossed 90% mark and cement consumption remaining healthy with double-digit
      growth, cement prices witnessed a blow out and crossed Rs.200 per bag mark.
      To meet the rising demand, most of the cement manufacturers are going for capacity expansion.
      Close to 108 mtpa of additional capacity is expected to come up in the next three years. However, in
      case of capex delay, which is the likely possibility with Equipment supply constraints, manpower
      crunch and environment clearance delays prices of cement may harden further.
      Outlook
      With, both demand and supply are expected to grow neck to neck; cement industry will continue to
      operate at close to 90% level and party of rising prices for cement players may not end in the near
      future. We believe. Industry will be able to pass on the increase in raw material to the consumers. High
      growth in volumes will drive the industry profitability to new highs. Increase in prices can provide a
      surprise.




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INDUSTRY ANALYSIS
Life Cycle Analysis
      Cement is a typical cyclical industry, characterized by the boom-and bust syndrome. A huge potential
      market and rapid growth in the early stages lead to a surge in interest and a flurry of research. The
      projected growth rates point to a lucrative market. The buoyant markets and huge profits raked in by
      players tempt more players into the market. Capacities increase in excess of demand and a glut in
      capacity is created. Competition increases, prices fall and margins come under pressure. Capacity
      addition comes to a halt; weaker players shut shop or sell off to larger ones. Demand catches up and
      the cycle is repeated all over again. Perhaps, of all the cyclical industries, the Indian cement industry
      exhibits this boom-and-bust cycle most visibly.
      Buoyed by booming economy with amplified demand for enhanced infrastructure housing &
      commercial space, we believe the cement industry is showing the boom, at present.

Types of cement
      Cement is a mixture of limestone, clay, silica and gypsum. It is a fine powder which when mixed with
      water sets to a hard mass as a result of hydration of the constituent compounds. It is the most
      commonly used construction material.
      DIFFERENT TYPES OF CEMENT
      There are different varieties of cement based on different compositions according to specific end uses
      namely Ordinary Portland Cement, Portland Pozolona Cement, Portland Blast Furnace Slag Cement,
      White Cement and Specialized Cement. The basic difference lies in the percentage of clinker used.
         Ordinary Portland Cement (OPC):
         OPC, popularly known as grey cement, has 95% clinker and 5% of gypsum and other materials.
         It accounts for 70% of the total consumption. White cement is a variation of OPC and is used for
         decorative purposes like rendering of walls, flooring etc. It contains a very low proportion of iron
         oxide.
         Portland Pozolona Cement (PPC):
         PPC has 80% clinker, 15% pozolona and 5% gypsum and accounts for 18% of the total cement
         consumption. Pozolona has siliceous and aluminous materials that do not possess cementing
         properties but develop these properties in the presence of water. It is cheaply manufactured
         because it uses flyash/burnt clay/coal waste as the main ingredient. It has a lower heat of
         hydration, which helps in preventing cracks where large volumes are being cast.
         Portland Blast Furnace Slag Cement (PBFSC):
         PBFSC consists of 45% clinker, 50% blast furnace slag and 5% gypsum and accounts for 10% of
         the total cement consumed. It has a heat of hydration even lower than PPC and is generally used
         in construction of dams and similar massive constructions.
         White Cement:
         Basically, it is OPC: clinker using fuel oil (instead of coal) and with iron oxide content below 0.4%
         to ensure whiteness. Special cooling technique is used. It is used to enhance aesthetic value, in
         tiles and for flooring. White cement is much more expensive than grey cement.
         Specialized Cement:
         Oil Well Cement: is made from clinker with special additives to prevent any porosity.
         Rapid Hardening Portland Cement: It is similar to OPC, except that it is ground much finer, so that
         on casting, the compressible strength increases rapidly.
         Water Proof Cement: OPC, with small portion of calcium stearate or non-saponifibale oil to impart
         waterproofing properties.




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      LOW BUT RISING SHARE OF BLENDED CEMENT IN INDIA
      In India, about 44% of the cement produced is Ordinary Portland Cement (OPC), 47% is Pozzolana
      Cement (PPC), 8% is Portland Blast Furnace Slag Cement (PBFS), and the remaining 1% are special
      cements.
      Blended cements (PPC and PBFS) are composite cements produced by blending clinker -which is the
      output of the kiln- at the grinding stage with pozzolonic or other material with cement like properties.
      Blended cement provides significant energy savings as it replaces a proportion of clinker with other
      materials such as fly ash or blast furnace slag. Although compressive strength of the major types of
      blended cement is equivalent to that of Grade 33 OPC cement; blended cement offers a reduction in
      the risk of thermal cracking; superior performance under elevated temperature curing conditions; good
      long-term strength; higher resistance to acids, sulphates and alkali attacks, with more suitability for
      coastal areas; reduced permeability with consequent improvement in durability; smoother finishing,
      etc.
      Blended cement has a low but rising share of India's cement production. In India, the share of blended
      cement in the total production had increased from 47% in 1978-79 to 76% in 1982-83. After this, the
      Indian cement industry witnessed a higher production of the higher grade OPC, and the production of
      blended cement gradually declined to 27% in 1992-93. However, this was followed by an upward
      trend, and the share of blended cement reached approximately 56% in 2004-05.

Manufacturing Processes
      There are two general processes for producing clinker and cement in India: a dry process and a wet
      process. In general, the dry process is much more energy efficient than the wet process, and the semi-
      wet somewhat more energy efficient than the semi-dry process. The semi-dry process has never
      played an important role in Indian cement production and accounts for less than 0.2% of total
      production.
                                    Cement Manufacturing Process

                                            MINING (LIMESTONE)                  PUCHASED   POWER

                                                  CRUSHING
          Other Raw Materials
           (BAUXITE, IRON
              ORE AND                             GRIDING
              REDMUD)
                                                  RAW MEAL


                                           BLENDING & STORAGE

                 FUEL                                                           PUCHASED POWER/
              (Coal and Oil)             PRE HEATING/PRE-CALCINER &             GENERATED POWER
                                               CLINKERIZTION


                                            CLINKER STORAGE
                GYSUM

                                            CEMENT GRINDING
             FLY ASH/LAG
                                            CEMENT STORAGE


                                                  PACKING


                                                  MARKET




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      Over the last decade, increased preference is being given to the energy efficient dry process
      technology so as to obtain a cost advantage in a competitive market. Moreover, since the initiation of
      the decontrol process, many manufactures have switched over from the wet technology to the dry
      technology by making suitable modifications in their plants. Due to new, even more efficient
      technologies, the wet process is expected to be completely phased out in the near future. In 1960,
      around 94% of the cement plants in India
      used wet process kilns. These kilns have              Process wise cement production
      been phased out over the past 46 years
      and at present, 96.3% of the kilns are dry      Wet
      process, 3% are wet, and only 1% are          Process
      semidry process. Dry process kilns are          3.5%
      typically larger, with capacities in India                                                Dry Process
      ranging from 300- 8,000 tonnes per day or                                                     96.3%
      tpd (average of 2,880 tpd). While
      capacities in semi-dry kilns range from
      600-1,200      tpd    (average     521tpd),
      capacities in wet process kilns range from    Semi dry
      200-750 tpd (average 425 tpd).                 Process
                                                        0.2%
      DRY PROCESS
      In dry process production, limestone is crushed to a uniform and usable size, blended with certain
      additives (such as iron ore and bauxite) and discharged on to a vertical roller mill where the raw
      materials are ground to fine powder. An electrostatic precipitator dedusts the raw mill gases and
      collects the raw meal for a series of further stages of blending. The homogenized raw meal thus
      extracted is pumped to the top of a preheater by air lift pumps. In the preheaters the material is heated
              C.
      to 750° Subsequently, the raw meal undergoes a process of calcination in a precalcinator (in which
      the carbonates present are reduced fed to the kiln. The remaining calcination and clinkerization
                                                                                               C.
      reactions are completed in the kiln where the temperature is raised to 1,450-1,500° The clinker
      formed is cooled and conveyed to the clinker silo from where it is extracted and transported to the
      cement mills for producing cement. For producing OPC, clinker and gypsum are used and for
      producing PPC, clinker, gypsum and fly ash are used.
      WET PROCESS
      The wet process differs mainly in the preparation of raw meal where water is added to raw materials to
      produce slurry. The chemical composition is corrected and the slurry is then pumped to the kiln where
      evaporation of moisture, preheating, calcinations and sintering reaction takes place. The clinker is
      cooled and transported, as in the case of other plants, with suitable conveyors to cement mills for
      grinding. The wet process is more energy intensive, and thus becomes expensive when power and
      energy prices are high.

Licensing policy of the government
      GOVERNMENT POLICIES
      Government policies have affected the growth of cement plants in India in various stages. The control
      on cement for a long time and then partial decontrol and then total decontrol have contributed to the
      gradual opening up of the market for cement producers. The stages of growth of the cement industry
      can be best described in the following stages:
          Price and Distribution Controls (1940-1981)
          During the Second World War, cement was declared as an essential commodity under the
          Defence of India Rules and was brought under price and distribution controls which resulted in
          sluggish growth. The installed capacity reached only 27.9 MT by the year 1980-81.
          Partial Decontrol (1982-1988)
          In February 1982, partial decontrol was announced. Under this scheme, levy cement quota was
          fixed for the units and the balance could be sold in the open market. This resulted in extensive
          modernization and expansion drive, which can be seen from the increase in the installed capacity




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          to 59MT in 1988-89 in comparison with the figure of a mere 27.9MT in 1980-81, an increase of
          almost 111%.
          Total Decontrol (1989)
          In the year 1989, total decontrol of the cement industry was announced. By decontrolling the
          cement industry, the government relaxed the forces of demand and supply. In the next two years,
          the industry enjoyed a boom in sales and profits. By 1992, the pace of overall economic
          liberalization had peaked; ironically, however, the economy slipped into recession taking the
          cement industry down with it. For 1992-93, the industry remained stagnant with no addition to
          existing capacity.
      GOVERNMENT CONTROLS
      The prices that primarily control the price of cement are coal, power tariffs, railway, freight, royalty and
      cess on limestone. Interestingly, government controls all of these prices.
      TAX STRUCTURE
      The Indian Cement industry is one of the highest taxed one. At the price level of Rs. 200 per bag, total
      tax burden, as a percentage of ex-factory realization works out to 45%. The cement industry has been
      continuously representing to the Government for more rational tax regime. The Central Government in
      its budget presented on 28th February 2007, for the first time, announced a dual excise duty structure
      for cement industry. Excise duty was increased to Rs. 600 per MT on cement with Retail Sale Price
      (RSP) exceeding Rs. 190. per bag and Rs. 350 per MT for cement with RSP of Rs.190 per bag and
      below as against specific excise duty of Rs. 400 per MT so far. This dual structure not only enhanced
      taxation burden further on the industry but also complicated its effective implementation. Government,
      however, having realized difficulty of the industry and the consequent burden to the consumer, has
      subsequently revised the structure w.e.f. 31st May 2007. It has now levied an advalorem duty of 12%
      on cement with. RSP exceeding Rs. 190 per bag while retaining specific duty of Rs. 350 per MT on
      cement sold Rs. 190 per bag and below.

Industry Structure and Nature of competition
      INSTALLED CAPACITY
      India is the world’s second largest cement producing country after China. The industry is characterized
      by a high degree of fragmentation that has created intense competitive pressure on price realizations.
      Spread across the length and breadth of the country, there are approximately 130 large cement plants
      owned by around 52 companies and 365 mini-cement plants with an installed capacity of around
      172.08mtpa as on June 2007. Large cement plants accounted for 94% of the total installed capacity in
      India.
      CAPACITY CLUSTERS
      Cement and its raw materials namely                         Regional Capacity Distribution
      coal and limestone, are all bulky items
      that make transportation difficult and
      uneconomical. Given this, cement
      plants are located close to both,                                                                Nothern
      sources of raw materials and markets.           Southern                                         Region
      Most of limestone deposits in India are          Region                                           19%
      located     in    Madhya      Pradesh,            32%
      Rajasthan,       Andhra       Pradesh,
      Maharashtra and Gujarat, leading to
      concentration of cement units in these                                                              Central
      states. This has resulted in ‘clusters’.                                                            Region
      There are eight such clusters in the                   Western                       Eastern         16%
      country and account for 81% of the                     Region                        Region
      cement capacity. There is a trade-off                   18%                           15%
      between proximity to markets and




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      proximity to raw materials due to which some cement plants have been set up near big markets
      despite lack of raw materials.

                                           Capacity Distribution

                                                                    Rajasthan      Madhya
                                  Others                                           Pradesh
                                                                      13%
                                   19%                                               11%
                        Andhra
                        Pradesh                                                     Chhattisgarh
                          16%                                                           7%


                                                                                          Gujarat
                          Tamil Nadu                                                       11%
                                           Karnataka                Maharashtra
                             9%
                                              7%                       7%


      STRONG CORRELATION WITH ECONOMIC GROWTH
      The cement industry accounts for approximately 1.3% of GDP and employs over 0.14 million people.
      Cement production and consumption has strong co-relation with economic growth and industrial
      activity. As cement is a basic construction material with virtually no substitute, it is used worldwide for
      all construction work. Thus, the growth in the construction industry has a direct relation with the
      production and consumption of cement. With the upswing in the economy, the demand for cement is
      growing, mainly due to the boom in the housing sector, which increases spending for infrastructure
      development and other industrial activity. GDP from the construction industry has grown at a high rate
      over the last three years-12.1% during FY2006, 12.5% during FY2005, and 10.9% during FY2004.
      This has had a positive impact on cement consumption, which increased 10.1% during FY2006, as
      compared with 8.1% during FY2005.


                               Growth in Cement Production, GDP & IIP
       12


        9


        6


        3
                                                                          Cement Production     GDP        IIP

        0
                 2001             2002              2003          2004             2005             2006
       -3

      The rapid growth in Cement production had positive impact on capacity utilization of cement
      producers. Industry is now witnessing a capacity utilization which it has never seen before. Capacity
      utilization has now crossed 90% mark.




RR Information & Research                      12                                         Industry Research
                                                                                               Cement Industry



                                 Installed capacity & Capacity Utilization
       180             Installed Capacity(LHS)          Capacity Utilisation(RHS)                              100%
       160                                                                                                     90%




                                                                                                     166.73
                                                                                             157
       140                                                                                                     80%




                                                                                     151
                                                                            144
                                                                140
                                                                                                               70%




                                                  135
       120




                                      121
                                                                                                               60%


                          111
       100
                105

                                                                                                               50%
        80
                                                                                                               40%
        60                                                                                                     30%
        40                                                                                                     20%
        20                                                                                                     10%
         0                                                                                                     0%
              1999      2000        2001         2002         2003        2004      2005   2006     2007


Competition
      With an installed capacity of around 172.08 million tonnes per annum (mtpa) as on June 2007, large
      cement plants accounted for 94% of the total installed capacity in India. The installed capacity is
      distributed over across approximately 130 large cement plants owned by around 54 companies and
      365 mini-cement plants.
      The booming demand for cement, both in India and abroad, has attracted global majors to India. In
      2005-06, four of the top-5 cement companies in the world entered India through mergers, acquisitions,
      joint ventures or greenfield projects. These include France's Lafarge, Holcim from Switzerland, Italy's
      Italcementi and Germany's Heidelberg Cements.
      The Indian cement industry has also witnessed a flurry of mergers and acquisitions within the
      domestic players, bringing smaller players under the umbrella of larger companies, and larger
      companies coming under the umbrella of global players like Holcim and Heidelberg. At present, two
      major groups largely dominate cement industry, Holcim and Aditya Birla Group, controlling more than
      40% of total capacity. Holicm-ACC-Gujarat Ambuja Cements has a combined capacity of 35.25 mtpa
      and Aditya Birla Group through Grasim and Ultatech Cement controls a combined capacity of 31.11
      mtpa. Further, more than global majors are now controlling a quarter pie of total capacity.
      At present, ACC is the largest player with a capacity of 20.02 mtpa. UltraTech CemCo Ltd. now
      occupies the second slot with a capacity of 17 mtpa (which includes 1.5 mtpa of subsidiary Narmada
      Cement). The Gujarat Ambuja group has emerged as the third largest player with a capacity of 15.23
      mtpa. Grasim ranks fourth with a capacity of 14.12 mtpa. Other leading players include India Cements,
      JK Group, Jaypee group, Century Textiles, Madras Cements, Lafarge, Shree Cement and Birla Corp.
      RECENT BUYOUTS OF INDIAN CEMENT COMPANIES
                                                                                                    EV/$
      Acquirer                          Acquired Company                 Capacity           Cost   tonne       Year
      Holcim                            GACL                                13.00          21160      227     2005-06
      Holcim-GACL-ACIL                  ACC-ACEL                            18.20          35464      129     2004-05
      Grasim                            LARSEN & TOUBRO                     16.00          22000       80     2003-04
      ZUARI INDUSTRIES Ltd.             Shri Vishnu Cement                   1.20           3850     N.A.     2002-03
      Italicementi Group                Zuari Cement                         1.70           3400       97     2000-01
      Lafarge                           Raymond Woollens                     2.24           7850       80     2000-01
      GACL                              ACC                                 11.94           9609       48     1999-00
      GACL                              DLF Cement                           1.40           1620       54     1999-00
      Grasim                            Indian Rayon                         3.20     Share swap       23     1998-99




