Analysis of Cement Industry

1. INTRODUCTION

The Indian cement industry is second largest in the world after China and has grown at a CAGR of 8% in the last decade. The sector has evolved significantly in the last two decades, going through all the phases of a typical cyclical industry. After having gone through a period of over-supply and the phase of massive capacity additions (latter half of the previous decade), the industry is currently in a consolidation phase, with capacity additions coming up to cater to the increasing demand. Demand has been driven by a booming housing sector and increased activity in infrastructure development such as state and national highways. While the demand is growing at a robust pace of 8% to 10% annually, the paucity of major capacity additions is putting upward pressure on the cement prices.

The Indian cement industry with a total capacity of 251.2 million tonnes (including mini plants) in March 2016 has emerged as the second largest market after China, surpassing developed nations like the USA and Japan. Per capita consumption has increased from 28 kg in 1980-81 to 120 kg in 2015-16. In relative terms, India’s average consumption is still low and the process of catching up with international averages will drive future growth. Infrastructure spending (particularly on roads, ports and airports), a spurt in housing construction and expansion in corporate production facilities is likely to spur growth in this area. South-East Asia and the Middle East are potential export markets. Low cost technology and extensive restructuring have made some of the Indian cement companies the most efficient across global majors. Despite some consolidation, the industry remains somewhat fragmented and merger and acquisition possibilities are strong. Investment norms including guidelines for foreign direct investment (FDI) are investor-friendly. All these factors present a strong case for investing in the Indian market.

The growth prospect of cement industry is tremendous as the demand is picking up due to government initiatives as well as increase in the construction work. The government initiatives has provided the required boost for the industry to think of expansion and increasing their capacity to not only fulfill domestic demand but also for exporting cement. The outlook for the cement industry is looking positive. Also, the use of alternate fuels has increased the brand image of the cement companies and also helped them in reducing their dependence on coal for energy production.

Also, the competition in industry is intensifying which is good for buyers, as they can hope to benefit from the competitive strategies of the players in the cement industry. Moreover, consolidation of large player in cement industry has provided some amount of stability in the supply of cement as well as it has brought some order in the industry.

2. RESEARCH METHODOLOGY

2.1 Objective

The following are the main objective of the study:

• To analyze the Indian economy.
• To analyze the current trend and future aspects of cement industry in India
• To analyze the financial market & the share movements in order to study the prospects of investing in a particular stock or sector

2.2 Research Design

The first step is to conduct the analysis through EIC model. The next step is to understand what EIC model all about and what are the steps to achieve it. For which the first step is going through various internet sites and reading about the EIC model and usefulness off the whole process. Then, the next analysis is of sector selection. I have chosen Cement Sector as it comes under the Infrastructure Industry which is very vital for the growth of the Economy. After doing a thorough research on the cement sector in India, the company I chosen was Ambuja Cement Limited, as cost is the important factor for the cement industry, and the strategy which any company can adopt is cost leadership and Ambuja Cement Limited is the Cost Leader in the cement sector. The next step leads is to know the economic conditions which will have a bearing on the cement sector. Then the following characteristics will be studied:- Capacity Utilization, Regional Updates, Evaluating the Cement Industry through Porter’s Model, Indian Cement Industry-The current Scenario, etc. The next step is to know the history about the company along with the growth prospects that possess for the future. The next process is analysis on the company and conclusion of the project with comments on the future investment in the company.

3. THE STATE OF THE INDIAN ECONOMY

3.1 Performance during 2015–16 and 2016–17

• The global economy continues to face subdued growth owing to low commodity prices and low inflation rates, stagnant growth in advanced economies, and geopolitical and political uncertainties. The International Monetary Fund (IMF) projects global economic growth to be 3.1 per cent in 2016, with expectations to recover to 3.4 per cent in 2017.
• Against the dismal global conditions, the Indian economy’s expansion has been noteworthy. Despite an expected decline in the growth rate owing to slowdown in manufacturing, decline in budgetary capital expenditure and demonetisation, India is expected to continue as the fastest growing large economy.
• The Indian economy is projected to grow at 7.1 per cent as against 7.6 per cent in FY16. estimates might be lowered as they were forecasted using data till October 2016

Table 1. Growth rate of GDP and its components

3.2 GDP performance in 2016–17 from the demand side (comprising consumption, investment and net exports)[pic 1]

• In FY17, the government’s final consumption expenditure emerged as the major driver of GDP growth with an increase of over 23 per cent as against 2.2 per cent in FY16

• The Gross Fixed Capital Formation (GFCF) to GDP at constant prices, an indicator of investments across the country, declined by 0.2 per cent in FY17, continuing the downward trend since 2011.
• In FY16, exports of goods and services witnessed a growth of 2.2 per cent (Advanced Estimates) as against a y-o-y decline of 5.2 per cent in FY15, owing to partial recovery in commodity prices. The imports witnessed a y-o-y decline of 3.8 per cent due to lower gold and other bullion imports.

3.3 Inflation and monetary policy