The Hindu Business Line : ‘We do not have a system to capture cement consumption’

Looking at the demand patterns in States, it looks to me that it has been from Government expenditure on projects and the tier II and especially tier III cities where it is business as usual. Clearly, the growth has not been in the metro cities other than NCR.

Mr Sumit Banerjee, Managing Director, ACC Ltd.

Kripa Raman

Mumbai, Oct. 5 Mr Sumit Banerjee, Managing Director of ACC Ltd, India’s largest cement manufacturing company, talks to Business Line about the industry in general and about the weakness of data availability on cement and on its demand and consumption patterns.

The commodity cycle is on the slow upswing again, but India needs all the capacities being commissioned, he says.

The cement industry has reported good growth in despatches the last few months. Do you expect this to continue?

There is a weakness in our data availability. See, we use cement despatch data to reflect demand. But the despatch is to the dealers so you do not really get a hang of exact sales or exact consumption, because there are inventories in the pipeline which extends from our plant to the godowns which are manned by the C&F agents, then to the dealers. Because there are two- or three-tier distribution network if you are reaching the far and wide markets in India. There is a consumer/contractor who is also stocking. So, if you take that into pipeline definition, the pipeline is not small. If you want to really capture consumption then we don’t have a system.

So, are despatch figures understated or overstated? What would be the margin of error? The figures would be an indication of the market at least?

It is an indication. But not exactly on a monthly basis. It does correct itself.

I have no idea what the margin of error is — maybe 5-7 per cent.

It can be sometimes overstated, sometimes understated. There could be unmet demand. During some period of this year, it was clearly my understanding that we were unable to meet the needs of market, which is why the prices went up

Consumption perhaps slowed down at some sites somewhere because cement was not flowing as much as they would have liked to move.

So, some months there can be a pipeline stock available where the consumption numbers are overstated because you are going by despatch, and in some months consumption or demand would have been actually higher than what we have supplied.

Where is this demand that you were not able to meet coming from?

I think that is a very important question for us. Because again data availability comes into picture. Like some of the FMCG or consumer durables industry, they do much more systematic analysis of their segments. Unless you segment you cannot analyse that. In our (ACC) case we have segmented, I may have some data about my customers. I can determine how much of my sales are going into individual home builders or how much of my cement is going to contractors or into infrastructure projects.

I might, I am not so sure. But as an industry we don’t have this data. So there is a lot of work to be done. Actually, we have as an industry commissioned National Council for Applied Economic Research to do a study of the cement market and segment-wise demand drivers and demand composition. That result will be available by the end of November or December. From company to company, everybody will have broad indication. But it is not aggregated.

So where is the demand coming from for ACC?

Again for me the data is unstructured, because on demand I will give you the same hackneyed answer which has been given in the last three-four months by everybody. Looking at the demand patterns in States, it looks to me that it has been from Government expenditure on projects and the tier II and especially tier III cities where it is business as usual. Clearly, the growth has not been in the metro cities other than NCR.

Does where you are selling make a difference to your margins?

Strictly speaking it may. But I am not saying that margin is dependent on tier I, II, or III cities. The cost to serve a market depends on its distance from our plants. And when the market complexion or segmental demand shifts then it impacts your margin. In some cases, negatively. It is a very complex calculation, but it does impact.

But your consolidated numbers were down in 2008. Are you vulnerable to the commodity cycle again?

That was because you remember last year we had this situation in the months around June where inflation was very high? The Government was actually inviting cooperation from us so that cement does not contribute to inflation and ACC came out with a public statement saying that we’ll hold prices till July-August. We could not increase prices because of the commitment to the Government for three four months, while during the same period costs went up. Remember the price of coal, the imported coal prices went up to $200 and things like that.

These cannot be predicted even by top notch economists. Commodities such as coal, and petroleum (because diesel impacts anybody everywhere). Also petroleum prices have an indirect impact because we use these polypropylene granules for our bags. It is not going to be like last year when it was a spike. But we can see from the last two-three months, there is a slow upward trend. And I personally expect that trend will be maintained. But going by the first six months of the year (calendar 2009), cement as a sector has probably outperformed many other industries.

What will be the impact of the explosion in industry capacity expected over 2009-2010?

Quite a few of them (plants planned by industry) will come up, with most of them work is going on the ground, orders have been placed. But there are a few plants — I cannot name them but I know of — where equipment suppliers have got advances but they have been told to go slow. But they are a few only. But overall, a large number of plants will get commission by the end of 2009 and another large number of plants will get commissioned by end of 2010.

And it is all required because fundamentally speaking our per capita consumption of cement in the country is 120-116 kg or in that range. China is 600 plus and the US is 350 plus. The US is a mature economy so there is not so much construction going on. China is another extreme. But if you go to some country such as Thailand and Malaysia, it is three-four times our per capita consumption of cement, so we need all the capacities. Basically in principle if you come from economics and demographics and the penetration level of cement today, we need all the capacities and more.

What does the regional growth pattern look like?

This year so far, North has grown well, East also. South has tapered off. Basically, it is driven by lack of growth in Karnataka and Andhra Pradesh.

We also have a ready mix concrete (RMC) business. It actually analyses the markets in the mega cities. Because they are mostly catering to the big contractors, housing projects and all. You can clearly see that in Bangalore and Hyderabad and in some of the other growth centres, Mysore for example and Vishakapatnam, there the commercial property development as well as organised housing has taken a hit.

Now RMC was delivering a narrower margin (than cement). It always delivered a lower margin. But it is today delivering even negative margins. One of the reasons for that is that we had set up more plants because we were on the growth path, and were not ready for this crash in the organised housing sector, right.

At one time it was a well established trend that the RMC concrete market was to grow and it was actually growing at a pace of 25 per cent. So from 25 per cent to a growth of 3-4 per cent is a huge decline. What has happened is that in Bangalore, Hyderabad, and Mumbai real estate construction has not grown. But the capacities have come up just as we have put up capacities other people have also put up capacities. There are more people vying for a smaller pie. So the margin is the first one to go.

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