Industry Risk Score : Cement and Cement Products

Executive Summary

India stands second in the world both in terms of production and consumption of cement after China. Its domestic capacity stood at 502 million tonnes as on FY19 as per Cement Manufacturers Association (CMA). The Indian cement industry is organized and consolidated in nature wherein the top 20 companies account for around 70% of the total production. On the other hand, demand for cement is based on an underlying requirement, as it depends on the country’s construction and infrastructure activity, real estate sector and other industrial and allied activities.

Cement production witnessed a strong growth in FY19 rising at ~14% to ~328 million tonnes as compared to ~288 million tonnes in FY18. Steady implementation and completion of infrastructure projects primarily in the northern and central region helped rise in demand. Further, projects such as Bharatmala, Sagarmala, building dedicated freight corridors (DFC’s) and smart city projects also assisted the rise in demand during the year. Moreover, demand from housing segment primarily the rural housing coupled with real estate segment witnessed stable demand post demonetization, RERA and implementation of GST. The segment had plunged last year with sudden removal of liquidity from the system which had led to declining investments which were already tapering. Also with the government’s focus on providing affordable housing in rural areas supported demand and is expected to continue going ahead.

The cement industry is a highly energy intensive sector with energy and raw materials together forming the most critical component in the production of cement. The industry faces risks in terms of raw material costs due to its dependence on limestone, the supply of which is regulated under the Mines and Minerals (Development and Regulations) Act, 1957 and is subject to periodic review and renewal. Due to the nature of its business, the cement manufacturing industry is subject to operating risks and requires investments towards requisite safety requirements and standards. It is also subject to various central and state environmental laws and regulations relating to pollution control.

Since the introduction of the new taxation regime viz Goods and Services Tax (GST) the cement prices witnessed the downtrend. Despite healthy demand growth, factors such as capacity additions, ramp-up of acquired assets limited price hikes during the year. However, going ahead, demand is expected to be proportionate to incremental supply thus assisting moderate price hikes.

Key Risks & Attributes

  • Seasonal and cyclical demand
  • Regional oligopolistic market
  • Input costs risk, and exposure to environmental laws and regulations

Demand & Supply Scenario


Demand for cement and cement products is closely linked to the government spending in affordable housing, growth in urban infrastructure, roads and irrigation spends. Cement demand is expected to continue to rise at a steady pace in medium term after witnessing a healthy growth in the previous year. The growth in demand is expected to be supported by affordable housing, investment in infrastructure and growth expected in the Eastern and Southern regions.

The Union Budget of 2018-19, in fact, doubled the allocation for affordable housing to Rs. 8.9 billion. Moreover, plans to extend the rural road network scheme connecting all eligible habitations under Phase III of Prime Minister Gram Sadak Yojana is also expected to support demand. The government has also decided to adopt cement instead of bitumen for the construction of all new road projects as cement is more durable and cheaper to maintain than bitumen in the long run. Further, projects such as dedicated freight corridors, ports and metro rail projects are underway expected to be positive. Cement industry (including gypsum products) attracted foreign direct investment worth US$ 5.2 billion between April 2000 to March 2019 and is likely to witness increase in investments going ahead as well.

Cement products primarily comprise ready mix concrete (RMC), cement bonded particle board (CBPB), cement blocks and other ancillary products. Demand for other products is driven by housing and infrastructure development. RMC is a high growth product with an estimated market size of Rs. 50-60 billion. Currently, only 5% of the cement production is consumed by RMC, as against developed countries’ average of 80%.

Of the total capacity, 98% comprises with the private sector and the rest with the public sector. Capacity utilization for the cement industry is estimated to be around 71-72% for FY19, exposing it to risks related to capacity underutilization and high fixed costs. Further, cement being a bulk commodity, is freight intensive and transporting it over long distances affects the margins. Thus, the cement industry is largely regional in nature on account of significant transport costs involved. Southern India has almost one-third of the country's total installed cement capacity. However, supply chain management continues to be a prominent monitorable for players as its quality deteriorates upon contact with moisture over a period of time, prolonged storage or exposure to moisture during transport.

Acuité expects that the healthy industry dynamics and favorable government initiatives in housing and infrastructure spending will extend an overall boost to the cement sector over the long term.

Nature & Extent of Competition


Compared to a few years back, the Indian cement industry currently is more organized and consolidated. The top 20 companies account for around 70% of the total production. The top five players in the market are UltraTech Cement Limited, ACC Limited, Ambuja Cements, Shree Cements Limited and Nuvoco Vistas Corporation Limited.