RR Information & Research                         13                                          Industry Research
                                                                            Cement Industry


      India Cement              Raasi Cement               1.80         3200       73     1998-99
      Grasim                    Shree Digvijay             1.23          650      N.A.    1998-99
      India Cement              Shri Vishnu Cement         1.00         1150       68     1998-99
      Lafarge                   Tisco                      1.73         5500       77     1998-99
      LARSEN & TOUBRO           Narmada Cement             1.40         1700       52     1998-99
      GACL                      Modi Cement                1.80         1660       45     1998-99
      India Cement              CCI-Yerraguntla            0.40         1980      118     1997-98
      India Cement              Visakha Cement             0.90          600      N.A.    1997-98
                                                                                 Source: Cris Infac
      ANNUAL CAPACITY OF CEMENT COMPANIES
                                2004-05     2005-06    2006-07    2004-05    2005-06     2006-07
       Company Name             Capacity    Capacity   Capacity   Share %    Share %     Share %
       ACC                          18.23      18.64      20.02    12.15%      11.96%      12.16%
       Ultra Tech(L&T Cement)       17.00      17.00      17.00    11.33%      10.91%      10.32%
       Guj. Ambuja Cement           14.57      14.86      15.23     9.71%      9.54%        9.25%
       Grasim Ltd                   14.12      14.12      14.12     9.41%      9.06%        8.57%
       India Cement Ltd              8.81       8.81       8.81     5.87%      5.65%        5.35%
       J K Group                     6.41       6.55       7.02     4.28%      4.20%        4.26%
       Jaypee                        5.60       6.10       6.60     3.73%      3.91%        4.01%
       Century Textile Ltd           5.90       6.30       6.30     3.93%      4.04%        3.83%
       Biral Corpn. Ltd              4.78       5.11       5.78     3.19%      3.28%        3.51%
       Madras Cement                 5.47       5.47       5.47     3.65%      3.51%        3.32%
       Lafarge                       5.00       5.00       5.00     3.33%      3.21%        3.04%
       C C I Ltd                     3.85       3.85       3.85     2.57%      2.47%        2.34%
       Zuari                         3.40       3.40       3.40     2.27%      2.18%        2.06%
       Kesoram Industries            2.10       2.63       2.90     1.40%      1.69%        1.76%
       U.P State Cement              2.59       2.59       2.59     1.72%      1.66%        1.57%
       Penna                         0.00       2.23       2.50     0.00%      1.43%        1.52%
       Orient Paper Inds             2.33       2.40       2.40     1.56%      1.54%        1.46%
       Mehta Group                   2.36       2.36       2.36     1.58%      1.52%        1.44%
       Mysore Cement                 2.10       2.10       2.10     1.40%      1.34%        1.27%
       Chettinad Cement              1.80       1.80       1.80     1.20%      1.16%        1.09%
       Andhra Cement                 1.74       1.74       1.74     1.16%      1.12%        1.06%
       Mangalam                      1.00       1.00       1.00     0.67%      0.64%        0.61%
       Tamil Nadu Cement             0.90       0.90       0.90     0.60%      0.58%        0.55%
       HMP Cement Ltd                0.67       0.67       0.67     0.45%      0.43%        0.41%
       Malabar                       0.62       0.62       0.62     0.41%      0.40%        0.38%
       Rain Industries               0.00       0.00       0.25     0.00%      0.00%        0.15%
       Others                       18.68      19.57      24.27    12.45%      12.56%      14.74%
       Total                       150.04     155.82     164.70       100         100          100




RR Information & Research              14                                   Industry Research
                                                                                   Cement Industry


      MARKET SHARE OF MAJOR COMPANIES
      Over the years the relative share of major players has remained more or less same. In FY07, ACC
      acquired the highest market followed by GACL, Grasim and Ultratech. However, Ultratech has lost its
      second position in FY02 and slipped to fourth place in FY07.


      Company Name                  2001-02     2002-03     2003-04     2004-05      2005-06      2006-07
      ACC                            12.75%      13.24%      13.57%      13.25%       12.71%       12.00%
      Guj. Ambuja Cement              9.65%      10.70%      11.28%      11.54%       10.71%       10.63%
      Grasim Ltd                     10.00%      10.54%      10.70%      10.49%       10.40%        9.90%
      Ultra Tech Cem Co Ltd          11.60%      10.81%      10.42%      10.31%        9.73%        9.46%
      India Cement Ltd                6.16%       5.20%       5.43%       5.19%        5.99%        5.66%
      Jaypee                          4.17%       4.21%       4.02%       4.33%        4.48%        4.57%
      Century Textile Ltd             5.05%       4.70%       4.65%       4.84%        4.71%        4.36%
      J K Group                       4.82%       4.53%       4.49%       4.60%        4.38%        4.19%
      Madras Cement                   3.02%       3.08%       3.02%       2.92%        3.23%        3.50%
      Biral Corpn. Ltd                4.05%       4.10%       4.08%       4.00%        3.66%        3.40%
      Lafarge                         3.77%       3.35%       3.21%       3.50%        3.25%        3.02%
      Others                         24.96%      25.53%      25.13%      25.02%       26.75%       29.31%
      Total                         100.00%     100.00%     100.00%     100.00%      100.00%      100.00%




RR Information & Research                  15                                     Industry Research
                                                                                        Cement Industry



COST ANALYSIS
                                                                Industry : Cost Break up - FY06
      The energy costs and cement
      freight costs are the two most
      important elements in the cost                    Depreciation          Employee Cost
      structure of a cement company.                        7%                     5%
      While, the share of energy costs
      has increased marginally, freight                                                              Power & Fuel
      cost has experienced a decline in                                                                 29%
      its share of total operating costs.     Raw Material
      The share of other costs (such as          17%
      stores & spares, manufacturing
      overheads, and administrative
      expenses) has declined. The
      share of costs on account of
      material, repair and maintenance,       Freight/Distrib
                                                                                                       Other Exp
      employees and selling expenses               ution
                                                                                                         21%
      have more or less remained                   21%
      stable.



Power & Fuel
      The cement industry is one of the most energy-intensive sectors within the Indian economy. Clinker
      production is the most energy intensive step, accounting for nearly 75% of the energy used in cement
      production. In India, an estimated 90-94% of the thermal energy requirement in cement manufacturing
      is met by coal. The remaining is met by fuel oil and high-speed diesel oil.
      Despite recent increase in coal prices the industry has been able to control the expenditure on this
      account by investing in captive power plants – freeing themselves from the tariff hike by SEB and
      reducing the energy consumption required to produce a tonne of cement.
      However, Government is planning to phase out supplies of subsidized coal to cement, steel and paper
      industry. The proposed decision if implemented could result in cost escalation of almost 30-40%, as
      the prices of coal under auction system are 30-40% higher than the notified prices. For example the
      notified prices for coal for these industries varies from Rs1500-2000 per tonne. As against this the
      auctioned coal is sold at a price ranging from Rs2800-3000 per tonne.
      COAL
      Coal is an important input in cement manufacture and accounts for 15-20% of the total cost. Coal
      serves a dual role in cement manufacture. Firstly, the heat value in coal provides the thermal energy
      required for the operation of the kiln. Secondly, the mineral content in coal (basically, silica content)
      acts as a constituent in clinker. For each kg. of clinker, the cement industry on an average requires
      800 K. Cal of coal for dry process and 1350 K. Cal. of coal for wet process and for every tonne of
      clinker, around 200-220 kg of coal is consumed. Cement accounts for around 4.5% of India's coal
      demand.
      Consumption of coal for production of cement has not increased proportionately with cement
      production because of the switch to the dry process, efficiency improvements in cement kilns and the
      increased use of fly ash produced in power plants and granulated slag produced in blast furnaces of
      steel plants in the production of cement.
      However, over the years, there has been deterioration in the quality of coal. In particular, the ash
      content has increased implying lower calorific values for coal, and improper and inefficient burning,
      etc. Therefore, coal consumption has started to increase increased resulting in higher fuel and
      transportation costs. In order to reduce these problems, the cement industry started implementing coal




RR Information & Research                     16                                       Industry Research
                                                                                       Cement Industry


      washeries, which reduce the ash content of the coal at the mine itself. Cement companies are also
      resorting to importing coal, or using alternative fuel such as lignite or petcoke.
      POWER
      Cement is a power intensive industry requiring on an average 90-105 units of power in the wet
      process, and 100-110 units of power in the dry process to produce one tonne of cement
      produced. Significantly power accounts for 15-20% of the variable cost of cement manufacturing.
      Cement manufacturing consumes power mainly for three purposes: raw meal grinding, kiln rotation
      and clinker grinding. Each stage accounts for roughly one third of the total power consumption. A dry
      process plant typically has an average connected load of 15 MW. Based on the present installed
      capacity of 172 mtpa of cement, the total industry requirement is roughly 2520 MW. This is just around
      2% of India's total current power generating capacity.
      Over the years, the cement industry has consistently suffered from power cuts. In fact, availability and
      quality of power have always been crucial issues for cement companies. Further, price increases by
      State Electricity Boards (SEBs) have meant that even their poor quality power comes at a high cost.
      Rising power tariffs have reduced the diseconomies associated with self-generation through Diesel
      Generating (DG) sets. Accordingly, to insulate themselves from power cuts, cement units had initially
      installed captive DG sets as a standby. However, with the increase in the frequency of power cuts and
      rising power tariffs, many cement companies are meeting 60-100% of their power requirement through
      captive facilities. The captive power generation capacity of cement plants is presently estimated at
      around 1,800 MW. During FY2005, roughly 43% of the total domestic cement production was
      undertaken using captive power as against only 21% in FY1995. Thus, the share of cement production
      using captive power has only increased over the years.

Transportation
      Outward freight on cement is an important element in the operating cost of a cement plant. It accounts
      for around one third of the total variable costs. Most of the cement plants in India are located in and
      around the limestone clusters. These clusters are distant from the collieries and the markets for
      cement. Cement has an average lead of around 535 km. Thus, cement companies have to rely on
      extensive transportation for moving coal from the coal pitheads to the cement plants and for
      dispatching cement from the plant to the markets. As both coal and cement are of low value and bulky
      in nature, freight costs are considerably high for cement plants.
      Cement companies use both road and rail transport to transport cement and to receive coal. Although
      rail transportation is more economical for distances beyond 250-300 km, cement companies have
      started preferring road transportation even for longer distances because of insufficient wagon supply
      to the cement industry. Presently, Rail dispatches amount for about 33% while roads carry the balance
      66%. The balance 1% is accounted by Sea transportation. The share of road over rail has only gone
      up over the years. For coal transportation, the dependence on rail network is still very high and
      accounts for around 70% of coal movement.
      Over the past 12-15 months freight cost on cement has jumped more than 20%. This was largely
      because of the Supreme Court ruling that banned overloading of cement trucks. For example, a truck
      that used to carry 14-15 tonnes of cement can now carry only 9 tonnes. Further increasing diesel
      haven’t helped the cause.
      This has induced many cement companies to shift a portion of their cargo to rail. However, with Indian
      Railways facing shortage of wagons, we do expect that it will gradually increase freight charges, which
      in turn could push up the freight cost again.

Raw Materials
      Cement is usually used in mortar or concrete. Here it is mixed with inert material (called aggregate),
      like sand and coarse rock. Portland cement consists of compounds of lime mixed with oxides like
      silica, alumina and iron oxide. There are three major raw materials for cement:




RR Information & Research                    17                                       Industry Research
                                                                                        Cement Industry


      LIMESTONE
      Limestone is the main raw material and is the source of calcium carbonate. Calcium carbonate is burnt
      to obtain calcium oxide (CaO). The other sources of calcium carbonate are marl, chalk, seashell and
      coral reef. Limestone is the most abundant source of CaO. Cement is the biggest limestone user in
      India accounting for over 75-80% of limestone produced in India. The composition of limestone used
      by the various sectors varies. For cement, the CaO content of limestone should be a minimum of 44%.
      Typically, 1.4-1.5 tonnes of limestone are required per tonne of clinker. Thus, for a 1 million tonne
      cement plant, assured availability of cement grade limestone reserves of the order of 50-60 mt in the
      close vicinity is important.
      As on 31 March 2006, the country's estimated gross reserves of cement grade limestone stand at
      97430 mn.t. The gross limestone reserves of 97430.35 mn.t. include 19031.02 mn.t. of probable and
      55923.70 mn.t. of possible reserves, that are converted into proved equivalent category. The total
      proved equivalent reserves are estimated at 63760 mn.t. However, 23% of proved equivalent
      reserves, i.e. 21,718 mn.t falls under forest areas and 7.5% i.e. 5754 mn.t are restricted under Coastal
      Regulation Zone (CRZ). Thus the net Proved Equivalent Reserves of 35,585 mn.t are available during
      XI Plan.
      Out of total limestone reserves, over 45% of the inventory of cement grade limestone is in the
      Southern region, followed by the Northern region with 21.84%, the Western region with 12.34% and
      the Eastern region with 15.82% and rest 3.64% with central region.
      Andhra Pradesh has the privilege of possessing about 31% of the country's total proved equilanet
      reserves of limestone. Commercial grade limestone deposits are being exploiting from Bethamcherla,
      Macharla, Neereducherla, Tandur, Mudimanikyam of Kurnool, Guntur, Anantapur, Ranga Reddy, and
      Nalgonda districts are widely used in our country for panelling, and flooring purposes. Sullavai
      limestone of Karminagar and Warangal districts, massive limestones of Mudimanikyam, Nalgonda
      districts.


                                        Total Lime Stone Reserves

                          Chhatisgarh      Others
                             5%                                               AP
                                            14%
                                                                             31%

                          J&K
                          6%

                           HP
                           6%

                          Meghalaya                                      Karnataka
                             6%     Rajasthan                              13%
                                                        Gujrat
                                       8%
                                                        11%



      STATE-WISE STATUS OF CEMENT GRADE LIMESTONE RESERVES IN INDIA AS ON MAR 06
       Zone            State                Reserves in Million Tonnes                           Proved
                                         Proved    Probable      Possible             Total     Equivalent
                       Harayana              31.22        1.93         2.42             35.57         33.78
                       HP                   1809.6            0     4269.7             6079.3          3945
           North       J&K                  123.22      524.37     5009.53            5657.12      2995.04
                       Rajasthan             563.8     3321.29     3748.97            7634.06      4763.19
                       Uttaranchal           188.2     1227.29      453.43            1868.92      1273.95
            Total of North Zone            2716.04     5074.88    13484.05           21274.97        13011




RR Information & Research                    18                                        Industry Research
                                                                                        Cement Industry


                       MP                   1592.49        251.68        736.8       2580.97          2137.07
          Central
                       UP                     327.9        412.02       225.25        965.17           728.94
           Total of Central Zone            1920.39         663.7       962.05       3546.14          2866.01
                       Assam                 338.83           244        906.2       1489.03           962.73
                       Manipur                11.02          2.68         7.86         21.56            16.83
                       Meghalaya             547.42        980.41       4779.9       6307.73          3623.66
                       Arunachal                  0           108        275.5         383.5           213.35
                       Orissa                 87.36         95.83       410.55        593.74           359.72
           East
                       Bihar                 120.22         67.14       658.74         846.1           496.56
                       West Bengal              6.4            3.2           0           9.6             8.64
                       Jharkhand              54.58         55.65       114.16        224.39           150.62
                       Nagaland               10.48        113.57       896.63       1020.68            538.3
                       Chhatisgarh          2540.49        797.72      1177.86       4516.07          3687.82
             Total of East Zone              3716.8        2468.2       9227.4       15412.4          10058.2
                       Gujrat               3709.96       6707.99            0      10417.95          8405.55
           West
                       Maharashtra           890.78        111.02       812.33       1814.13          1374.66
            Total of West Zone              4600.74       6819.01       812.33      12232.08          9780.21
                       AP                    959.41       1442.38      28032.6      30434.39          15985.4
                       Karnataka            7718.37       2270.53      2820.12      12809.02          10717.2
                       Kerala                 44.58          9.35        40.37          94.3            71.31
           South       Tamil Nadu            750.46        282.75       454.27       1487.48          1175.52
                       Andaman                    0          0.32         0.51          0.83             0.48
                       Lakshdweep                 0              0          90            90               45
                       DIU                    48.84              0           0         48.84            48.84
            Total of South Zone             9521.66       4005.33     31437.87      44964.86          28043.7
            Grand Total (Gross)            22475.63      19031.12      55923.7      97430.45          63759.1
                                                                                   (Source: Planning Commission)

      GYPSUM
      Gypsum is used as a retarding agent. Ground clinker, on contact with water, tends to set
      instantaneously because of the very fast reaction between tri-calcium alluminate and water. In the
      presence of gypsum, the desired setting time can be achieved. Gypsum is added to the extent of 5%
      during the clinker grinding stage. Gypsum is naturally available in abundance in Rajasthan, Gujarat
      and Tamilnadu.
      GRANULATED BLAST FURNACE SLAG (GBFS)
      The other raw materials that are also used in the manufacture of cement are blast furnace slag (a
      waste product obtained from iron-smelting furnaces) and flyash (leftover ash from a thermal power
      station). Limestone contains about 52% of lime and about 80% of this lime is lost during ignition of the
      raw materials. Similarly, Clay contributes about 57% silica of which about 25% is lost during ignition.
      GBFS is obtained by granulation of slag obtained as a by-product during the manufacture of steel. It is
      a complex calcium aluminum silicate and has latent hydraulic properties. That is why it is used in the
      manufacture of Portland blast furnace slag cement.
      MAINTENANCE AND STORES REQUIREMENTS
      The two important items of stores and spares in the case of cement manufacture are refractory
      material and grinding media. For grinding media, high chrome grinding balls are normally used. In the
      case of refractory materials, companies go in for two kinds of refractory bricks-high alumina and high
      chrome. Typically, the life of the refractory material is 6-8 months (with the indigenously made high-
      alumina bricks), after which the kiln has to be stopped and the affected sections relined, a process,
      which takes 3-4 days. Kiln relining is normally made to coincide with the normal planned shutdown.
      Some companies are also experimenting with imported high-chrome bricks, which provide for a longer
      uninterrupted operational life of 18-24 months. In practice, this can extend the availability of calendar
      hours and thereby enhance the actual capacity of the plant.




