AP split: Is it ‘ache din aane wale hain’ moment for cement cos?

Are good times round the corner for the cement industry in the South? At least the industry thinks so.

The reason for its sudden optimism is the bifurcation of Andhra Pradesh – the largest manufacturing and consuming market in the southern region – into Telangana and Seemandhra. The industry expects cement consumption to pick up as a new capital and associated infrastructure have to be built for Seemandhra.

After years of slowing sales, cement plants not running to full capacity and falling prices, the cement industry is now talking of a revival. With a business-friendly Chandrababu Naidu as Chief Minister of Seemandhra, it is only a matter of time that big projects are announced.

Shortly before he was sworn in, Naidu met a few industry leaders and assured them of all help. More importantly, he reminded them that if Hyderabad is what it is today – the re-positioning of the city as Cyberabad, a new airport, the flyovers and the numerous high-rise office and apartment complexes – the credit should largely go to him. And, he resolved that he would do one better for the new capital, as and when it is chosen and work starts.

The industry had a good run for a few years till the Assembly elections in Andhra Pradesh in 2009. With the model code of conduct in vogue before the 2009 elections, all government projects came to a standstill. The cement industry believed that things would pick up soon after, but the death of Chief Minister YS Rajasekhara Reddy in a helicopter crash in September 2009, a few months after he took office a second time, resulted in a prolonged period of political uncertainty in the State, because of which administration suffered and project implementation took a backseat.

Prior to Rajasekhara Reddy, it was during Chandrababu Naidu’s tenure as Chief Minister (from 1995 to 2004) that a number of mega projects were unveiled in Andhra Pradesh, especially to remodel Hyderabad as a city that will compete with Bangalore for IT investments.

A new airport built by the private sector, a 20-km-long flyover from the airport to the city and a host of large projects ensured that there was a good demand for cement. Besides, there were government-sponsored irrigation and low-cost housing projects that too ensured a steady offtake.

AV Dharmakrishnan, CEO, Ramco Cements, which has cement plants in Andhra Pradesh and Tamil Nadu, is confident that Chandrababu Naidu means business. A new capital will have to be built, which means a Secretariat, Assembly building, Raj Bhavan for the Governor, airport and educational institutions will have to come up in Seemandhra. These will not be mere announcements but will be completed on schedule. That is the reputation that Chandrababu Naidu earned during his earlier stint as Chief Minister of the then unified State.

According to Dharmakrishnan, cement demand in Andhra Pradesh peaked during Chandrababu Naidu’s second term as Chief Minister and Rajasekhara Reddy’s first term in power. Demand then grew at nearly 20 per cent on an average every year, he says. “The potential is huge. The industry will grow by leaps and bounds in Andhra Pradesh over the long-term,” adds Dharmakrishnan.

Another advantage for Andhra Pradesh is the huge limestone reserves that it has. This and the growth in demand prompted existing companies to expand capacity and new players to enter the market.

At the peak, according to Dharmakrishnan, unified Andhra Pradesh consumed over 20 million tonnes of cement; it is now almost half that figure.

Sreekanth Reddy, Executive Director, Sagar Cements, echoes Dharmakrishnan’s views on the long-term prospects of the industry, but says it will take another 12-18 months for cement demand to really pick up. The site for a new capital for Seemandhra has to be identified first and only then can work start on building the various facilities. “It will definitely take a good 12-18 months before real spend on infrastructure happens,” he says. Things should look good for the cement industry for three-four years as the projects take shape.

“The graph,” says Sreekanth Reddy, “will not probably follow what people expect (of a sudden pick up). It will be a slow growth but longer lasting.”

Industry players say that in the month since the elections results were out, cement prices in both Telangana and Seemandhra have gone up by nearly Rs 100 a bag. There is no significant pick up in demand, but a dramatic improvement in sentiment, according to them.

With the anticipated pick up in demand, major cement players with plants in unified Andhra Pradesh, who were moving it by rail to the eastern markets, hope they will be able to sell a bulk of the cement in Telangana and Seemandhra itself. After the bifurcation of the State, a bulk of the cement capacity – close to 50 million tonnes – will be in Seemandhra and about 30 million tonnes in Telangana.

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