Industry Risk Score: Cement & Construction

The Indian cement market is oligopolistic in nature. Since large players act as gatekeepers, they enjoy a significant influence over price levels. Ongoing and past consolidations are likely maintain the sector's oligopoly nature. The housing sector is the primary mover of the industry, accounting for ~60% of the total cement consumption. Infrastructure sector is the second largest customer and accounts for ~22% of cement consumption. Others including commercial and industrial sectors account for ~18% of total. The outlook for the short term continues to be marginally favourable as the economy starts at a low base. Consumption of cement is growing at an average of 5% in last five years. On the back of higher infrastructure spending and increases in housing demand, the sector is expected to witness a stable growth in FY18 as well. Going forward, even though capacity additions are expected to be limited in relation to the incremental demand, players may register higher utilisation levels and increase efficiency.

Until recently, production capacity of the industry reached ~360 million tonnes (MT) in FY14 against 228 MTs in FY11, however, capacity utilization level remained at ~71%. Even though overall demand remains stable- recording a growth of 4.2% in FY17 YTD on account of higher government spending, healthy monsoon, over-capacity has become a new reality. Favourable government policies expectedto drive demand include spending on infrastructure and housing for all and this will further drive demand. With nation building activities increasing volumes, the sector's debt protection matrix has been improving significantly. Variables such as EBIT, ROCE and Debt/ Equity have shown marked improvements in FY16, after a lull during the previous 2 financial years. Sustainability may however depend upon capacity utilization levels in the medium to long term. The demonetization exercise in Q3 FY17 will however slowdown business activities in the otherwise bullish trend followed by the sector this year.

Category Weightage Score Rating
Industry Risk Score 100% 3.48 BBB
Business Risk 85.0% 3.50 BBB
Demand-Supply 25% 3.00  
Nature and Extent of competition 25% 4.00  
Input related risk 25% 3.00  
Government regulation 25% 4.00  
Financial Risk 15.0% 3.33 BBB
EBIT (5 year) 33% 5.0  
EBIT Std. Dev. 0% 3.0  
ROCE (5 year) 33% 2.0  
D/E (5 year) 33% 3.0  

Source: Acuité Research; Ace Equity

Key Risks & Attributes

  • Availability of inputs and complementary products
  • Prices of raw material
  • Capacity additions in view of incremental demand
  • Demand from end-user sectors (such as housing and infrastructure)