Cementing the future

From their lows in 2008, stock prices of leading Indian cement companies have rallied from three to eight times. Most of them trade at or near all-time highs - bar the blip we have witnessed since the beginning of calendar 2016. Over the same time frame, operating margins and return ratios have worsened significantly: most now at decadal lows (see Figure 1). Is the market right in forecasting a change in fortune for the cement sector? Capacity utilisation - turning up? As Table 1 reveals, the cement industry in India has gone through huge capacity addition, growing 150 per cent over the past ten years, while demand has just about doubled. Consequently, capacity utilisation that was a robust 90 per cent in 2006-08 has fallen to below 70 per cent. In fact, over FY13-15, cement prices barely increased 1 per cent per annum - not even keeping pace with costs - leading to erosion in margins and returns. Industry insiders are, however, bullish over long-term prospects. Capacity addition is slowing as margin pressures, high leverage and reduced availability of limestone - a key raw material - make further expansion less viable and difficult to fund. C

This article was originally published on April 29, 2016.