The Indian construction industry is very large and is a growth driver to various sectors of the economy. It employs about 31 million persons – second only to agriculture in terms of employment. It consumes 40-50% of the National Plan outlay and contributes 20% of GDP

The cement industry is the most visible beneficiary of the housing and construction boom in the country. The importance of the housing sector in cement demand can be gauged from the fact that it consumes almost 70%-80% of the country’s cement.

For India, the world's second largest producer of cement after China, the recent boom in infrastructure and the housing market has boosted its cement industry. Add to that an increasing global demand and a flurry of activity in infrastructure projects – highways roads, bridges, ports and houses – has sparked off a spate of mergers and acquisitions in the sector. Furthermore, the country’s finance minister, P. Chidambaram, has stated that India would double spending on infrastructure over the next five years to sustain its record economic growth and modernize its infrastructure.

The industry had an excess capacity of close to 33 MT a few years back, which had led to a supply overhang in the markets and had a negative impact on realizations. It had also led to poor capacity utilization. However, with the excess capacity declining on the back of increasing demand, it had led to the demand-supply scenario tilting in favour of cement manufacturers. Further, compared to growth in demand, capacity additions happened at a slower rate. Thus, a favorable pricing scenario presented itself to the cement manufacturers in the past two years.

Another factor that has changed the landscape of the Indian cement sector is that it is relatively consolidated than what it was 10 years ago. While in 1995 the top 5 cement manufacturers in the country accounted for 26% of industry capacity, now almost 40% is controlled by the top 4 players.

The cement industry comprises of 125 large cement plants with an installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum.

Among the leading domestic players in terms of cement manufacturing are: Ambuja Cement, Aditya Birla Group (which owns UltraTech Cement), ACC Ltd., Binani Cement, India Cements and J K Cement. They are not only the foremost producers of cement but also enjoy a high level of equity in the market.

Though cement is a commodity with major manufacturing technology obsolescence in decades, the cements industry has taken initiatives to usher in change. Mergers & Acquisitions in the industry has helped the industry come out of its technological obsolescence.

Moves like owning ships for movement of cement within India, early emphasis on captive power plants, captive jetties and emphasizing on branding in cement sales have yielded rich dividends. Post the Holcim acquisition, Ambuja Cements have benefited from the MNC's expertise in areas like waste-based power generation and the same is expected to continue in future.

Apart from meeting the entire domestic demand, the industry is also exporting cement and clinker. The export of cement during 2001-02 and 2003-04 was 5.14 million tonnes and 6.92 million tonnes respectively. Export during April-May, 2003 was 1.35 million tonnes. Major exporters were Gujarat Ambuja Cements Ltd. and L&T Ltd.

The Planning Commission for the formulation of X Five Year Plan constituted a 'Working Group on Cement Industry' for the development of cement industry. The Working Group has identified following thrust areas for improving demand for cement;

         i.            Further push to housing development programmes;

        ii.            Promotion of concrete Highways and roads; and

      iii.            Use of ready-mix concrete in large infrastructure projects.

Further, in order to improve global competitiveness of the Indian Cement Industry, the Department of Industrial Policy & Promotion commissioned a study on the global competitiveness of the Indian Industry for making the Indian Cement Industry more competitive in the international market.

Technological change is the way to the future

Continuous technological upgrading and assimilation of latest technology has been going on in the cement industry. Presently 93 per cent of the total capacity in the industry is based on modern and environment-friendly dry process technology and only 7 per cent of the capacity is based on old wet and semi-dry process technology. There is tremendous scope for waste heat recovery in cement plants and thereby reduction in emission level. One project for co-generation of power utilizing waste heat in an Indian cement plant is being implemented with Japanese assistance under Green Aid Plan. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially.

India is also producing different varieties of cement like Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement, White Cement etc. Production of these varieties of cement conform to the BIS Specifications. Also, some cement plants have set up dedicated jetties for promoting bulk transportation and export.

Valuation of Cement Stocks

Key stocks in the cement industry to watch are ACC , Ambuja Cements, Madras Cements , Shree Cements, Ultratech Cements, J&K Cements and India Cements. In the cement sector, the key parameter to value a stock would be the Enterprise Value per tonne (EV/tonne). It must be noted that if the company were to be bought over or in cases of Mergers and Acquisitions, this (EV/ton) is the likely price at which one would be interested in acquiring it.

Given the demand from infrastructure sectors, we find the current valuations are reasonably attractive and recommend investors to ‘Hold’ the stocks with a long term perspective. However individual stocks should be compared on the basis of cost of operations, Management team and their operating margins.