Since the industry is largely consolidated, large players partially control supply. Consequently, it leads to low bargaining power to buyers. High capital cost, long gestation period and access to limestone reserves act as key barriers for entry for any new players. Further, high distribution and marketing costs, requirement of several government approvals for setting up new plants add to the barriers as well. However, with limited product differentiability smaller regional competitors have resorted to provide discounted prices in order to remain relevant and competitive in the market dominated by larger players. In fact, lately it has led to leading cement companies to lower their prices thereby increasing competition albeit at a lower level.

In terms of product substitution, though there are some partial substitutes such as asphalt, glass, steel, and wood, cement practically has no direct substitutes. Given the high transportation costs and the undifferentiated nature of the product, competition in the cement industry is mostly local in nature. Larger plants can earn better margins by achieving economies of scale and command some pricing power in their region. Further, companies that have a strong distribution network and retail presence tend to have better realizations.

Acuité believes that the competitive intensity in the cement industry is low with the top companies dominating majority of the market.

Input Related Risk


The primary raw material for cement industry is limestone. Other raw materials include iron ore, gypsum, fly ash, slag, coal and pet coke.

The mining rights of limestone mining are government controlled. Typically, large cement manufacturers engage in the mining of limestone and pay royalty or dead rent to the government. The mining rights are subject to periodic compliance checks and clearances by various government bodies and royalty amounts are subject to periodic reviews, posing input risk in terms of availability and pricing of this key raw material. The amendment to the MMDR Act in 2016, allowing the transfer of captive mines granted through non-auction routes, has been a positive move for the industry. Other raw materials are sourced from third-party suppliers or the open market and are subject to general business risks related to demand- supply dynamics.

The cement industry is energy intensive, with energy costs comprising 35-50% of the total expenditure. Therefore, dedicated and low-cost supply of energy is one of the most critical factors in cement manufacturing. Cement companies are increasingly employing cheaper sources of energy such as waste heat recovery power generation, captive thermal power plants based on coal, and solar power, wherever feasible.

Due to the polluting nature of cement manufacturing, the industry is subject to operating risks and has to comply with safety requirements and standards as well.

Acuité believes that the dependence of the industry on limestone availability and prices, poses moderate risk to the cement industry.

Regulatory Risk


Limestone mining is governed by the MMDR Act, 1957 and its recent amendment in 2016. Mining lease is required to be obtained from the relevant state government for limestone mining, which has to be renewed from time to time. Players are susceptible to compliance risk, and any slippages can lead to adverse actions such as fines, restrictions, or revocation of the mining rights. Further, the cement industry is subject to various central and state environmental laws and regulations relating to pollution control. Increasing impetus on pollution control and environment protection regulations may impose new liabilities on manufacturers in the form of additional investment in pollution control equipment. Further cement and most of the related products fall in the highest Goods and Services Tax (GST) rate slab of 28%, RMC at 18% and CBPB at 12%. Thus, the industry is not being able to work on low economies of scale.

Acuité believes that the sector is exposed to moderate risk with respect to government regulations.

Technology Risk


Most of the Indian cement plants employ the environment friendly dry process kiln technology, which is one of the most advanced technologies to manufacture cement. The industry has progressively reduced its thermal energy consumption from 800-900 kcal/kg of clinker in the 1980s to 650-750 kcal/kg in 2015. Similarly, power consumption registered a remarkable improvement from 105-115 kWh/tonne cement to 70-90 kWh/tonne cement during the period.

With most large players using advanced technologies already, Acuité believes that the industry faces low risk in the medium term on account of continuous advancement in technology and related capital expenditure.

Industry financial performance risk score

Operating Margin
(Marginally favorable)

Interest Coverage Ratio
(Marginally favorable)

Return on capital employed
(Marginally favorable)

Debt/ Equity

GCA days

Note: The industry financial performance risk score is provided on a 6-point scale


Acuité IRS should not be treated as a recommendation or opinion that is intended to substitute for a financial adviser's or investor's independent assessment of whether to buy, sell or hold any security of any entity forming part of the industry. Acuité IRS is based on the publicly available data and information and obtained from sources we consider reliable. Although reasonable care has been taken to ensure that the data and information is true, Acuité, in particular, makes no representation or warranty, expressed or implied with respect to the adequacy, accuracy or completeness of the information relied upon. Acuité is not responsible for any errors or omissions and especially states that it has no financial liability whatsoever for any direct, indirect or consequential loss of any kind arising from the use of Acuité IRS.