Mumbai: While domestic cement consumption is growing at nine to 10 per cent on soaring demand for houses and infrastructure projects, cement manufacturers' profits will stay depressed for some time as prices remain under stiff competitive pressures, feel analysts.

"You cannot raise prices unless there is a collective effort in this business, as the industry is so fragmented and because of the excess capacity," says UTI Securities' Novonil Guha.

A big step towards consolidation is in the offing after Larsen & Toubro, the largest cement producer, decided last month to sell out to rival Grasim Industries in a deal valued at Rs 2,200 crore. The deal is expected to raise Grasim's capacity to 31 million tonnes, accounting for 22 per cent of the total capacity.

The top three Indian cement-makers will control 45 per cent of the market, while some 50-odd firms have the remaining 55 per cent of the 141-million-tonne capacity. But many analysts say the industry needs more consolidation and some plants will have to be shut down to crank up prices.

Last year's output was 111.5 million tonnes, out of a total capacity of 138 million tonnes, outpacing domestic consumption by 3.5 million tonnes. Says Jitendra Sriram of Deutsche Bank AG: "The acquisition of Cemco makes strategic sense for Grasim by re-balancing its portfolio. But the acquisition was not cheap, and we expect earnings per share and returns on the capital employed to fall 17 per cent and 250bp, respectively, in fiscal 2004."

Housing accounts for about 60 per cent of the cement consumption in India and infrastructure another 20 per cent. The growing trend of nuclear families and low-cost home loans has fuelled the demand for houses.

India has just 170 million concrete houses for a population of more than 1 billion, a shortage of some 30 to 80 million, according to Housing Development Finance Corporation, the country's top housing mortgage firm. It estimates there will be a yearly demand of 5 million houses over the next 18 years.

The Indian government's thrust on improving infrastructure focuses on building concrete roads, including a 7,300-kilometre highway project to connect the country from the Himalayas to the southern coast and from west to east. "Still the industry profitability has shrunk to its lowest in 10 years mainly due to weak pricing," says Manish Bhandari, an analyst with HDFC Securities.

Exports from coastal plants are picking up gradually, but constitute a mere 6 per cent of production. And it makes little sense for cement firms to transport cement beyond 450 kilometres, as freight costs in India are high, says Bhandari.

Industry observers say there was a wave of consolidation between 1999 and 2001, when big firms like Tata Iron and Steel Co and Raymond exited the sector and foreign majors like France's Lafarge and Italy's Italcementi strengthened their presence.

All eyes are now on whether Gujarat Ambuja, which is sitting on a nearly 15-per cent stake in Associated Cement Company, bought about three years ago, will attempt to take control. Sriram says foreign majors like Lafarge, Italcementi, Cemex and Holcim cannot afford to ignore the Asian region.