RR Information & Research                     19                                       Industry Research
                                                                                                      Cement Industry


Major Cost Per tonnes of Production
      The average energy costs for cement companies have increased from Rs. 482/tonne (of cement
      production) in FY1994 to Rs. 637/tonne in FY1998. This represents a CAGR of 7.3%. The costs
      increased despite successful efforts by the companies to reduce specific energy consumption in
      cement manufacture. Since then, the average energy cost per tonne has however declined from Rs.
      590 in FY2000 to Rs. 568 in FY2005. Cost control measures such as: increased reliance on imported
      coal; greater stress on producing cement through captive power; and focus on reducing power
      consumption have resulted in this development.

       900                                                  Major Costs per tonne
       800
                    2004-05     2005-06      2006-07
       700
       600
       500
       400
       300
       200
       100
         0
                Raw Material          Employee Expenses        Power, Oil & Fuel       Selling &          Other Expenses
                 Consumed                                                            Administrative
                                                                                       Expenses

       The average energy costs for cement companies have increased from Rs. 482/tonne (of cement
      production) in FY1994 to Rs. 637/tonne in FY1998. This represents a CAGR of 7.3%. The costs
      increased despite successful efforts by the companies to reduce specific energy consumption in
      cement manufacture. Since then, the average energy cost per tonne has however declined from Rs.
      590 in FY2000 to Rs. 550 in FY2006-07. Cost control measures such as: increased reliance on
      imported coal; greater stress on producing cement through captive power; and focus on reducing
      power consumption have resulted in this development.
      In 2005-06 per tonnes cost jumped by 8%, however per tonne raw material cost declined by more than
      170 basis points. In 2006-07 per tonne cost increased by almost 900 basis points, largely on account
      of increased expenses on selling and administration. Per unit employees cost surged by more than
      16% and per unit cost increased by almost 13%.
      Total expenditure as percentage of sales is showing a downward trend. This was largely possible
      because of slower increase in power & fuel cost in comparison to total sales.

             Y-o-Y trend of Major Costs
                              Raw Material                    Employee Exp                 Power, Oil & Fuel
                              Selling & Admin Exp             Other Exp                    Total Operating Exp (RHS)
       35                                                                                                               100
                                                                                                                        90
       30
                                                                                                                        80
       25                                                                                                               70
       20                                                                                                               60
                                                                                                                        50
       15                                                                                                               40
       10                                                                                                               30
                                                                                                                        20
        5
                                                                                                                        10
        0                                                                                                               0
             0403     0406     0409   0412     0503    0506   0509   0512    0603   0606   0609   0612    0703   0706




RR Information & Research                              20                                         Industry Research
                                                                                       Cement Industry




NATURE AND PROSPECTS OF DEMAND
      Cement is the preferred building material in India. It is used extensively in household and industrial
      construction. Earlier, government sector used to consume over 50% of the total cement sold in India,
      but in the last decade, its share has come down to 35%. Rural areas consume less than 23% of the
      total cement, due to the availability of cheaper building materials. Demand for cement is linked to the
      economic activity in any country. Broadly, it can be categorized into demand for housing construction
      (homes, offices etc.) and infrastructure creation (ports, roads, power plants etc). Level of economic
      activity drives growth in cement consumption. Hence, cement demand in emerging economies is much
      higher than developed countries where the demand has reached a plateau. With Economy growing at
      brisk pace, India too will see sturdy cement demand going forward.
      Per-capita cement consumption is an imperative indicator of the status of industrialization and
      development of the country. With the growth of economy, per capita cement consumption rises at brisk
      pace. Though India is the second largest cement manufacturer, it is among the lowest cement
      consuming countries. In India per capita cement consumption is 122 kg, which is far below the world
      average of approximately 320 kg. Hence, signifying immense potential going forward.

                                     Per Capita Cement Consumption


                  700
                  600
                  500
                  400
                  300
                  200
                  100
                     0
                           China      Japan        USA          UK         India       World
                                                                                       Avg.
                                                                               Source: Cris Infac

      India's cement consumption increased by more than 10.53% during FY07 to 148.41 mtpa compared to
      134.27 mtpa in during FY06. On a decadal basis, India's cement consumption has increased at a 10-
      year CAGR of more than 8% during FY1997-07. Demand has largely been driven by a shift in housing
      construction preferences to concrete and the rapidly rising population. The healthy growth beginning in
      FY2005 is also due to increased demand from National Highway Development Projects (NHDP).
      During 1998-2007, the domestic cement consumption grew at a CAGR of more than 7.4%. However, if
      we break this period of 9 years into two parts a clear shift in domestic cement consumption is visible.
      For the first period i.e. from FY 1998-2002 cement consumption grew at a CAGR of 6.4%. This period
      witnessed slow economic growth of 5-6% leading to slower housing and infrastructure growth. This
      was the same period when manufacturing industry was saddled with excess capacity leading to muted
      industrial investment. The second phase i.e. the period from FY2002-07 when the pace of economy
      growth picked up significantly and the cement consumption grew at a CAGR of 8.4% up by 200 basis
      points. This growth came on the back of increasing in housing activity and rise in infrastructure
      spending.




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                                                                                           Cement Industry


                              Cement Consumption & Consumption Growth
                                         Consumption (LHS)          Grow th (RHS)
       160                                                                                          14%
       140                                                                                          12%
       120
                                                                                                    10%
       100
                                                                                                    8%
        80
                                                                                                    6%
        60
                                                                                                    4%
        40
        20                                                                                          2%

         0                                                                                          0%
               2000      2001         2002    2003           2004       2005        2006   2007


End Users
      During the last two and half decades, the end-users fro cement industry has changed considerably. Till
      the early 1980s, Governent used to be the biggest user (50% of total domestic consumption).
      However, with lifting of controls and privatization, private sectors’ share in total consumption has gone
      up radically. Currently, Government accounts for meager one-fifth share of total domestic cement
      consumption.
      Housing sector has emerged as the biggest consumer of cement industry, accounting for 60% share
      of total domestic cement consumption. Infrastructure sector accounting for 20% and Commercial
      Projects with 20% consumption has emerged as the second and third largest consumers of cement
      industry.

consumption Distribution
      Regional disparity has been
                                                   Region wise cement consumption in FY06-07
      witnessed in the cement
      consumption              and                   Central                                      North Region
      consumption           growth.                  Region                                           20%
      Southern region accounts                        15%
      for nearly 30% of total
      cement           consumption           Western
      followed by northern and                Region
      western region. Although,                19%
      there has been an year to
      year variation in the region-
                                                                                                      Eastern
      wise consumption growth                 Southern                                                Region
      rates, the relative shares of            Region                                                   16%
      each region has more or                   30%
      less remain stable across
      the past few years.
      The major consumption states for cement in India include Maharashtra (18.19 mt in FY2006-07), UP
      (15.87 mt), Andhra Pradesh (12.35 mt), and Tamil Nadu (12.78 mt). Over the last three years,
      consumption growth has outpaced the national average in Andhra Pradesh, Haryana, Rajasthan, and
      Karnataka.




RR Information & Research                     22                                           Industry Research
                                                                                                   Cement Industry



                           Major Cement Consuming states in FY2006-07


                                                                                       West bengal
                                                                        Rajasthan
                                           Others       Punjab                            5%
                                                                           6%
                    Madhya Pradesh          22%          4%
                         4%
                                                                                     Andhra Pradesh
                                                                                          8%

                                                                                      Tamil nadu
                                                                                         9%
                         Uttar Pradesh
                              11%                                                     Karnataka
                                                              Gujarat     Kerala         7%
                                         Maharashtra           7%          5%
                                            12%




Exports
      TOTAL EXPORTS
      As cement is a low value, high bulk commodity, freight cost becomes a significant factor in determining
      the landed cost of cement. This has resulted in a very low volume of international trade in cement.
      World cement trade has averaged just around 6-7% of the total production.
      Although, world trade in cement is limited because of high freight costs, there are countries, which
      either import a significant share of their total consumption or export a major share of their total
      production. Most of the importing countries belong to the developing world. The Middle East countries
      (although not falling in the developing world category) have huge requirements of cement because of
      construction work in projects in the oil sector. Also in these countries, unfavourable conditions (for
      example, inadequate cement limestone reserves) have discouraged cement capacity creation.
      Most of the exporting nations look for mass transportation as mass transport leads to significant
      advantages such as savings in freight costs and packing costs, avoidance of transit loss,
      adulteration, pilferage, bursting of bags and damage to cement.
      Though at the ex-factory level, Indian cement is quite competitive but a plethora of duties along with
      infrastructure bottleneck reduces this competitiveness. India’s cement exports have seen very volatile
      y-o-y growth. During FY2006, cement exports were higher by 49.34%, however, in FY07 it declined by
      3.28%. The year on year variation in the export trend implies that companies rely on cement exports to
      balance out the domestic demand supply situation.

                                             Growth in Exports (Y-o-Y)

                               60%
                               50%
                               40%
                               30%
                               20%
                               10%
                                0%
                              -10%
                              -20%       2002-03    2003-04    2004-05     2005-06    2006-07




RR Information & Research                          23                                              Industry Research
                                                                                      Cement Industry


      The Indian cement industry exported 5.84mn tonnes of cement during FY07, accounting for 3.77% of
      the total production. There has been a significant year on year variation in the export trend, implying
      that Companies rely on cement exports to balance out the domestic demand supply situation.

                                            India's cement Exports

       7                         Total Exports-mt (LHS)                                              4.5%
                                 % of Production (RHS)                                               4.0%
       6
                                                                                                     3.5%
       5
                                                                                                     3.0%
       4                                                                                             2.5%




                                                                            6.03




                                                                                           5.84
       3                                                                                             2.0%
                                                                                                     1.5%




                                                              4.04
       2
                                3.47
                  3.38




                                                 3.06
                                                                                                     1.0%
       1                                                                                             0.5%
       0                                                                                             0.0%
              2001-02        2002-03         2003-04        2004-05      2005-06        2006-07

      Because of freight costs, India is in a position to export cement through sea routes to countries in
      Indian subcontinent, South East Asia, Middle East, countries on the East coast of African continent
      including South Africa, Madagascar, and also Mauritius and other islands of the Indian Ocean. India
      can export to the neighbouring and land-locked countries such as Pakistan, Nepal and Bangladesh
      through rail as well as road routes. An additional route for exports to Bangladesh is the Inland
      Waterways on the river Brahmaputra.
      Over the years India’s export destination has witnessed considerable change. The total cement
      exports to Iraq now accounts for almost 25% of total exports. Nepal, which used to be the major
      exporting nation for Indian cement manufacturers, is no more the most preferred nation.
      COUNTRY WISE CEMENT EXPORTS
      Country                          2001-02    2002-03    2003-04     2004-05      2005-06      2006-07
      Iraq                               0.00%      0.00%      0.84%       0.08%       17.35%       24.77%
      Nepal                             34.50%     30.10%     36.64%      16.39%        9.24%        7.26%
      Yemen                              0.00%      0.00%      0.00%       0.00%        1.70%        3.10%
      Qatar                              0.00%      0.00%      0.00%       1.17%        4.66%        2.90%
      Sri Lanka                          1.21%      2.06%      2.49%       2.43%        1.67%        1.82%
      U.A.E.                             0.00%      0.00%      0.50%       1.00%        3.03%        1.41%
      Others                            64.29%     67.84%     59.52%      78.92%       62.34%       58.75%
      Total                            100.00%    100.00%    100.00%     100.00%      100.00%      100.00%

Demand sources
      Cement demand in the country emanates from three major sources viz. Housing Sector accounts for
      60% of total cement demand, infrastructure projects 20% and industrial projects 20%.




RR Information & Research                        24                                   Industry Research
                                                                                         Cement Industry


                                              Key Consuming Sectors
                            Housing                                             Industrial
                             Sector                                               Sector
                              60%                                                  20%




                                                                             Infrastructure
                                                                                 Sector
                                                                                  20%



      DEMAND FROM RESIDENTIAL HOUSING SECTOR
      Housing demand accounts for 60% of total cement demand and 90% of total real estate demand.
      Housing demand has supported the cement industry even in times of low infrastructure or industrial
      demand.
      The house construction activity has been on the upswing for the past 5 years. Moreover, it has been
      observed that the boom is localised to the organised urban housing segment, extending to the
      relatively prosperous rural belts. The growth in the residential real estate market in India has been
      largely driven by rising disposable incomes, a rapidly growing middle class, low interest rates, fiscal
      incentives on both interest and principal payments for housing loans and heightened customer
      expectations, as well as increased urbanisation and nuclearisation.
      We expect a total of 14.3bn sq. ft of residential housing space to be created over FY2006-10E i.e. an
      annual average of approximately 3.6 bn sq ft., which in turn translate into 428 mn tonnes demand for
      cement over FY2007-10E.
      A large proportion of the above demand for houses, especially in urban centres such as Mumbai,
      Bangalore, Delhi (Gurgaon, Noida) and Pune, is likely to come from high-rise residential buildings.
      Since this is a fairly new segment, the growth of the highrise segment will be faster as compared to the
      growth of the urban housing segment. The reasons for the construction of highrise apartment buildings
      are the lack of space in cities such as Mumbai and proximity to offices and IT parks in places such as
      Gurgaon, Bangalore and Pune. The high-rise culture is gradually seeping into other cities such as
      Kolkata, Hyderabad and Chennai due to increasing affordability, nearness to IT/BPO parks and the
      township concept being embraced within close proximity to such IT/BPO parks.
          Growth Drivers
               Favorable demography and higher disposable income
               As per the Census of India report around 22.1% of India’s population is in the 25-39 yrs age
               group which is expected to increase to around 25% in 2026 resulting in an addition of about
               4.9mn people each year to this age bracket. According to Ministry of Urban Affairs,
               Government of India, over the next 20 years, the working age population is projected to grow
               at 1.9% per annum.
               Further, with strong economic activity expected to continue, India corporate as well as the
               MNCs have been on a hiring spree for the past couple of years, has resulted in rising
               incomes. With economy all set to grow at 9% this trend is expected to continue in the coming
               years. Expected rise in disposable income levels would enable household to migrate from
               non-pucca houses to the urban pucca-housing segment and also from smaller houses to
               larger ones.
               Reduction in the average age of house owner coupled with higher income levels and surging
               population in 25-39 age group will drive the growth in housing to new levels.
               Nuclear families and urbanization
               India’s urban population has increased from meager 17% of total population in 1951 to 28% in
               2001, driven largely by steady migration of people from rural to urban areas in search of
               employment. The National Council for Applied Economic Research (NCAER) estimates the
               total number of Indian household to increase from 204.3 mn units in 2006 to 221.9 mn units in




RR Information & Research                    25                                         Industry Research
                                                                                         Cement Industry


