Consolidation in the Indian Cement Industry

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Case Details:

Case Code : BSTR162
Case Length : 27 Pages
Themes: Acquisition strategy | Consolidation
Period : 1997 - 2005
Organization : -
Pub Date : 2005
Teaching Note :Not Available
Countries : India
Industry : Engineering, Construction, and Real Estate

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"No significant expansion is expected to take place in the next couple of years (starting 2005) even as demand is catching up because the industry has learnt hard lessons after its over enthusiastic expansion drive between 1995 and 1997 when a whopping 40 million tonnes capacity was added then as compared to the overall production of over 140 million tonnes now".¹

- S R B Ramesh Chandra, President, All India Mini Cement Manufacturers Association and MD, Coromandel Cements Ltd. in 2004.

"India is not the most difficult country to work given our experience in some other markets. But if we look at the cost structure, electricity is an issue and our Indian operation has the highest electricity cost within the group. Globally cement prices are doing well in all markets where we are present but in India, unfortunately, it is too low. This is because of competition and oversupply and even though demand is growing pricing opportunity is a bit low here."²

- Carlo Pesenti, CEO, Italcementi SpA in 2005.

Introduction

With an installed capacity of approximately 150 million tonnes in 2005, India is the second largest producer of cement in the world accounting for approximately 6% of the global production (Refer Exhibit I for cement production in India and other countries in 2003). In 2004, the Rs 300 billion cement industry in India operated at 80% of capacity. The industry has also shown perceptible improvements in 2004 as compared to 2003 (Refer Exhibit II for the financial highlights of cement industry in 2003 and 2004). In 2003-04, compared to the world average consumption of approximately 270 kg per capita, cement consumption per capita in India was only about 100 kg.

This compares with per capita consumption of 450, 447 and 631 kg in China, France and Japan, respectively. The potential for growth makes the cement industry in India attractive.

But as it takes considerable investment to build a greenfield capacity, and there is gestation period of 3-4 years before a company breaks even, acquisition of smaller players in a fragmented industry³ is considered a viable option by industry majors. In India, the cement industry is cyclical in nature. Cement production normally peaks in the month of March while it is at its nadir in the month of August and September. Though the industry has seen consolidation by domestic players starting in the mid-1990s, it was only in the late 1990s that foreign players entered the market. By 2005, leading global players who had entered India included Holcim Group (Holcim)⁴, Lafarge, Italcementi SpA, among others.

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1] Dasarath Reddy B, "Cement industry to see an upswing,"Business Standard, March 2, 2004.

2] Sinha, Vivek, Sharma, Sanjeev, "Holcim deal encourages Italcementi to look for India,"The Economic Times, February 15, 2005.

3] The cement industry in India is highly fragmented. In 2004, 55 companies controlled the 146.38 million tonnes of installed capacity under the large plants category.

4] Formerly Holderbank.