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S. Vaidya Nathan

Much of the savvy with which Gujarat Ambuja Cements has handled its finances and its strategic acquisition initiatives is widely linked to Mr Anil Singhvi, Executive Director (Finance). The string of acquisitions, especially the strategic stake in ACC, has placed the Ambuja group on a strong footing to combat even MNCs aspiring to enter the Indian cement market. In this first of a two-part series, Mr Singhvi shares his views on the industry trends.

Excerpts from the interview:

Do you think that the sharp rise in volumes in the last 21 months is sustainable?

We think these volumes are not only sustainable but would accelerate since they are on the back of a solid demand, which has been untapped for years. According to government estimates, there is a latent demand for 33 million homes in the country. Cement demand seen in recent times is due to lowering of interest rates, which has made housing loans cheaper and more affordable. We have seen a distinct shift in consumption pattern, where 70 per cent of the cement consumed today is used for the housing sector against 40 per cent some five years ago. The aspiration of younger generation to own homes instead of renting is driving cement demand.

The demand has been largely from the housing sector and is topped by the demand for road construction through such projects as the Golden Quadrilateral, East-West-South-North Corridor and roads/bridges being constructed all over the country. Housing and road construction can be seen as two areas that would continue to drive cement demand in the years to come.

Will there be adequate replacement for demand that has come in from the Golden Quadrilateral project, which is slated to be completed in the next 12 months?

We think once the Golden Quadrilateral project is completed and the benefits of such projects in the form of lesser time to reach the desired destination, lesser wear of vehicles and all-round reduction in cost for the economy become evident, we will see increased road-building activity. The Finance Minister has, for the first time, promised in the Budget that a fourth of the 48 new roads would be constructed using cement. This, in itself, is a very encouraging sign. And we see good demand for infrastructure, which this country lacks.

How do you see the price trends in the key markets? Producer arrangements that led to price spurts two years ago have collapsed. Will the pricing power improve for the industry at the macro level?

We see demand-supply equilibrium by the end of this year considering the healthy growth in cement demand over the past two years. Besides, there are no greenfield projects expected over the next three years. Thus, the supply side, which used to play spoilsport, is likely to be reined in. Once this equilibrium is reached, cement prices should move to levels from where they had fallen to, and after that there is a possibility of increase in cement prices by 10-15 per cent in different pockets in the country.

Do you see the prospect of localised price spurts than a broad-based rally (for instance, Tamil Nadu and Kerala until two years ago had seen prices, which were higher than elsewhere in the country)?

Cement is a freight-intensive low-value product that cannot be transported over long distances and, hence, pricing will continue to be a regional play. Cement prices are unlikely to move up or down on a national scale and factors such as demand-supply in a region and presence of stronger/weaker players would determine prices. Andhra Pradesh, Maharashtra and Rajasthan are three pockets where supply still outstrips demand, and till these States see some quantum of balance cement prices would continue to rule weak.

Do you think the consolidation (Grasim-L&T and Gujam-ACC), in particular, has altered the pricing patterns — have they moved totally into the hands of the bigwigs in the industry?

Big players have made an impact in bringing price stability, but only in pockets where they have a larger marketshare. But as long as smaller players continue to be around, they can always create ripples that even bigger players will find difficult to control. All the four players have always had fairly large all-India market share but, at the regional levels, they are all one among many. So, their sobering effect may not last.The road projects have provided the industry with good volumes in the last two years. Have they come at remunerative prices or are their beneficial effect limited to improving the demand-supply situation?

Cement supplied to road projects are tender-based or at a price negotiated with the supplier. They help companies in selling bulk volumes. GACL normally does not participate in tenders and, hence, is not really affected by the discounted prices. However, it diverts some cement from the retail market, which is GACL's mainstay and, hence, it benefits the company.

How do you view the effect of the consolidation by some major players in the industry? Would producer pricing power improve as a consequence?

Consolidation in cement industry cannot happen till cement prices improve and the buyer has sufficient cash and lenders cushion to lend funds for acquisitions.

Since cement producers (sellers) have a price target in their mind they are unlikely to sell at a price, which is lower than their expected price.

The consolidation of cement industry would depend more on the willingness of the seller rather than economic and logical reasoning, It looks unlikely that the sellers would be willing to sell at realistic price. In any case if the company has debt, it will be lenders' headache rather than the promoters who would not be worried about the outstanding loan. Yes, there would definitely be some degree of price stability once the industry consolidates.

How do you see the demand-supply trends in the next couple of years?

The cement demand has been growing at a healthy clip; despatches in 2001-02 were 102 million tonnes, which translated into growth of 10 per cent. The annual despatch in 2002-03 was 111 million tonnes, translating into a growth of 9 per cent. We expect the cement despatch to continue at 9-10 per cent on an enlarged base.

No greenfield capacities are coming up for the next three years, as none of the existing players has announced any new projects, and three years is the minimum time that any company will take to set up a cement plant.

Besides, neither the capital market nor the lenders are likely to support new projects. Brownfield projects are not such an issue as they would not constitute a huge addition to capacity at one go. Thus, it will not have a great impact on cement prices for a longer period.

(To be concluded)

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