               2010 i.e. an increment of 17.6 mn household. Of the incremental 17.6 mn, 8.3 are estimated
               to be added in urban areas. Hence urban households are expected to have a share of 47% in
               incremental households, against earlier share of 28%, which would lead to further urbanization
               of Indian economy, thereby creating more demand for residential houses in urban areas.
               Further, the joint family system in India is now remoulding towards nuclear family system. The
               average number of persons per household has come down from 6 persons in 1971 to 5.5 in
               2001. With faster growth in urban households and increasing nuclearisation of families, the
               average household size will continue to reduce, thereby pushing the demand for newer
               houses.
          Requirement of floor space area
          Assuming a single house for each 17.6mn incremental household, we expect that by FY 2010,
          17.6mn new houses will be constructed. Further, assuming an average size of 810 sq. ft (90 sq.
          yards) for the houses, we estimate a total 14.3 bn sq. ft of residential housing construction by
          FY2010 i.e. an annual construction of almost 3.6bn sq. ft over FY2007-10E. Out of total 14.3bn sq.
          ft of residential construction; rural area is likely to see more than 7.53 bn sq. ft construction and
          urban areas would add approximately 6.72 bn sq. ft.
                            No. of Household         Average size of houses       Total Area of construction
                                       (in Mns)                      (in Sq. Ft)                     (in bn sq. ft)
          Rural                              9.3                          810                           7.533
          Urban                              8.3                          810                           6.723
          Total                            17.6                                                        14.256
          Estimation of Cement Demand
          With an average annual 3.6 bn sq. ft addition in floor space area and taking an average of 30 kg of
          cement requirement per sq. ft of residential construction we expect a total demand of 428 mn
          tonnes for cement over FY2006-10E. We expect the cement demand from residential housing to
          witness a CAGR of 7 –8% over FY2007-10E.
          Rising Property and home loan rates could spoil party
          Apart from the increasing nuclearisation and rising incomes, easy availability of finance coupled
          with declining rate of interest rates has been instrumental in boosting housing demand. With falling
          interest rates and increasing competition in the home loan market, interest rates on housing loans
          came down from a high of 13.25% per annum in FY2000 to a low of 7.25% per annum in FY2005.
          However, with the hectic economic activity, the liquidity in the market has been tightening which in
          turn has resulted in rising home loan rates. Rising inflation rates has also contributed to monetary
          tightening. During the last 18 months the rates have gone by 300-400 bps. This coupled with rising
          property prices, which has almost doubled during the last 1-2 years, could spoil the party.
      DEMAND FROM INDUSTRIAL AND COMMERCIAL SECTOR
      Commercial construction comprises construction of office space, hotels, hospitals, schools, stadiums
      etc. In India, most of the investment in this segment is driven by office space construction. Within
      office space construction activity, almost 70-75 per cent of the demand comes from IT/BPO/call
      centres. The other key demand drivers include banking and financial services, FMCG and telecom.
      This dependency on IT/ITES is expected to continue due to India’s emergence as a preferred
      outsourcing destination, despite China and Russia also emerging as strong contenders.
      The industrial and commercial sector comprises of all the major industrial set ups, commercial offices,
      IT & ITES parks and organized retail formats. Over the last three – four years, India grew at an
      impressive rate of more than 8%. During this period most of the domestic industry has achieved
      almost full capacity utilization, entering a phase of sustained investment-led growth as major capacity
      expansions are being planned in the industrial sector.
      According to CRIS INFAC Construction Review, February 2006, in the last 4 years, while the IT sector
      continued to grow at a healthy rate, the ITES sector stole the show with a phenomenal 48 per cent
      growth. Going forward, revenue from ITES is expected to grow at a CAGR of 30 per cent to reach
      $19.7 billion in 2009-10; and the IT service industry will clock export revenues of $28.5 billion by 2008-
      09, growing at a CAGR of 26 per cent.




RR Information & Research                         26                                    Industry Research
                                                                                                        Cement Industry


                   Export revenue from IT Sector (in bn $)                        Export revenue from ITES Sector(in bn $)

       35                                                              25
                                                             28.7                                                         19.8
       30                                                              20
                                                 23.6
       25
                                        19.1                           15
       20
                                15.4
                                                                       10                                         7
       15              11.8
                                                                                                         5.2
             8.9                                                                                3.7
       10                                                               5               2.4
                                                                               1.4
        5
                                                                        0
        0                                                                    2001-02 2003-03 2003-04 2004-05 2005-       2009-
            2004       2005    2006E   2007E    2008E     2009E                                               06E         10E
      Source: CRIS INFAC “Software Annual Review” (January 2005)       CRIS INFAC “IT Enabled Services Annual Review” (February2006)

      Consequently, the growth in the sector will translate into substantially higher demand for commercial
      space, adding to the overall investment in construction activities.
      CRIS INFAC, February 2006, believes the growth in IT/ITES is likely to translate into construction
      investments of Rs 148 billion (118 million sq ft) by 2007-08 as compared with investments of Rs 74
      billion (61 million sq ft) in the last 3 years. The investments are based on the manpower/workspace
      requirement in the sector.
      Retail boom to result in construction investments of Rs 112 billion over the next 5 years (Source: CRIS
      INFAC Construction Review, Feb 2006) CRIS INFAC, September 2005, estimates that retail spending
      in India in fiscal 2005 was Rs. 9.9 trillion, of which organised retail accounted for Rs. 349 billion, or
      approximately 3.5%. The organised retail segment in India is expected to grow at a rate of 25% to
      30% over the next five fiscal years. The growth of organised retail is expected to be driven by
      demographic factors, increasing disposable incomes, changes in shopping habits, the entry of
      international retailers into the market and the growing number of retail malls (“CRIS INFAC Relating
      Annual Review,” (September 2005) CRIS INFAC).
      CRIS INFAC also estimates that this increased activity in retail would result in increased revenues in
      the organized retail sector, as illustrated by the following chart:
      CRIS     INFAC,      February 2006,
      believes the current spark in mall                            Expected Revenues from organized retail sector
      construction activity across India will
      result in around 105 million sq ft of
      mall space by 2010. This would                    1200
      translate into construction investment                                                                   1095
      of Rs 112 billion over the next 5                 1000
      years.     (Source:    CRIS     INFAC                                     Increased retail
      Construction Review, Feb 2006)
                                                        800                 revenues would result in
      The increase in disposable incomes,                                    construction activity of
      demographic changes (such as the                  600                         Rs.112bn
      increasing number of working
      women, who spend more, the rising                 400
      number of nuclear families and
      higher income levels within the urban                                     350
      population), the change in the
                                                        200
      perception of branded products, the
      growth in retail malls, the entry of                    0
      international     players   and      the                                 2005P                           2010P
      availability of cheap finance will drive
      the growth in organized retail.                         Source: CRIS INFAC, “Construction, Annual Review” (February 2006)




RR Information & Research                            27                                                 Industry Research
                                                                                           Cement Industry


      Mall Construction: Investment over the next 5 years
                                                Units               2003E         2004E       2005P         2010P
      Organized retail industry                 Rs. Billion           177           281         350          1095
      Increase in revenue                       Rs. Billion                         104          69           745
      Revenue per sq. ft. (Rs. Per sq. ft.)     Rs. Per sq. ft.     10000         10000       10000         10000
      Additional space required by 2010         mn sq ft                                                       75
      Cost of construction                      Rs. Per sq. ft.                                              1500
      Total construction activity (Rs. Billion) Rs. Billion                                                   112
                                                   Source: CRIS INFAC, “Construction, Annual Review” (February 2006)

      We expect cement consumption from this sector to register a CAGR of 9-10% driven by large-scale
      construction activities.
      DEMAND FROM INFRASTRUCTURE SECTOR
      The Indian economy is all set to grow at a pace of over 9% in the current fiscal. Increased emphasis
      on infrastructure development made it achievable. Infrastructure has been witnessing extraordinary
      growth across all sectors such as roads, railways, irrigation, power, water supply urban infrastructure,
      ports and airports. However, in order to achieve this kind of growth on a sustainable basis, a further
      impetus is required to be given to the Infrastructure development in the country. GOI, recognizing this
      fact has planned to spend around Rs. 13.2 trillion on infrastructure development for the next five year.
      However, this figure has been revised upwards to Rs.19.2 trillion.
      Out of total proposed expenditure, a construction activity are expected to account for more than 50%
      of total investment and is expected to be the biggest beneficiary of the surge in infrastructure
      investment over the next five years.
      Planning commission projected that the total spending by the central government, state government,
      PSUs and through the Public-Private partnership (PPP) would be around Rs19.3 trillion ($470 billion)
      for the next 5 years as against Rs. 7.7 trillion spend during Xth Five Year Plan, a jump of over 150%.
      This would imply a construction opportunity of over Rs.11.2 trillion for the next 5 years.
      In light of such huge expenditure on construction activities, the demand for cement from infrastructure
      sector is expected to grow at a CAGR of 24-25%.
      Overall Demand
      Driven by a strong residential housing demand, growing industrial and commercial activities and the
      continued momentum in infrastructure investment, the cement consumption is expected to witness a
      CAGR of more than 12% in line with the economic growth because of the strong co-relation with GDP
      and the increased activity in the construction sector. We further believe that due to huge expenditure
      by GOI on infrastructure the proportionate demand from infrastructure sector will move northwards and
      we expect the total share of cement demand from infrastructure to be close to 25% in 2010. However,
      proportionate demand from housing sector will move southwards and will come down to around 55%
      while remaining 20% will be from commercial sector.




RR Information & Research                    28                                           Industry Research
                                                                                            Cement Industry




NATURE OF SUPPLY
Current Scenario
      India is the second largest producer of cement in the world. In 2005, India produced 142 mt of cement,
      accounting for 6.4% of global production of 2.22 billion tonnes. India is the second largest producer-
      behind China (1,000 mt), but ahead of the US (99 mt) and Japan (66 mt). India's cement industry-both
      installed capacity and actual production-has grown significantly over the past three decades, with
      production increasing at an average rate of 8.1% per year between 1981 and 2004-05.
      India's cement production increased by more than 9% during FY07 to 154.74 mtpa as compared to
      12.40% during FY2006, production increased 7.07% during FY2005, and 5.19% during FY2004.
      Production has increased at a 3-year compound annual growth rate (CAGR) of 8.4%. On a decadal
      basis, India's cement production increased at an annual average of 8.2% during FY1996-2006, as
      compared with 6.9% during FY1986-96.

     180                         India's Cement production and Growth Rate                                     18
     160                                  Production (LHS)            Grow th (RHS)                            16
     140                                                                                                       14
                                                                                                               12
     120
                                                                                                               10
     100
                                                                                                               8
      80
                                   93.6




                                                                                                               6
      60
                                                                                                               4




                                                                                            140.876
      40                                                                                                       2
                                              101.83



                                                             111.28



                                                                       117.06



                                                                                  125.34




                                                                                                      154.74
              81.8



                         94.2




      20                                                                                                       0
       0                                                                                                       -2
             1999        2000    2001        2002        2003         2004      2005       2006       2007


Capex plan
      Owing to the recent burst in cement prices EBIDTA/Tonne margin of cement manufacturer jumped to
      Rs.1150 per tonne. At these levels of profitability average industry RoCE has reached more than 26%.
      Encouraged with such lucrative return cement manufacturers have announced capacity additions of
      more than 100mn tones over the next 3-4 years.
      JP associate have planned to increase its capacity by 13.7 mn tonnes. Grasim industries have
      planned to add around 8 mn tonnes of fresh capacity to its existing capacity. GACL and ACC will add
      around 7.3 mn tonnes of capacity. Lafarge has planned to add 6 mn tonnes to its existing capacity.
      Most of these capacities will be added through green field projects that take near about 36 months to
      commence production due to number of bottlenecks such as Environmental clearance & Land
      acquisition etc.
      Most of the capacity addition will come in FY2008-09. Around 47.3 mn tonnes of fresh
      capacity is expected to come on stream in FY2008-09. Further 26 mn tonnes will be added in
      FY2009-10.
      Even after considering issues like acquisition of limestone reserves, land acquisition, environment
      clearance etc.; industry will add a capacity of 70 mtpa by 2009 and 87 mtpa by 2010. This means
      cement supply is expected to increase by more than 11% during the next three years.




RR Information & Research                     29                                           Industry Research
                                                                                                                Cement Industry


                                                Capacity Addition (in million tonnes)
                    20
                                                                             17.98
                                                      14.88                                                       14.7
                    15
                                                              10.93                   11.3
                    10                  7.33                                                              7.69
                                                                                                    4.6                    5
                    5     3.9     3.4                                  3.5
                                                                                             2.5
                                                0.9
                    0
                         Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10

   Proposed Capacity Addition (in million tonnes)
    Company                     Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 TOTAL

    ACC                           0.9   0.9    1.08    0.2                           1.18                                 3            7.26
    Anjali Portland Cement                      0.2                                                                                     0.2
    Barak Valley                                       0.2                                                                              0.2
    Birla                                                                             1.7                                               1.7
    Binani                                     3.05                                                                                    3.05
    Century                                                                                                              2.5            2.5
    Chettinad                                                                                      2.5                                  2.5
    Dalmia                                                                             2                                                 2
    Grasim                                                    4.73    3.43                                                             8.16
    GACL                            1     1                                                  2.3           3                            7.3
    Hiedelberg                                                                         1                                                  1
    India Cement                                                1       1                                                 2              4
    Italicementi                                                                                                  2.2                   2.2
    JP Associates                                               4                     3.5    1.2                                 5     13.7
    JK Cement                                                                          8                                                 8
    JK laxmi                                                                                  3                                          3
    Kamal Cement                                                                               2                                          2
    Kesoram                                                                                  1.6                                        1.6
    Lafarge                                                                            3                                  3              6
    Madras Cement                                2                     2.5                                                              4.5
    Manglam Cement                              0.5                                                       1.6                           2.1
    Murli Agro                                                                        2.6                                               2.6
    My Home                             1.5                                                                      1.49                  2.99
    Nirma                                              0.5                                                                              0.5
    OCL India Ltd                                              1.4      1                                                               2.4
    Orient paper                                                                       1                                                 1
    Penna                                                                      2       1                                                 3
    Prism Cement                                                                                                   3                     3
    Rain Cal                                                            1                                          1                     2
    Raghuram Cement                                                                    1                                                 1
    Sagar Cement                                              2.25                                                                     2.25
    Saurashtra cement                                                                        1.2                                        1.2
    Shree Cement                    2                          1.5           1.5                                                         5
    Sanghi                                                                                                               4.2            4.2
    Ultra Tech Cement                           0.5                                                                                     0.5
    Zuari Cement                                                        2                                                                 2
    Total                                             15.5                           47.3                        26.1          19.7 116..61




RR Information & Research                                30                                                     Industry Research
                                                                                                                                                                                                                                                                                                                             Cement Industry




DEMAND-SUPPLY MISMATCH
      Though India is the second largest cement manufacturer, it is among the lowest cement consuming
      countries. In India per capita cement consumption is 122 kg, which is far below the world average of
      approximately 320 kg. Hence, the cement industry has been in a surplus position since a long time.
      Although there exists overcapacity in the industry, the surplus has been declining ever since from
      2001. During 2001, cement industry had 29.49 mn tonnes of overcapaity, which has now got reduced
      to 16.29 in 2006. This has lead to significant capacity utilization from 79.69% in 2001 to 93.57% in
      2006.
                                   175                                                            All India - Cement Capacity, Production & Demand

                                   150

                                   125

                                   100

                                              75

                                              50

                                              25
                                                                                                                                          Capacity                                                  Production                                                             Consumption
                                               0
                                               2001                                                    2002                                                    2003                                                    2004                                                      2005                                       2006


      There exist regional surplus/shortages in the Indian cement industry. The oversupply is largely in the
      Southern and Northern regions. By contrast, there is a supply shortage in Eastern and Western
      regions. There is significant inter-regional movement of cement, which plays a crucial role in the
      regional demand-supply dynamics. Most of the cement movement across regions takes place from
      North to Central (3.35 mt during FY2005), South to West (5.20 mt), Central to North (2.45 mt), and
      Central to East (2.51 mt).
      160
                                                          Capacity                                  Production                                      Consumption
      140




                                                                                                                                                                                                                                                                                                                                                                                44.0
      120
                                                                                                                                                                                                                                                                                                                           38.1
                                                                                                                                                                                                                                                                      31.3
                                                                                                                                                                                                  31.7




      100
                                                                                                                               30.0




                                                                                                                                                                                                                                                           24.3
                                                          25.7




                                                                                                                                                                                                                                                                                                                                                                     29.9
                                                                                                                                                                                       22.9




                                                                                                                                                                                                                                                                                                                                                                                49.1

       80
                                                                                                                    21.3




                                                                                                                                                                                                                                                                                                                27.1
                                                                                                                                                                                                                                                                                                                           43.9




                                                                                                                                                                                                                                                                                                                                                                                           28.3
                                                                                                                                                                                                                                                                                                                                      25.9
                                               19.5




