The cement sector might not have a smooth sailing in the current five-year Plan (2012-17) in terms of expansion. 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, India would require 480 million tonnes (mt) of standing capacity by 2011-12.
Land acquisition, environment clearances, poor demand and inadequate supply of raw materials such as limestone, coal and fly ash might hamper expansion plans, say industry officials and market experts.
During 2007-12, the companies added 150 mt of fresh capacities taking it to 330 mt, about 10 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.
Estimates by working group on cement industry for 2012-17
|All figures in million tonnes
Source : Working Group of Cement Industry for 12th five year plan
"Land acquisition is a big issue. None of the state government is providing land to set up units, and getting clearances from different authorities take time. New expansion is tough," says H M Bangur, chairman and managing director of north-based Shree Cement. For the last couple of years, the company has been trying to acquire land in Karnataka, which will take another few months, he says.
Shree Cement is not alone. Majority of the cement makers are facing hurdles. "That's why, more than half of the new capacities during 2007-12 were brownfield expansions," says chief financial officer of a south-based cement company.
Sunil Singhania, equity head at Reliance Mutual Fund, says, "Capacity creation is very difficult in India due to paucity of land and 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 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 say 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.
According to the working group's report, in the best scenario cement consumption for the current financial year will be 265 mt which will rise to 324 mt in FY15 and 397 mt in 2016-17.
Taking the 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 the vice-president of a 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 eight per cent per annum, even till FY17 utilisation will remain below 85 per cent," adds research head of a Mumbai-based brokerage house.
India, 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.