India's cement sector may not find the current five year plan (2012-17) a smooth sailing as far as their expansion is concerned. Known for its fast and aggressive plan in the previous plan period, cement companies seem unlikely to continue their pace of adding capacities this time around.
According to a working group's report on cement industry, India would require 480 million tonnes (MT) of standing capacity by FY12.
Land acquisition, environment clearances, poor demand and on top of it inadequate supply of raw materials like limestone, coal and fly ash may hamper expansion plans, say industry officials and market experts.
During 2007-2012, cement companies added around 150 MT of fresh capacities taking it to 330 MT, ten per cent more than the targeted 300 MT. The first few years of the period saw cement makers post exorbitant profits which were utilised for rapid expansion.
"Land acquisition is a big issue. No state government is providing land for setting up units and getting clearances from different authorities do take longer period. Green-field expansion is tough," says H M Bangur, chairman and managing director of north-based Shree Cement. For last couple of years, the company is in a process of acquiring land in Karnataka which will take yet another few months, he added.
Shree Cement is not alone. Majority of the cement makers are facing hurdles. Shaildendra Choksi, whole-time-director of JK Lakshmi Cement, said, "Opportunities of expansion through brown-fields have almost exhausted. Now, only way to grow is green-field projects which is not easy. At a time when there is no demand, there is no point in adding capacities only to keep them under-utilised."
"That's why, more than half of the new capacities during 2007-12 were brown-field expansions," says chief financial officer (CFO) of a south-based cement company.
Sunil Singhania, equity head at Reliance Mutual Fund, says, "Capacity creation in India is very difficult because there is no land and no limestone deposits among others. And several cement companies have written down assets. I believe capacity additions going forward will not be as aggressive as it has been in the past. And probably, expansion will be slower than the demand growth."
Sector's analysts agree with Bangur and Singhania. According to them at a time when existing capacities are being under-utilised over three years now, it's unlikely that cement makers would pump in more money into expansion. They added that demand for the building commodity has not been great barring a few patches of months which is leading to erosion in return on companies' investments.
As per the working group's report, in the best scenario India's cement consumption for the current financial year (2012-13) will be 265 MT which will rise to 324 MT in FY15 and 397 MT in 2016-17.
Taking current capacities into consideration at a little less than 100 per cent utilisation will be capable to take care of consumption demand comfortably till FY15. "In short, there is enough capacities available to take care of demand for the next three years too," says vice president at domestic brokerage firm.
But they add that even taking a moderate growth in capacity addition, cement players will add yet another 50 MT of fresh capacity in its kitty by FY15 which would mean under-utilisation to persist. "For that matter, if capacities grow with rate of 8 per cent per annum, even till FY17 utilisation will remain below 85 per cent," adds research head of a Mumbai-based brokerage house.
Country, currently, has over 40 players in operations but close to half of the market is controlled by majors like Aditya Birla group's UltraTech, Holcim's ACC and Ambuja, Jaiprakash Associates, India Cements and Shree Cement.
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