                                                                                                                                                                                                                                                                      36.7
                                                                                                                                                                                                                                                                                 24.5
                                                                                                                                                                                                  36.1
                                                                                                                               33.3




                                                                                                                                                                                                                                                                                                                                                22.4
                                                                                                                                                                                                                                                                                                                                                          23.9
                                                                                                                                                                                                             22.1




                                                                                                                                                                                                                                                                                           20.6




       60
                                                          29.6




                                                                                                                                                                                                                                                           34.1
                                                                                                                                          21.5




                                                                                                                                                                                                                                                                                                     22.6
                                                                                                                                                                                       31.7
                                                                     17.4 20.8




                                                                                                                                                                                                                                                                                                                                                                     32.0
                                                                                                                    29.8




                                                                                                                                                                                                                        18.1 16.8 20.4




                                                                                                                                                                                                                                                                                                                29.7
                                               26.1




                                                                                                                                                                                                                                         18.2 14.8 20.3




                                                                                                                                                                                                                                                                                                                                                                                           27.5
                                                                                                                                                    16.8 15.6 19.0




                                                                                                                                                                                                                                                                                                                                      25.4
                                                                                 16.5 15.8 17.8




                                                                                                                                                                                                                                                                                 22.9
                                                                                                  18.2 12.9 16.9




                                                                                                                                                                     17.8 13.1 17.5
            16.3 15.1 16.1
                             17.6 13.6 16.3




                                                                                                                                                                                                                                                                                                                                                23.6




       40
                                                                                                                                                                                                             20.6




                                                                                                                                                                                                                                                                                           22.0




                                                                                                                                                                                                                                                                                                                                                          21.8
                                                                                                                                          19.4




                                                                                                                                                                                                                                                                                                     19.7




       20
                                               30.6
                                                          41.5
                                                                     21.8




                                                                                                                    33.1
                                                                                                                               44.6
                                                                                                                                          23.9




                                                                                                                                                                                       35.3
                                                                                                                                                                                                  46.1
                                                                                                                                                                                                             26.1




                                                                                                                                                                                                                                                           38.1
                                                                                                                                                                                                                                                                      46.8
                                                                                                                                                                                                                                                                                 28.9
                                                                                                                                                                                                                                                                                           25.1
                                                                                                                                                                                                                                                                                                     23.0
                                                                                                                                                                                                                                                                                                                29.0
                                                                                                                                                                                                                                                                                                                           49.8
                                                                                                                                                                                                                                                                                                                                      28.9
                                                                                                                                                                                                                                                                                                                                                25.6
                                                                                                                                                                                                                                                                                                                                                          24.5
                                                                                                                                                                                                                                                                                                                                                                     32.5
                                                                                                                                                                                                                                                                                                                                                                                53.2
                                                                                                                                                                                                                                                                                                                                                                                           28.9




        0
                             Eastern
                                               Northern
                                                          Southern




                                                                                                  Eastern
                                                                                                                    Northern
                                                                                                                               Southern




                                                                                                                                                                     Eastern
                                                                                                                                                                                       Northern
                                                                                                                                                                                                  Southern




                                                                                                                                                                                                                                         Eastern
                                                                                                                                                                                                                                                           Northern
                                                                                                                                                                                                                                                                      Southern




                                                                                                                                                                                                                                                                                                     Eastern
                                                                                                                                                                                                                                                                                                                Northern
                                                                                                                                                                                                                                                                                                                           Southern




                                                                                                                                                                                                                                                                                                                                                          Eastern
                                                                                                                                                                                                                                                                                                                                                                     Northern
                                                                                                                                                                                                                                                                                                                                                                                Southern
            Central




                                                                                 Central




                                                                                                                                                    Central




                                                                                                                                                                                                                        Central




                                                                                                                                                                                                                                                                                           Central




                                                                                                                                                                                                                                                                                                                                                Central
                                                                     Western




                                                                                                                                          Western




                                                                                                                                                                                                             Western




                                                                                                                                                                                                                                                                                 Western




                                                                                                                                                                                                                                                                                                                                      Western




                                                                                                                                                                                                                                                                                                                                                                                           Western




                                              2001                                                                 2002                                                               2003                                                                2004                                                 2005                                                 2006




RR Information & Research                                                                                                                                    31                                                                                                                                                            Industry Research
                                                                                        Cement Industry


Possible bunching up of capacities in FY09
      Of the total expected capacity addition of 100 mn tonne, 47.3mn tones is expected to complete in
      FY2008-09 alone. This is likely to unsettle the demand supply situation in the market and result in
      significant supply overhang in FY2008-09.


                          Capacity Addition (in million tonnes)

       20
                                                             17.98
                                       14.88                                                   14.7
       15
                                               10.93                 11.3
       10                 7.33                                                          7.69
                                                                                  4.6                 5
         5    3.9   3.4                                3.5
                                                                            2.5
                                 0.9
         0
              Q1     Q2    Q3    Q4     Q1        Q2   Q3     Q4     Q1     Q2    Q3     Q4    Q1     Q2
              07     07    07    07     08        08   08     08     09     09    09     09    10     10




RR Information & Research                    32                                         Industry Research
                                                                                         Cement Industry




PRICES
      Cement prices, the key driver of Cement Companies’ earnings, are on up trend due to narrowing gap
      of demand supply. In past, cement prices had suffered from excessive supply, fragmentation, reckless
      capacity additions and fiscal incentives for setting up new capacities. The surplus position had resulted
      in significant pressure on price realizations in recent years. The cyclical trough in the late-1990s had a
      severe impact on the industry financials and many companies were referred to BIFR. However,
      slowdown in capacity additions following the withdrawal of fiscal benefits, coupled with continuing
      strong demand and consequent high operating rates has resulted in a strong surge in prices. Cement
      prices tend to move upwards as capacity utilization moves towards 90% mark.
      During the last four years i.e. from FY 2004 to FY 2007 cement prices gradually increased as the
      capacity utilization level approached and finally crossed the 90% mark. During FY06-07 when capacity
      utilization crossed 90% mark and cement consumption remaining healthy with double-digit growth,
      cement prices witnessed a blow out and crossed Rs.200 per bag mark. Cement producers power
      could be gauged from the fact that even a 20-25% hike in freight rates was straight passed on to the
      consumers.


             Correlation between Cement Prices & Capacity Utilization
     230                                     Spurt in cement prices, prices                                 115
                  Cement prices rose          rose by approximately more
     220           by approximately                    than Rs.60                                           110
                        Rs.16.
     210
                                                                                                            105
     200
             Cement prices rose by                                                                          100
     190         Rs.10 to 13.
                                                                                                            95
     180
                                                                                                            90
     170
                                                                                                            85
     160
                                                                                                            80
     150

                                                                          Capacity Utilisation in% (RHS)    75
     140
                                                                          Prices in Rs./50 kg (LHS)

     130                                                                                        70
       Apr-01 Oct-01 Apr-02 Oct-02 Apr-03 Oct-03 Apr-04 Oct-04 Apr-05 Oct-05 Apr-06 Oct-06 Apr-07

      We believe industry will continue to operate at more than 90% level during the coming years and there
      by we may see marginal upward movement in prices.




RR Information & Research                     33                                        Industry Research
                                                                                                                                        Cement Industry


                                                            Capacity Utilization
            100%
                                Capacity utilization is
                               expected to remain more
             95%                      than 90%.                                                                                                           93%
                                                                                                           93%                                93%
                                                                                                                              92%
                                                                                            90%
             90%

                               85%
             85%                                                                  83%
                                                                        81%
                                                             79%
             80%    78%
                                         77%
                                                    75%
             75%




                                                                                                                              2008E

                                                                                                                                              2009E

                                                                                                                                                          2010E
                     1999

                                2000

                                          2001

                                                     2002

                                                                 2003

                                                                          2004

                                                                                   2005

                                                                                                 2006

                                                                                                               2007
      Given that cement capacity utilization will remain close to 90% mark, so, there is hardly any scope for
      the prices to drop by any reasonable levels. We do believe that price may see some northward
      movement in future.

                                                  Capacity Utilization & Cement Prices
             100%                                                                                                                                           250

              95%                                                                                                                                           230
                                         Cement Prices (RHS)
                                         Capacity Utilisation (LHS)                                                                                         210
              90%
                                                                                                                                                            190
              85%
                                                                                                                                                            170
              80%                                                                                                                                           150

              75%                                                                                                                                           130
                                                                                                                      2008E

                                                                                                                                      2009E

                                                                                                                                                  2010E
                        1999

                                  2000

                                           2001

                                                     2002

                                                             2003

                                                                        2004

                                                                                 2005

                                                                                          2006

                                                                                                        2007




RR Information & Research                                   34                                                                         Industry Research
                                                                                            Cement Industry



MARGINS & PROFITABILITY
Operating Profit Per tonne
      Cement prices have firmed up during the last few years due to improvement in demand-
      supply position and increasing consolidation in the industry. This lead to improved operating profit
      per tonne of cement produced (we took a sample pure cement companies accounting for more than
      60% of cement production and sale). Operating profit per tonne surged from around Rs.250/ tonne in
      FY2004-05 to Rs.800/tonne in FY2006-07.

                                              Operating Profit/Per Tonne (in Rs.)
                    900
                    800
                    700
                    600
                    500
                    400
                    300
                    200
                    100
                      0
                                  2004-05                  2005-06                  2006-07


OPM & NPM
      The operating profits and margins for cement companies are most sensitive to cement sales
                                                                                   rd
      realizations. Cement prices increase from around Rs.155/ per 50 kg in 3 Quarter FY2004-05 to
                                st
      approximately Rs.230 in 1 Quarter FY2007-08. Adding to this, Industry’s total sale is increasing at
      faster pace in comparison to rate of growth in operating cost. Operating cost in FY2005-06 jumped by
      more than 31% whereas total sale rose by more than 37%. In FY2006-07 sales rose by whopping 45%
      whereas operating cost increased by just 23.50%. Riding on high average sales realization and better
                                                                                       rd
      higher sales, OPM and NPM of cement industry has been on up trend from 3 Quarter FY2004-05.
      During this period, OPM & NPM has increased moved up from approximately 5.5% & 2.6%
      respectively to 29% & 27% respectively.

                                               OPM, NPM & Prices
       35                                                                                                       240
                                                                                                                230
       30
                                                                                                                220
       25                                                                                                       210

       20                                                                                                       200
                                                                                                                190
       15                                                                                                       180
       10                                                                                                       170
                                                                                                                160
        5
                                                                                                                150
                                                                             Prices         OPM          NPM
        0                                                                                                       140
            200403 200406 200409 200412 200503 200506 200509 200512 200603 200606 200609 200612 200703 200706




RR Information & Research                       35                                         Industry Research
                                                                                        Cement Industry




STRATEGIC ANALYSIS
SWOT Analysis
      STRENGTHS
         High Entry Barriers
         Cement being a capital-intensive industry creates high entry barriers for the new players.
         Moreover, the creation of distribution channel, acquisition of limestone reserves etc makes entry of
         new players extremely difficult.
      WEAKNESS
         Dependence on Government
         Industry is highly dependent on government authorities for power supply. Cement industry has
         been suffering from frequent power cuts.
         Increasing dependence on imported coal
         Over the years, there has been deterioration in the quality of coal. In particular, the ash content
         has increased implying lower calorific values for coal, and improper and inefficient burning, etc.
         This has increased the dependence of cement industry on imported coal. Poor port infrastructure
         and high volatility in exchange rates creates concerns.
      OPPORTUNITIES
         Growth from newer products - Ready to mix concrete
         RMC is a value-added semi-finished product that results in a superior quality concrete. Ready mix
         concrete consists of cement, aggregates, water and other ingredients, which are weighed and
         batched at a centrally located plant and then directly placed at the construction site. Various
         advantages of RMC are quality control, eco friendly, greater speed of construction, correct
         proportion of ingredients, lower wastage, reduced manpower requirement etc. RMC is a high
         margin product as compared to site mixed concrete (SMC).
         RMC is extensively used in developed countries. However, Ready Mix Concrete (RMC) demand in
         India is still in its infancy, estimated at around six million cubic meters in volume terms in 2005. In
         India, RMC accounting for meager 5% of cement production that is converted to RMC as against
         70% in developed countries.
         Launched first in Mumbai a few years ago is gaining ground in other metros in India. The majority
         of the RMC demand comes from metros. Banglore is the largest market of RMC owing to large-
         scale construction activities.
         Looking at the high yield RMC market, cement majors such as ACC and Ultra Tech has planned
         to set up their RMC plants in Banglore. ACC expects its RMC business to grow at 40% over the
         next few years.
         Growing Economy
         Though India is the second largest cement manufacturer, it is among the lowest cement
         consuming countries. In India per capita cement consumption is 122 kg, which is far below the
         world average of approximately 320 kg. With the growth of economy, per capita cement
         consumption rises at brisk pace. Hence, signifying immense potential going forward.
      THREATS
         Rising input cost
         Rising interest rate
         Rising interest rates may impact housing demand and thereby affecting cement demand.
         Moreover, it will result in increased interest cost. And may also affect capex plan implementation.
         Substitutes
         Bitumen and Engineering plastic have emerged as substitute of cement in road and building
         construction.




RR Information & Research                    36                                         Industry Research
                                                                                           Cement Industry


Industry Attractiveness
                                                                            Bargaining    power            of
      Bargaining power of                                                   Buyers: - Low
      Suppliers: - High                                                     In the recent past the cement
      GOI exercise excessive control                                        industry is witnessing major
      on Coal and Power prices &                                            change in purchase quantity. Now
      supply. Government authorities                                        the share of small purchases i.e.
      also control the transportation                                       retail purchases have been rising
      sector.                                                               whereas that of bulk purchase has
                                                                            declined. Moreover, with industry
                                                                            operating at above 90% level
                                                                            increases the bargaining power of
                                                                            manufacturers.



                                        Rivalry Among the Firms: -
                                        High
                                        Large     number    of   players,
                                        Overcapacity, High degree of
                                        product     homogeneity,    High
                                        storage cost and high exist
                                        barriers, creates intense rivalry
                                        among the firms.




    Threat of Substitute: -                                                 Barriers to entry: -
    Low                                                                     Medium to High
    Use of Bitumen in Road                                                  High     Capital     Investment
    construction and Engineering                                            (Rs.3500/tonne),    Distribution
    plastic in Building creates some                                        Network    and    Oversupplied
    concern for the industry.                                               market deters new entrants.
                                                                            However,     Technology     and
                                                                            Manpower are easily available.




Strategic Analysis of Plant Location
      Due to the bulky nature of cement, outward freight costs account for a high proportion of total cost.
      Hence, companies prefer to be close not only to the limestone quarries, but also to the cement
      markets.
      ACC, with its 14 plants has presence in all regions. Its plants are located in HP, Rajasthan, UP, MP,
      Jharkhand, West Bengal, Chhattisgarh, Orissa, Maharashtra, Karnataka, Tamil Nadu & Andhra
      Pradesh. The diversified production capacity enables ACC to cater to all the major consuming states
      as well as exploit its natural resources, thereby reducing transportation cost.
      India Cement has 8 plants located in Tamil Nadu and AP. Though, AP and Tamil Nadu are rich in
      terms of limestone reserves but they are not the biggest consuming states of cement. The states have
      surplus capacities.
      ACL with its 7 plants caters to markets of Punjab, HP, Rajasthan, Gujarat and Maharashtra.
      Maharashtra is largest cement consumer and has deficit in cement production. All these states
      accounts for more than 29% of total cement consumption and have abundant limestone reserves.




RR Information & Research                      37                                         Industry Research
                                                                                             Cement Industry


      Grasim has 7 plants with access to Punjab, Rajasthan, MP, Chhattisgarh, Maharashtra, Tamil Nadu
      and Karanatka giving it access to huge limestone reserves of these states. Its plants give it access to
      36% of total cement consuming markets. However, most of these states are in surplus cement
      production.
      Ultra Tech cement serves Eastern, Western, and Southern Region with its 7 plats. Its plants are
      located at West Bengal, Chhattisgarh, Maharashtra, Tamil Nadu and AP.

