Expected Infrastructure push sets South India's cement market in motion

The country’s largest cement market is also the most oversupplied.

This has, however, not deterred top companies from announcing expansion plans for the South India market. The lure, observe industry executives and analysts, is an expected push to demand arising from infrastructure spending.

Industry majors and analysts expect the rise in overall infrastructure capital outlay in the Interim Budget to Rs 11.11 trillion in 2024-25 (FY25) will not just boost public sector investments but also bring in private investments.

Most agree the Southern states stand to gain from these new projects.

“Earlier, 75-80 per cent of the infrastructure projects used to happen in North India, above Madhya Pradesh and on its Western side. Now, new airports, mega road projects, ports, Metro rail projects, and energy sector projects are happening a lot in South India. Around 35 per cent of the infrastructure project share now is from this region. In the Northeast too, infrastructure project share is increasing,” said Parthasarathy Ramanujam, chief marketing officer, India Cements.

The Northeast is a market that some of the Southern players often tap into, including Ramco Cements.

As of December 2023, the Southern market is estimated to have a total capacity of 186-200 million tonnes. There is no official data maintained on industry capacity utilisation levels, and hence estimates vary; however, everyone is optimistic about an improvement in it.

“South India’s market has surplus capacity. Because of the push in the infrastructure sector, our capacity utilisation increased by 5-10 per cent, from the earlier capacity utilisation of 50-55 per cent, and it increased to 60-65 per cent now,” said Ravinder Reddy, director at Bharathi Cement Corporation.

Most of this demand growth has come in the past two to three years, according to analysts. They pin the entire South market industry utilisation at around 55 per cent.

“After the end of the information technology boom, there was a lull in cement demand for the South India market, which is now being revived with infrastructure and other city infrastructure improvement-related projects. I expect utilisation to improve from the current 55 per cent to 60-65 per cent in the next two to three years,” noted Jyoti Gupta, a research analyst with Nirmal Bang.

Top players like UltraTech Cement have outdone South India industry estimates, indicative of the impact of consolidation seen in the past few years.

Jefferies, in a note on UltraTech Cement’s management takeaways in January, said the South market has been consolidating and the company’s utilisation there was over 70 per cent.

“A large share of central government projects and national highway projects is coming to all the Southern states. More state investments will push demand further,” Reddy added.

Gupta from Nirmal Bang estimated this demand growth to be in the range of 8-9 per cent in the past two years, after years of a weak 2-3 per cent growth prior to that.

“We are estimating a 6-7 per cent healthy growth rate for FY25," she said.

She also pointed out that projects like Bharatmala, port connectivity, and a high-traffic density corridor under PM Gati Shakti, all require bigger and more dependable cement suppliers.

As if on cue, top cement makers such as Dalmia Cement and UltraTech have announced capacity additions.

These capacity additions, however, have regional players worried about the pricing situation.

“The demand-supply situation is getting disturbed because of additional capacity being added. Unlike the North, in the South, capacity addition is more than demand; hence, we are having a price issue. Everyone wants to utilise their factories to at least 85 per cent of capacity,” Ramanujam added.

Cement companies tend to focus on increasing volumes rather than increasing prices in an oversupplied and crowded market like South India.