Cracks in the building

22 July 2003

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."