                                 Cement        Cement                                       Plant       Limestone
       Region        Capacity                                       Plant (Company)
                                Production   Consumption                                    Capacity   Requirement
                                                       Northern Region
       Jammu and
                       0.20        0.16         1.01                                                      0.30
       Kashmir                                                JK                                0.2
                                                              ACL (G)                           2.5
       Punjab          4.2         4.46         5.66          ACL (G)                           0.5       6.30
                                                              Grasim (G)                        1.2
                                                              ACC                              3.52
       Himachal
                       5.32        4.81         1.59          CCI                              0.20       7.98
       Pradesh
                                                              ACL                              1.60
       Chandigarh                               0.26                        -                    -
       Uttaranchal                              1.83                        -                    -
       Haryana         0.17                     4.93          CCI                              0.17
                                                              ACC                               0.6
                                                              Birla Corp.                      0.72
                                                              Birla Corp.                      1.28
                                                              Mangalam                          0.4
                                                              Neer Shree                        0.6
                                                              Grasim                           1.75
                                                              J.K. s                            2.8
       Rajasthan      20.73       20.24         8.27                                                      31.10
                                                              J.K. s                           0.75
                                                              J.K. Lakshmi                     2.23
                                                              J.K. Udaipur Udyog                0.9
                                                              Gujarat Ambuja s                  1.8
                                                              Shree CEMENT                      4.5
                                                              Binani                            2.2
                                                              Shriram Works                     0.2
       Delhi           0.5                       3.5          CCI (G)                          0.50       0.75
          Total of
                                                                                                          46.43
        North Zone    31.12       29.67         27.05                                          31.12
                                                        Central Region
                                                              ACC (G)                            2
                                                              Birla Corp. (G)                  0.63
                                                              Mysore Cements (G)                0.5
       Uttar                                                  U.P. State Cement Corp.          0.48
                       7.32        4.88         14.2                                                      10.98
       Pradesh                                                U.P. State Cement Corp.          0.43
                                                              U.P. State Cement Corp. (G)      1.68
                                                              JP Associates (G)                 0.6
                                                              JP Associates (G)                  1
       Madhya         17.68        17.4         6.37          ACC                               1.7       26.52
       Pradesh
                                                              Birla Corp.                       0.8
                                                              Birla Corp.                      0.75
                                                              Century                            3
                                                              Grasim                             3
                                                              Mysore Cements                   1.02
                                                              CCI                               0.4
                                                              JP Associates                     2.5




RR Information & Research                     38                                            Industry Research
                                                                                 Cement Industry


                                                     JP Associates                   2
                                                     Prism Cement                  2.51
         Total of
                                                                                             37.50
       Central Zone   25.00   22.28    20.57                                      25.00
                                               Eastern Region
       Bihar           1      0.46     4.36          Kalyanpur Cements               1        1.5
                                                     ACC                           0.87
                                                     ACC (G)                        0.6
       Jharkhand      4.83    4.16     2.63          Lafarge India Pvt. (G)          3       7.245
                                                     Lemos Cements                 0.11
                                                     Sone Valley Cements           0.25
                                                     ACC (G)                       0.53
                                                     Birla Corp. (G)                0.6
       West Bengal    4.12    3.25     6.59          Birla Corp. (G)                 1       6.18
                                                     Ambuja Cement Eastern (G)       1
                                                     UltraTech (G)                   1
                                                     ACC                           1.58
                                                     Century                        1.8
                                                     Grasim                        2.06
                                                     CCI                            0.4
       Chhattisgarh   10.82   8.64     3.08          CCI                           0.38      16.23
                                                     Lafarge India Pvt.             1.6
                                                     UltraTech                      1.6
                                                     Ambuja Cement Eastern           1
                                                     Lafarge India Pvt.             0.4
                                                     UltraTech (G)                  0.8
       Orissa         3.04    3.31     4.15          OCL India                     1.28      4.56
                                                     ACC                           0.96
       Assam           0.2    0.13     1.09          CCI                            0.2       0.3
       Other N.E.
                       0.2     0.1     0.77                                                   0.3
       States                                        Meghalaya Cement              0.2
          Total of
                                                                                             36.32
       Eastern Zone   24.21   20.05    22.67                                      24.22
                                             Western Region
                                                   Shree Digvijay Cement
                                                   Company                         1.08
                                                   Saurashtra Cement               1.16
                                                   Gujarat Sidhee Cement            1.2
                                                   HMP Cements                      0.2
       Gujarat        17.14   13.56     9.12       UltraTech Cement                 5.3      25.71
                                                   Narmada Cement Co.               0.4
                                                   Narmada Cement Co. (G)           0.7
                                                   ACL                              1.5
                                                   ACL                               3
                                                   Sanghi Indus.                    2.6
                                                   ACC                               1
                                                   Century                          1.5
                                                   Grasim (G)                       1.4
                                                   UltraTech Cement                 3.3
       Maharashtra    11.8    11.38    16.78                                                 17.7
                                                   Narmada Cement Co. (G)           0.4
                                                   Indorama Cement (G)               1
                                                   Orient Cement (G)                0.8
                                                   ACL                              2.4
         Total of
         Western                                                                             43.41
          Zone        28.94   24.94    25.90                                      28.94




RR Information & Research             39                                         Industry Research
                                                                                  Cement Industry


                                             Southern Region
                                                   ACC                              2.11
                                                   ACC                               2.6
                                                   Kesoram Industries                 2
                                                   Grasim                            2.6
       Karnataka     10.89   9.98     9.38                                                   16.335
                                                   Mysore Cements                   0.57
                                                   CCI                               0.2
                                                   HMP Cements                      0.48
                                                   Bagalkot Udyog                   0.33
                                                   Malabar Cements                  0.42
       Kerala        0.62    0.68      6.5                                                    0.93
                                                   Malabar Cements (G)               0.2
                                                   ACC                              0.96
                                                   Grasim                           1.03
                                                   India Cements                    1.55
                                                   India Cements                    0.72
                                                   India Cements                     1.3
                                                   India Cements                     0.4
       Tamil Nadu    14.56   14.29    11.1         Tamil Nadu Cements Corp.          0.5      21.84
                                                   Madras Cements                   0.75
                                                   Madras Cements                   3.12
                                                   Chettinad Cement Corporation      0.6
                                                   Chettinad Cement Corporation      1.2
                                                   Dalmia Cements (B)               1.23
                                                   UltraTech Cement (G)              1.2
                                                   ACC                              0.33
                                                   Kesoram Industries                0.9
                                                   Orient Cement                     1.6
                                                   Zuari Cement                      2.2
                                                   CCI                               0.4
                                                   CCI                                1
                                                   Andhra Cements (G)               0.24
                                                   Andhra Cements (G)                0.5
                                                   Andhra Cements                     1
                                                   India Cements                     1.3
                                                   India Cements                    1.12
       Andhra                                      India Cements                    0.52
                     24.89   19.94    11.46                                                  37.335
       Pradesh
                                                   India Cements                     2.3
                                                   Sri Vishnu Cement                 1.2
                                                   Madras Cements                    1.6
                                                   UltraTech Cement                  2.3
                                                   Kistna Cements                   0.21
                                                   The K.C.P.                       0.58
                                                   Panyam Cements & Mineral
                                                   Inds.                            0.53
                                                   Rain Industries                    1
                                                   Penna Cement Industries           1.5
                                                   Penna Cement Industries            1
                                                   My Home Indus.                   1.56
       Pondicherry                    0.33
       GOA                            0.49
          Total of
         Southern    50.96   44.89    39.29                                        50.96      76.44
           Zone




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RISK & CONCERNS
Rising input costs
      POWER & FUEL
      Prices and Quantity are regulated and are revised upwards regularly. Further, given the shortage of
      energy future de-regulation of coal sector could be a risk factor. Adding to this, electricity prices are
      also witnessing pressure.
      TRANSPORTATION COST
      Rising fuel cost resulting in higher road and rail transportation cost.

Lower than expected growth in demand
      Any lower than anticipated cement demand growth will result in overcapacity in the industry, there by
      prices may head southwards. This will significantly affect earnings of cements manufacturers.

Large scale capacities addition in gulf countries
      India’s major cement exporting destination, Middle East, is adding huge cement capacities that are
      estimated to be around 70 mtpa. This will significantly affect India’s cement exports to gulf countries.

MRTPC alleges on 14 cement manufacturers
      India's trade practices regulator MRTPC had ordered a probe into the business practices of 14 leading
      cement manufacturers. The companies that are to be investigated include all the big guns like ACC,
      Ambuja Cement, India Cement, Ultra tech cement, Grasim and other smaller players like Sanghi
      Industries, Birla Corporation, Zuari Cement, Binani Industries, NCL Industries, Saurashtra Cement and
      JK Cement. The Director General of Investigation and Registration (DGIR) which is MRTPC's
      investigative wing submitted its preliminary report alleging that these manufacturers colluded to hike
      cement prices. The companies have time till October 25 2007 to reply to these charges.

Access to Finance
      Cement is a capital-intensive industry; Rs.3500/tonne is required for capacity addition. Cement
      industry has planned huge capex in the coming years, for which they will require huge capital.
      However, rising interest rates have created concern for the industry.




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CONCLUSION
      Based on our study we found a close relation between profitability of cement companies and capacity
      utilization. When capacity utilization inches towards 90% level; the cement prices tend to move
      upwards. Higher prices coupled with higher volumes, drives profitability of cement companies.
      When the capacity utilization reaches near its peak, any addition of fresh capacity takes time hence,
      prices move upwards. During the last three years, cement consumption grew at 9.5% CAGR, whereas
      capacity grew at CAGR of 5% only. This pushed prices up from close to Rs.150 /kg in FY2004-05 to
      Rs.230-250 per kg in FY2006-07.
      Going forward, cement consumption is expected to grow at a CAGR of more than 12% during
      FY2007-10E, led by following factors: -
                                                                                                th
         GOI has planned to almost double its spend on infrastructure to RS.19.3trillion for 11 five year
                                                     th
         plan against Rs.7.7 trillion spent during 10 five year plan. This will drive cement consumption
         from the infrastructure sector at a CAGR of 24-25%.
         Cement consumption from industrial and commercial sector is expected to grow at a CAGR of 9-
         10% driven by growing demand for industrial and retail space.
         Growing housing demand will lead to 7-8% growth in cement consumption.
      On the other hand, capacity is expected to grow at 11% during FY2007-10E. Though industry have
      planned to add over 100 mtpa capacity by FY2010-11, however considering issues like acquisition of
      limestone reserves, land acquisition, environment clearance etc. industry will add a capacity of 70
      mtpa by 2009 and 87 mtpa by 2010.
      However, we believe that cement producers are likely to see cost pressure ahead, particularly on raw
      material, power and fuel cost. The moots questions remain that will the cement manufacturers be able
      to pass on the increasing cost to the end consumer. We can take a cue from what happened during
      Q1FY2006, when industry was operating at close to 92% level, where in cement players had largely
      passed on the 20-25% hike in freight cost to the end consumer.
      Other factors such as imported cement will not impact the prices as the landed cost of imported
      cement will be closer to prevailing prices due to higher freight cost.

                                                                 Housing (60%) @ 7-8%

                                                                                                    @ 12%
                                     Demand                      Construction (20%) @ 9-10%

                                                                 Infrastructure(20%) @ 24-25%


       Growth                          Supply                    @ More than 11%


                                     Capacity                               85-90% level
                                     Utilization


                                       Others                  Low Impact

                                                               Attractive
                                       Valuations

      With, both demand and supply are expected to grow neck to neck; cement industry will continue to
      operate at close to 90% level and party of rising prices for cement players may not end in the near




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      future. Industry will be able to pass on the increase in raw material to the consumers. High growth in
      volumes will drive the industry profitability to new highs.

Sensitivity Analysis
      We have done a sensitivity analysis to see the impact of growth in installed capacity and in cement
      consumption on capacity utilization. This will in turn reflect the future movement of cement prices.
      Following three scenarios have been analyzed –
          Pessimistic: Consumption growth @ 10%, Capacity growth @ 12%.
          Realistic: Consumption growth @12%, capacity growth @ 11%.
          Optimistic: Consumption growth @13%, capacity growth @ 10%.

                                                  Capacity Utilization
                                                        Capacity Growth Rate (%)
                                   10%                               11%                             12%
      Consumption
      Growth Rate       2007    2008     2009    2010     2007     2008   2009    2010      2007   2008   2009 2010
           10%           90.1   90.1     90.1    90.1      89.3    88.5    87.7    86.9     88.5   86.9    85.4   83.8
           11%           90.9   91.7     92.6    93.4      90.1    90.1    90.1    90.1     89.3   88.5    87.7   86.9
           12%           91.7   93.4     95.1    96.8      90.9    91.7    92.6    93.4     90.1   90.1    90.1   90.1
           13%           92.6   95.1     97.7 100.3        91.7    93.4    95.1    96.8     90.9   91.7    92.5   93.4


                                           Sensitivity Analysis
                 105

                 100

                  95

                  90

                  85

                  80
                                Pessimistic            Realistic      Optimistic
                  75
                            2007                2008               2009              2010

      Even in the worst-case scenario, the capacity utilization is 83.8% at the lowest level. In case of
      realistic scenario, the levels are always above 90%. The past trends strongly indicate that cement
      prices move northward when capacity utilization breaches the 90% level. So, there is hardly any scope
      for the prices to drop by any reasonable levels.
      We believe that companies that are likely to do well are companies that -
                  have significant higher volume growth lined up.
                  have head room for improving efficiency and cutting cost.
                  offer head room in terms of valuation.
      We initiate coverage on companies that have taken lead in capacity expansion such as ACC, ACL
      India Cement, JK cement, JK Laxmi and Madras cement. Further stocks that have leverage to cement
      volumes, scope for improvement in efficiency and head for valuation are likely to do well. We rate JK
      Cement as pick of the sector with a BUY rating.




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MAJOR PLAYERS IN THE INDUSTRY
ACC
      BACKGROUND
      ACC Limited was incorporated in the year 1936. It came into existence consequent to ten existing
      cement companies belonging to four prominent business groups - Tatas, Khataus, Killick Nixon and F
      E Dinshaw groups joining together under one umbrella in a historic merger - the country's first notable
      merger at a time when the term mergers and acquisitions was not even coined.
      The house of Tata was intimately associated with ACC right from the beginning. Between the years
      1999 and 2000, the Tata group sold all its shareholding in ACC in three stages to subsidiary
      companies of Gujarat Ambuja Cements Ltd (GACL). Later a new association was forged between
      ACC and Holcim group of Switzerland in 2005.
      Holcim is the world leader in cement as well as being large suppliers of concrete, aggregates and
      certain construction-related services. The group has worldwide operations spread across more than
      70 countries. Considering the formidable global presence of Holcim and its excellent reputation, the
      Board of ACC has welcomed this new association. Accordingly, Holcim entered into a strategic
      alliance with the Ambuja Group by acquiring a majority stake in Ambuja Cements India Ltd. (ACIL),
      which at the time held 13.8 per cent of the total equity shares in ACC. Holcim simultaneously
      announced its bid to make an open offer to ACC shareholders, through Holdcem Cement Pvt Limited
      and ACIL, to acquire a majority shareholding in ACC. Accordingly more than 33% equity shares of
      ACC are held by ACIL. Now ACIL has become a private limited company as Ambuja Cements India
      Pvt. Ltd (ACIPL). Consequently, ACIPL has filed declarations indicating their shareholding and
      declaring itself as a promoter of ACC.
      ACC is India's foremost manufacturer of cement and concrete. The company has been a trendsetter
      and important benchmark for the cement industry in respect of its production, marketing and personal
      management process. The company has 14 cement plants all over India, three refractory plants and 6
      Ready Mix Concrete plants near to four metro cities of India. It has also extended its services
      overseas to the Middle East, Africa and South America, where it has provided technical and
      managerial consultancy to a variety of consumers, and also helps in the operation and maintenance of
      cement plants abroad.
      The company has won PHDCCI's good Corporate Citizen Award for the year 2001-02 and bagged the
      Enterprise Excellence Award for the year 2002-03 from the Indian Institute of Industrial Engineers.
      Over the years the company has made several acquisitions and divestments for their business
      development. The company has also carried out several expansions and modernization works to meet
      the competition and improve the quality of the products. The company diversified its business activity
      and entered into new business whenever the time needs and also came out from unviable businesses.
      The company has adequately insulated itself from distribution in power supply by meeting around 75%
      of its power requirement through captive generation.
      ACC is the largest player in the Indian cement industry with 12% market share and an installed
      capacity of 20.02 mtpa spread across all the five regions. The diversified production capacity enables
      ACC to cater to all the major consuming states as well as exploit its natural resources.
      LATEST RESULTS
      For the quarter ended June ’07 ACC has reported 27% growth in net sales to Rs 1867.95 crore. As a
      percentage of sales (net of stock adjustment) raw material cost, staff cost, power & fuel cost, freight
      expenses has declined to 11.16%, 5.14%, 15.68% and 13.84% respectively. (Last year: 11.18%,
      6.13%, 16.69% and 14.35%) However cost of cement & other products purchase and other expenses
      has increased to 1.56% and 22.83% respectively. (Last year: 1.03%, and 19.77%) Thus operating
      profits margins have fallen by 280 basis points to 29.1%. Operating profit has reported growth of 16%
      to Rs 544.4 crore.




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      Other Income has surged by 132% to Rs 28.3 crore. Provision for depreciation has increased by 9% to
      Rs 63.24 crore. PBT before EO has increased by 25% to Rs 511.63 crore. There was no extraordinary
      income in the quarter under review. However in the corresponding quarter in previous year there was
      an extraordinary income of Rs 146.62 crore (representing profit from sale of land & undertakings and
      profits from divestment on Everest Industries) Thus, PBT after EO was down by 8% to Rs 511.63
      crore. The provision for tax has increased by 13% to Rs 160.39 crore. Thus, net profit of the company
      have reported decline of 15% to Rs 351.24 crore.
      KEY POINTS
          ACC’s key strength lies in its market coverage. It has 14 plants spread across the whole country
          that mitigates the risk arising out of unfavorable demand supply situation in a specific region.
          ACC’s plants are located close to the cement manufacturers as well as raw material reserves.
          This helps ACC in transportation cost savings.
          Projects for augmentation of grinding capacities at Sindri and Wadi are in progress. Expansion of
          capacity at Bargarh by 1.18 M.T. alongwith a 30 MW Captive Power Plant is moving as
          scheduled. The project for expansion of New Wadi plant by a further 3.0 M.T. has been taken up.
          ACC is gearing to capture the booming Indian market by increasing its cement capacity. Close to
          7.5 mtpa of cement capacity will be added in the coming three years.
          ACC has tightened its belt for cost reduction. It has converted its wet process plant at Chaibasa in
          Jharkhand to a dry one, further it is setting up 70 MW power plants at Chaibasa, Lakhri and
          Bargrh. Company has also undertaken other efficiency programmes such as setting additional
          turbine at its Kymore plant to enhance power generation capacity, improve fly ash absorption rate
          at its plants in Wadi, Kymore, Gagal and Tikaria, increasing use of alternative fuels across plants.
          This will help ACC to improve its EBITDA margin.

Ultra Tech
      BACKGROUND
      UltraTech Cement Ltd (Formely UltraTech Cemco Ltd )is a subsidiary of Grasim Industries Ltd, the
      flagship company of the Aditya Birla Group. UltraTech Cemco was formed to carry on the cement
      business hither to carried on by Larsen and Toubro. The cement division of L & T came to UltraTech
      Cemco effective from 24th August 2004. The company was incorporated in the year 2000.
      Ultratech Cemco is the second largest in the Indian Cement industry by capacity, with installed
      capacity of 17 mtpa. Company has close to 9.5% share of total cement market and caters to Eastern,
      Western, Southern markets.
      The company produces Portland cement, Portland Blast Furnace slag cement, Portland Pozzolana
      cement and Grey Portland cement. Ultratech has five integrated plants, five grinding units and three
      terminals two in India and one in Sri Lanka.
      UltraTech has five integrated plants, five grinding units and three terminals — two in India and one in
      Sri Lanka. These include an integrated plant and two grinding units of the erstwhile Narmada Cement
      Company Limited, a subsidiary, which has been amalgamated with the company in May 2006.
      UltraTech is the country's largest exporter of cement clinker. The company exports over 2.5 million
      tonnes per annum, which is about 30 per cent of the country's total exports. The export markets span
      countries around the Indian Ocean, Africa, Europe and the Middle East.
      The cement division of L&T was demerged in 2004 after Grasim made the 30 per cent open offer for
      equity shares, gaining control over the new company, christened UltraTech. Besides the long term
      strategic value in the wake of rising demand for cement, with the growth of housing and infrastructure
      sectors in the country, the acquisition brings significant synergy gains to the parent company.




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      Ready Mix Concrete is likely to see substantial growth in the coming years. Recognising the
      opportunities that this business will offer, UltraTech has commenced setting up of Ready Mix Concrete
      plants at various places in the country.
      UltraTech's subsidiaries are: Dakshin Cements Limited and UltraTech Ceylinco (Private) Limited.
      LATEST RESULTS
      For the quarter ended June’07 Ultra Tech Cement has reported 16% growth in net sales to Rs
      1365.27 crore. The Company produced 3.91 million tonnes of cement, up by 1%. The effective
      capacity utilization was 104%. While domestic sales volume at 3.67 million tonnes registered a growth
      of 5 %, exports were curtailed to cater to the growing domestic demand.
      As a percentage of sales (net of stock adjustment) raw material cost, payment to & provision for
      employees and other expenses has increased to 8.69%, 2.32% and 13.13% respectively. (Last year:
      7.68%, 2.31% and 11.37%). However as a percentage of sales cost of finished goods purchased,
      power & fuel cost and freight cost has declined to 1.01%, 22.4% and 20.39% respectively. (Last year:
      2.17%, 23.99% and 20.63%). The, OPM has improved marginally by massive 10 basis points to
      31.8%. Operating profit was up by 16% to Rs 433.53 crore.
      Other Income has increased by 101% to Rs 26.89 crore. Interest expenses have decline by 11% to Rs
      20.15 crore while provision for depreciation have increased marginally by 3% to Rs 55.86 crore. Thus,
      PBT was up by 24% to Rs 384.41 crore. Provision for tax has increased by 25% to Rs 125.03 crore.
      Net profit was up by 23% to Rs 259.38 crore.
      KEY POINTS
                  UTCL is setting up a 92 MW power plant in Gujarat and 50 MW power plant in
                  Chattisgarh, expected to be completed by the end of FY2008 which would result in
                  significant savings of power cost of Rs 1.5bn pa from FY2009 onwards. UTCL is also
                  setting up another 46 MW thermal power plant in Andhra Pradesh to be used for
                  upcoming capacity expansion.
                  UTCL enjoys significant savings on logistic front due to synergies with Grasim, which is
                  expected to result in savings of about Rs 1bn in the next two years. Also company's
                  attempt of improving blending ratio will help reduce cost due to higher blending.
                  UTCL is in the process of various efficiency improvements programmes, such as power &
                  fuel efficiency, de-bottlenecking and ready mix concrete (RMC) plants involving capex of
                  Rs 3bn, 2.2bn and 600mn respectively that will drive EBITDA margin up.
                  The Board of UTCL has approved setting up a 33 MW TPP at the Company’s Unit in
                  Awarpur, Maharashtra. Further, the grinding capacity at the Unit in Gujarat is also being
                  augmented by 2 million tonnes per annum to cater to the markets of Western India.
                  Modern, large and efficient asset base.

Ambuja Cement Ltd
      BACKGROUND
      Ambuja Cements Ltd (ACL) started out as a joint sector co. with public sector Gujarat Industrial
      Investment Corporation (GIIC) and Narottam Sekhsaria & Associates in 1981. Later with private
      partners buying out GIIC's stake, the company became a private sector venture. It is having seven
      cement plants at Ambujanagar (Gujarat), Darlaghat (Himachal Pradesh), Upperwahi (Maharashtra),
      Rabriyawas (Rajasthan), Daburji (Punjab), Bhatinda district (Punjab) and Ropar (Punjab).
      The company is the most cost efficient cement manufacturer in the country. It has shown innovation in
      utilizing measures like sea transport, captive power plants, and imported coal and availing of govt.
      sops and subsidies to constantly check the costs. It has also been a major player in exports of cement.




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      The company has fully capitalised on the consolidation wave sweeping the cement sector and has
      acquired Modi Cement (now renamed Ambuja Cement Eastern) and DLF Cement (now renamed
      Ambuja Cement Rajasthan). It has also bought out 14.4% stake held by Tatas in ACC.
      As a measure of financial restructuring, it created Ambuja Cement India (ACIL) and gave a 40% stake
      in ACIL to AIG Asian Institutional Fund II, L.P., GIC Special Investments Pte Ltd, and the AIG Asian
      Opportunity Fund, ('AAOF'). It has transferred its investments in ACC and Gujarat Ambuja Eastern and
      its green field project in Andhra Pradesh to ACIL.
      GAC has entered into a partnership with Holcim Ltd of Switzerland through Ambuja Cement India Ltd
      (ACIL) during 2004-05. Holcim is holding 67% equity stake of ACIL. Consequent to this, ACIL has
      ceased to be a subsidiary company.
      The company has 15.23 mtpa of installed capacity of Cement. GACL has a total market share of more
      than 10.5% and capture close to 20% of Northern as well as Western region’s market.
      LATEST RESULTS
      For the quarter ended June’07 Ambuja Cements has sold 43.84 lakh tonnes of cement as against
      43.91 million tonnes in the corresponding quarter of the previous year, representing marginal decline
      of 0.2%. Average realisations during for the quarter works out to Rs 3340 crore, Y-o-Y up by 12%. Due
      to improvement in realisations revenues has increased by 11% to Rs 1464.36 crore
      As a percentage of sales (net of stock adjustment) staff cost and power & fuel cost have declined to
      2.98% and 16.28% respectively. (Last year: 3.07% and 17.04%). However as a percentage of sales
      raw materials cost, freight charges and other expenses has increased to 7.3%, 20.82% and 15.45%
      respectively. (Last year: 6.48%, 19.25% and 14.99%) Thus, operating profit margins have fallen by
      200 basis points to 37.2%. Due to fall in margins operating profit has slowdown at 6% to Rs 545.31
      crore.
      The company has reported positive other income of Rs 48.67 crore as compared to negative other
      income of Rs 6.38 crore in the corresponding quarter in previous year. The turnaround in other income
      was on account of forex gain of Rs 30.84 crore as compared to forex loss of Rs 18.55 crore in the
      corresponding quarter in previous.
      The company has reported a net interest income of Rs 21.06 crore as compared to net interest
      expenses of Rs 12.87 crore. Provision for depreciation has increased by 3% to Rs 58.3 crore. Thus,
      PBT have reported a growth of 27% to Rs 556.74 crore. Provision for tax has increased by 37% to Rs
      153.17 crore. Net profit of the company before EO was up by 23% to Rs 403.57 crore.
      In the quarter under review company had an extraordinary income of Rs 474.18 crore representing
      profits on profit on sale of its property at Kalina and profit on sale of shares of Ambuja Cement India to
      Holderind Investments. Thus net profit of the company after EO has zoomed by 168% to Rs 877.75
      crore.
      KEY POINTS
                  The company has capital expenditure plans for about Rs 3500 crore during the next two to
                  three years, for augmenting cement capacity by about 6 million tonnes.
                  ACL is in the process of setting up a 60 MW captive power plant in Gujarat to replace its
                  furnace oil based CPP. The first phase of the thermal power plant has commissioned
                  during Q1 FY2007, providing 30 MW of power generating capacity.
                  During Q1 FY2007, the company has also commissioned its new one million tonne
                  cement-grinding unit at Farakka in West Bengal.
                  Company is also adding one million tonne of cement grinding unit at Roorkee in
                  Uttarakhand, which is expected to commence production in Q2 FY2007.
                  The work of upgradation on the cement plant at Rabriyawas in Rajasthan is progressing
                  well and will also be commissioned during Q2 FY2007. With this, the clinkering capacity at
                  Rajasthan will increase from the current 1.5 million tonnes to 2 million tonnes annually.




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                  Work is ongoing for the clinker expansion projects at Bhatapara and Rauri, and
                  associated split grinding units. In addition, captive power projects at the plants in
                  Rabriyawas, Ropar, and Maratha, which will deliver in total 178 MW of capacity, are
                  currently at various stages of completion.
                  The sea-borne bulk cement transportation facilities of ACL have brought many coastal
                  markets within the easy reach. It has also made Ambuja India's largest exporter of cement
                  consistently for the last five years.
                  Strong track record of the management.
                  ACL is likely to benefit immensely from Holcim's India strategy.
                  Merger with ACEL will help to make its presence in high growth Eastern region market.
                  ACL recently launched fly ash blended cement in its major markets Gujarat, Rajasthan
                  and Maharashtra that may help company to take its blending ratio to 1.4x from current
                  1.3x. This will provide the much needed volume growth for the company.

India Cement
      BACKGROUND
      India Cements Ltd(ICL) was established in Feb.'46, it is a diversified company with interests in
      cement, shipping and real estate development. The first cement unit was commissioned in 1949 at
      Sankarnagar, Tamilnadu. By 1970, the capacity was raised to 9.1 lac tpa. The second cement plant at
      Sankari, Tamilnadu, was commissioned in 1963, with a capacity of 2 lac tpa, which was increased to 4
      lac tpa in 1966 and to 6 lac tpa in 1971.
      The subsidiaries of the company are ICL Securities Ltd, ICL International Ltd, Industrial Chemicals &
      Monomers Ltd and ICL Financial Services Ltd.
      In 1990 with ICL's acquisition of Coromandel Cement plant at Cuddapah, installed Capacity rose to
      2.6 million tonnes per annum. During 1991-92, the company started shipping activities by time-
      chartering dry bulk-cargo carriers. In 1994 ICL successfully floated a US$ 50 million GDR issue. In
      1995 it announced a 1:1 Bonus. It acquired its fifth bulk carrier in 1995. The company is also engaged
      in real estate and property development and it also has a wind farm in Coimbatore.
      In 1996 ICL's green field cement plant at Dalavoi commenced commercial production with an Installed
      capacity 90,000 TPA. In 1997 India cements acquired Aruna Sugars Finance Ltd which was later
      renamed as India Cements Capital & Finance Ltd. It also acquired Cement Plant of Visaka Cement
      Industry, at Tandur, Ranga Reddy district of Andhra Pradesh with Installed capacity 9,00,000 Tonnes.
      The cement division of Raasi Cement (RCL) was vested with the company from Apr.'98 under a
      scheme of arrangement. Also during the same year the company hived off its shipping division to ICL
      Shipping (ICLS). It also acquired Cement Corporation of India's Yerraguntla Cement Plant at Andhra
      Pradesh with an Installed capacity 4,00,000 Tonnes.
      In Oct.'99, ICL Securities, the company wholly owned subsidiary acquired 49.05% of the equity share
      capital in Sri Vishnu Cement (SVCL), simultaneously, Rassi Cement also acquired 39.5% of the equity
      capital of SVCL. At present the company along with its subsidiary holds 94.16% of the share capital of
      SVCL and is now a subsidiary of the company.
      During 2001-02, the company has launched a portal 'homztoday.com' containing A to Z on home
      making. This is a comprehensive web site focusing on a variety of home needs and providing various
      categories of users information ranging from property purchase to locating any type of service provider
      to homes.
      During 2004-05, the unique Waste Heat Recovery System for generation of power from waste gas at
      Vishnupuram plant was commissioned with generating power of 7.7MW. Currently, the plant locations
      of the company are at Sankarnagar, Sankari and Dalavoi in Tamilnadu, Chilamakur, Yerraguntla and
      Vishnupuram in Andhra Pradesh.




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                                                                                       Cement Industry

                          th
      India Cement, the 5 largest cement producer, has 8 plants located in Tamil Nadu and AP with an
      installed capacity of 8.8 mtpa, as on March 2007. The Company is the largest producer of cement in
      South India. The Company is the market leader with a market share of 28% in the South. It aims to
      achieve a 35% market share in the near future. The Company has access to huge limestone
      resources and plans to expand capacity by de-bottlenecking and optimization of existing plants as well
      as by acquisitions.
      LATEST RESULTS
      For the quarter ended June’07 India Cements have reported 45% rise in net sales to Rs 701.18 crore.
      The Company operated its plant at capacity utilisation of 104% during the quarter. Cement sales was
      at 23.06 lakh tonnes reporting an increase of 25%
      As a percentage of sales (net of stock adjustment) staff cost and transportation & handling expenses
      have increased to 4.58% and 15.33%. (Last year: 4.29% and 15.17%). However as a percentage of
      sales raw material cost, power & fuel cost, and other expenses have decreased to 10.44%, 21.6% and
      10.14% respectively. (Last year: 11.03%, 24.27% and 11.95%). Despite the increase in the input cost
      of materials particularly in the prices of coal and gypsum and wages of employees through a long-term
      wage agreement, the Company could contain the overall cost of production through significant
      economies in operation. The power consumption per tonne of cement was brought down by 2 units
      with a check on the power cost through availment of power from low cost power sources.
      The OPM has improved by 360 basis points to 37.7%. Surge in revenues coupled with improvement in
      margins have led to 60% growth in operating profits to Rs 264.29 crore. This improvement in
      performance was due to combined impact of higher sales volume, further improvement in selling
      prices and through operating efficiencies
      Other income of the company has zoomed by 79% to Rs 9.73 crore. Interest expenses have declined
      by 19% to Rs 31.4 crore and depreciation has increased by 43% to Rs 27.48 crore. The PBT for the
      quarter stood at Rs 215.14 crore as compared to Rs 112.87 crore in the corresponding quarter in
      previous year there by posting a growth of whopping 91%.
      The company had made provision for tax of Rs 31.74 crore as compared to Rs 0.28 crore
      (representing FBT) in corresponding quarter in previous year. Finally, PAT for the quarter stood at Rs
      183.4 crore as compared to Rs 112.59 crore in corresponding quarters in previous year thus posting a
      growth of 63%.
      KEY POINTS
                  The Company has taken on hand various projects to modernise and upgrade its existing
                  plants. The Company is also setting up an additional line of 1.2 million tonnes capacity at
                  its Malkapur Unit and the project will be funded through the internal generation. The
                  conversion from Wet Process to Dry Process at Sankari is also on the advanced stage of
                  completion and the plant is expected to be commissioned before September ’07. Work is
                  apace on two 1 million tonne grinding plants at Chennai (Tamil Nadu) and Parli
                  (Maharashtra). The overall capacity of the Company with all these projects on hand,
                  would go up to 14 million tonnes from the current level of 8.9 million tonnes in phases
                  within the next 18 months. With better blending and through supplementing / outsourcing
                  of clinker, effectively the company will be capable of producing up to 15 million tonnes per
                  annum.
                  The Company’s plans of setting up a Cement Plant in Himachal Pradesh is also under
                  way with feasibility studies being conducted. The Company is also actively pursuing its
                  efforts in obtaining mining lease in Rajasthan and Madhya Pradesh for setting up plants in
                  these states.
                  The Company has a strong distribution network with over 10,000 stockists of whom 25%
                  are dedicated.




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JK Laxmi Cement
      BACKGROUND
      JK Corp,(formerly Straw Products), the flagship of Hari Shankar Singhania, which was originally
      incorporated in 1938 to manufacture Straw Board from Wheat straw has grown into a multi-product
      corporation by diversifying into manufacture of paper, Cement, Magnetic Tapes, Polyester Staple
      Fibres(PSF) and Polyester Filament Yarn(PFY).
      Lakshmi Cement, the cement division of the company which commenced production with an installed
      capacity of 5 lac tonne at Sirohi,Rajasthan was set up in Rajasthan in 1982 has enhanced the capacity
      to 15 lac tonne in 1996-97 and further to 19.69 lac tonne by March 1999. The capacity currently
      stands enhanced to 24 lac tonne by way of debottlenecking.
      JK Laxmi Cement is a lead player in north India. Rajasthan and Gujarat account for 70% of JK
      Lakshmi Cement’s sales, while Mumbai accounts for 8%. As on March 2007 the company has an
      installed capacity of 3.13. The company has impeccable brand positioning in the market.
      LATEST RESULTS
      For the quarter ended June’07 JK Lakshmi has reported 18% growth in dispatches to 8.86 lakh
      tonnes. Strong growth in volumes was on primarily due to capacity addition carried out by the
      company. Average realisations during the quarter have improved by 20% to about Rs 3007 per tonne.
      Increase in volumes coupled with improvement in realisations has led to 41% growth in revenues to
      Rs 266.42 crore.
      As a percentage of sales (net of stock adjustment) raw material cost, staff cost and transport charges
      has increased to 11.26%, 4.54% and 16.56% respectively. (Last year: 10.3%, 4.42% and 15.15%)
      However as a percentage of sales cost of spares & packing materials consumed, power & fuel cost
      and other expenses has decreased to 6.11%, 22.71%, and 6.25% respectively. (Last year: 6.59%,
      25.54% and 7.32%). Decline in power cost has been due to commissioning of Captive Thermal Power
      plant. The OPM have improved by 80 basis points to 32.3%. Growth in revenues coupled with
      improvement in margins has led to 45% jump in operating to Rs 85.94 crore.
      Other Income has increased by whopping 338% to Rs 2.06 crore. Interest expenses have declined by
      22% to Rs 4.9 crore on account of pre-payment of high cost debts. Provision for depreciation has
      increased by 33% to Rs 14.52 crore on account of capacity expansion carried out by the company.
      PBT was up by 60% to Rs 68.58 crore. Decline in provision for tax by whooping 97% to Rs 0.12 crore
      has accelerated net profit growth at 76% to Rs 68.46 crore.
      KEY POINTS
                  The company has recently added a 36-MW captive thermal power project, which
                  is now fully operational. As a result, the company is expected to save about
                  Rs.22-23 crore (Rs 1/- per unit) annually. The company is likely to emerge as self-
                  sufficient in its power requirement.
                  The company has also prepaid its high-cost debt worth Rs.3 bn, substituting it
                  with a lower cost funding.
                  The company is expanding it cement capacity by 3 mtpa, which is likely to commence
                  production by Q1 FY2009.
                  The company is pursuing the ready mixed concrete (RMC) business aggressively. It is
                  already operating five RMC plants and plans to add at least another five to six plants in
                  the coming financial year.




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Madras Cement
      BACKGROUND
      Madras Cements Ltd(MCL), a flagship of the Ramco group, is a major player in the blended cement
      category in South India and is very popular for its Ramco brands of cements like `Ramco super steel
      cement' and `Ramco super grade cement'. It also operates a ready mix concrete plant (RMC) near
      Chennai.
      Between 1980 and 1985, it undertook a modernisation programme and replaced its four cement mills
      in R N Nagar, Tamilnadu, with a single new combined cement mill which ensured substantial reduction
      in energy and operation costs. In 1986, MCL implemented one more cement plant in Jayanthipuram,
      Andhra Pradesh.
      In 1990-91, the company expanded the capacity of its factory by 100000 tpa at an estimated cost of
      Rs 21.5 cr. In 1992-93, it diversified into power generation by setting up a 4-MW windmill at
      Muppandal in Kanyakumari, Tamilnadu, which was upgraded by adding eight wind turbines of 250 kW,
      thereby taking the generation capacity to 6 MW. In 1994-95, 70 additional wind mills were installed in
      Poolavadi, TN. The total Installed capacity of these plants, consisting 123 Wind Energy Generators is
      34.44 MW. During 2004-05, The company commissioned a 36 MW Thermal Power Plant at Alathiyur.
      The company, for the first time in India, commissioned a surface mine to modernise the mine
      operations at Ramasamyraja Nagar factory. The company received ISO 9002 certification for its units
      in Ramasamyraja Nagar, Alathiyur and ready mix concrete unit in Vengaivasal.
      During 1999-00, the company's slag grinding project at Jayanthipuram for manufacture of belnded
      cement was commissioned and also the capacity of the Alathiyur unit was expanded by 0.2 million
      TPA. The company's second unit at Alathiyur with a capacity of 15 lac tonnes at an estimated cost of
      Rs 300 crore was commissioned upto the clinkerisation in Jan.'01. The cement mill was commissioned
      in May '01. The klin fitted with cross bar cooler, the first of its kind outside US and the Vertical mill for
      cement grinding, the highest of its kind in Asia set up in Alathiyur Unit.
      The company took over the assets of Karnataka Minerals & Manufacturing Co, a mini cememnt plant
      situated at Mathodu, Hosadurga Taluk, Chitradurga Dist. The second klin at R R Nagar was upgraded
      in May'01 with the installation of fixed inlet segment to the cooler, new calciner and modifying
      preheater cyclone, thereby increasing the capacity of the unit to 11 lac TPA of blended cement.
      Madras Cements is the second largest cement player in the southern region next to India Cements. It
      is also one of the most cost-effective producers of cement in the country.
      LATEST RESULTS
      For the quarter ended June 2007 Madras Cement has reported a 13% growth in dispatches to 1382
      thousand tonnes. Average realisations during the quarter have improved by 22% to about Rs 3397
      /tonnes. Increase in volumes coupled with improvement in realisations has led to 38% jump in revenue
      to Rs 469.37 crore.
      As a percentage of sales (net of stock adjustment) raw material cost, power & fuel cost and other
      expenses has fallen to 12.15%, 18.41% and 11.66% respectively. (Last year: 12.87%, 19.39% and
      12.81%). However staff cost and transportation & handling charges has increased to 4.09% and
      14.5% respectively. (Last Year: 3.64% and 12.43%). Thus OPM has declined by 10 basis points to
      38.9%. Due to growth in revenues operating profit has increased by 34% to Rs 182.75 crore.
      Other Income have decline by 30% to Rs 2.02 crore. Interest expenses have increased by 92% to Rs
      8.02 crore while provision for depreciation has increased by 38% to Rs 23.93 crore. PBT have
      increased by 30% to Rs 152.78 crore.
      Provision for tax has increased by 34% to Rs 52.22 crore. Finally, PAT for the company stood at Rs
      100.56 crore as compared to Rs 78.85 crore in corresponding quarters in previous year, up by 28%.




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      KEY POINTS
                  The Company is establishing additional clinkering facility at Jayanthipuram by installing a
                  4000 TPD kiln. The clinkering process will be integrated with the existing production
                  facilities, leading to an increase of cement manufacturing capacity by 2 million TPA. The
                  estimated project cost is Rs.507.00 crores. The project is slated to be commissioned in
                  September 2007.
                  The Company is setting up a cement project near Ariyalur with a capacity of 2 million TPA.
                  To substantially meet the power requirements of the project, the Company is also
                  installing Wind Electric Generators for an aggregate capacity of 56.70 MW. The estimated
                  project cost, including the cost of installing the Wind Electric Generators, is Rs.967.00
                  crores. The project is slated to be commissioned in June 2008.
                  The Company is proposing to establish Grinding Units in the States of Tamil Nadu,
                  Andhra Pradesh and West Bengal. Establishment of grinding units near the fly ash
                  availability areas/major cement consumption areas will help the Company in economizing
                  transportation costs and better servicing of markets.



Comparison between top players
      As discussed earlier, we believe that companies that are likely to do well are companies that -
                  have significant higher volume growth lined up.
                  have head room for improving efficiency and cutting cost.
                  offer head room in terms of valuation.
                                                             Growth                     Latest
                              Current      % Change in                      OPM
      Company                                                  (%)                       P/E       EV/Tonne
                              capacity      Capacity                   (as on200706)
                                                           (Quarterly)                  Ratio
      ACC                    20.19                37.5        28.7          29.1         14.2            9070.8
      ACL                    15.20                47.9        11.5          37.2         14.3           13360.6
      Ultratech              17.00                14.7        15.7          31.8         12.8            7122.0
      India Cement            8.80               45.4         44.5          37.7         10.5            7894.0
      JK Cement               4.40               240.9        16.8          29.1          5.6            3342.6
      JK Laxmi                3.10               95.8         41.2          32.3         3.8             4390.0
      Madras Cement           5.50               82.3         37.7          38.9         12.1            8409.2
      We have selected JK Cement as pick of the Industry due to the following reasons: -
                  It has Largest Capacity Addition Plan, providing significant volume growth.
                  It is extremely undervalued.
                  It has reasonably good profit margins, which are expected to improve further because its
                  cost cutting measure and improving economies of scale.




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PICK OF THE INDUSTRY
JK Cement
      One of the largest cement manufacturers in Northern India, the Company is also the second largest
      white cement manufacturer in India. Grey cement is sold primarily to purchasers located in Northern
      India, while white cement is sold to purchasers throughout India. Additionally, the Company exports
      white cement to a number of countries, including South Africa, Nigeria, Singapore, Bahrain,
      Bangladesh, Sri Lanka, Kenya, Tanzania, United Arab Emirates and Nepal. . The company is a
      regional cement player with two grey cement plants in Rajasthan having a combined capacity of 4
      million tonnes (mt) and a 3.5 lakh tonne white cement unit.
      Company has strong clientele base that includes players like DLF, Parsavnath, Unitech, Omax, Ansal
      Group, L&T, Snowcem India, Asian Paints and Berger Paints etc. Company also has sufficient
      limestone reserve that can support production for more than 40 years.
      MANAGEMENT
      Dr. Singhania is the Chairman, he holds the Master of Art Degree in Economics and Ph.D. Degree in
      Economics from Agra University. He has Corporate experience spanning 50 years. He has been
      associated with the Company as Director and has led the Company since 31.03.1986. He is also
      Chairman of the J.K.Synthetics Ltd., J.K.Cement Ltd., J.K. Cotton Spg. & Wvg. Mills Co. Ltd., J.K.
      Traders Ltd. He has held the position of Chairman of the Merchant Chambers of Uttar Pradesh and
      Employees Association of Northern India. He has also being the president of Uttar Pradesh Stock
      Exchange Association Ltd. He has being a Director of Pradeshiya Industrial Investment corporation of
      Uttar Pradesh, Uttar Pradesh State Industrial Development Corporation and the Uttar Pradesh State
      Sugar Corporation.
      LATEST RESULTS
      For the quarter ended June’07 Company’s net sales has increased by 17% to Rs 326.4 crore. OPM
      has improved by 610 basis points to 29.1%. Net profits have increased by 59% to Rs 52.5 crore.
      During the quarter company had grey cement volume of 8.65 lakh tonnes and white cement volumes
      were 50.6 thousand tonnes. Total volumes have dipped by 6% on y-o y basis on account of
      maintenance shutdown undertaken.
      FUTURE EXPANSION PLAN
         Karnataka Project
                 Land has been acquired and major order for long delivery items placed.
                 Expected commissioning date: the first quarter of CY-2009.
                 Has a limestone reserve of around 90 million tonne, sufficient for 30 years of production,
                 near the plant.
                 Total capex would be Rs 1050 crore
                 Plant capacity: 3 million tonne and proposed capex: Rs 950 crore
                 Grinding unit capacity: 1 million tonne and proposed capex Rs 100 crore
                 Would also have captive power plant of 50 MW (2*25 MW) with one coming up in October
                 2008 and the second one in December 2008.
                 Clinker capacity of 2.3 million tonnes and fly ash capacity of 1.2 million tonne
                 IDBI has been appointed as the financial advisor for the project and the debt would be in
                 the region of Rs 550 crore for this project.
                 Environmental clearance for plant is expected within two months.




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                Demand in Karnataka region is expected to be around 10 mn tonne with a growth rate of
                10% per annum. Besides, Karnataka plant would also cater to Maharashtra region.
          Nihon Nirman Plant
                  Capacity of Nihan plant would be expanded to 4 lakh tonne.
                  Capex of Rs 65-70 crore would be spend towards expansion.
                The plant would start operation in Q3 (October-December) FY 2007.
          Power Projects
                  Power project of 20MW pet coke based thermal plant is expected to start from first week
                  of June 2007.
                  Second power project of 10 MW thermal power plant would commence operations from
                  July 2007.
                  Third power project of 13.2 MW based on waste heat recovery system will commence
                  from August–Nov 2007. This plant has been registered with United Nation Framework
                  Convention on Climate Change (UNFCCC). Company expects to generate 70,800 carbon
                  credit (CER) per annum translating into monetary value of Rs 8 crore per annum.
                  Present power cost of the company is Rs 4.25 from grid and Rs 4.40 on an average.
                  Power consumption is 88-90 units per tonne
                Expects a saving of Rs 200 per tonne on the completion of all the power projects.
          Proposed capex
                  J K Cement spent Rs 255 crore in FY 2007.
                  It expects Rs 400 crore in FY 2008, out of which Rs 150 crore would be on the existing
                  plant and Rs 250 crore would be towards the Karnataka plant.
                  FY 2009: Rs 600 crore.
               FY 2010: Rs 100 crore.
          Management expectations
                  Expects an increase of 20-25% in operating profit (OP) in FY 2008
                  Tax rate to be in the region of 35% in FY 2008
      VALUATION
      At CMP of Rs.173.7, the scrip trades at 5.14x of FY08 estimated EPS of Rs.33.78 and 2.5x of FY09
      estimated EPS of Rs.70. Company has lowest EV/tonne compared to its peers. The stock is
      exceedingly undervalued in comparison to its peers such Madras Cement and Binani Cement and
      provides significant upside potential to investors with long-term investment horizon. We recommend
      the stock with strong buy and a price target of Rs.500 in two years as the benefit of capacity addition
      will reflect from FY2009 onward. We also believe that on the back of further capacity additions, the
      company will continue to post stupendous growth even after FY2010. We give an OUTPERFORMER
      rating to the stock.




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      PROJECTED FINANCIALS
      Particulars            200503    200603    200703    200803E    200903E
      Sales Turnover          423.4     1108.7    1529.7     1962.3     2802.2
         Excise Duty            68.5     168.9     186.0      319.5      450.0
      Net Sales               354.9      939.8    1343.6     1642.8     2352.2
         Stock Adjustments       9.6      15.6       1.8        3.3        4.7
      Total Income            364.5      955.4    1345.5     1646.1     2356.9
         Total Cost           326.3      823.3    1016.3     1150.1     1476.9
      Operating Profit          47.6     141.4     358.0      496.0      880.0
         Depreciation           12.6      31.0      33.2       38.0       51.3
         Interest               24.3      58.2      52.9      105.5      106.4
      PBT                       10.8      52.2     272.0      352.6      722.3
          Tax                    3.6      17.2      89.8      116.3      238.4
      PAT                        7.2      35.0     182.2      236.2      484.0
      EPS                        1.4       5.0      26.1       33.8       69.8




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sources. Efforts have been made to avoid errors and omissions and are not to be construed as an advice or
an offer to act on views expressed therein or related financial instruments. The authors shall not be
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The investments discussed or recommended in this report may not be suitable for all investors. Investors must
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using such independent advice, as they believe necessary. While acting upon any information or analysis
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