The Hindu Business Line : Why the regional mix matters

If there is one key success factor that investors should watch out for while selecting cement stocks, it is the location of the player. The potential for demand growth in the market they operate in makes all the difference between growth and stagnation. The bulk nature of the commodity prevents easy transport from regions of excess supply to those of scarcity.

The transportation cost incurred in hauling the commodity will eat into margins and the manufacturer may end up with little profit. Also, as the shelf-life of cement is short due to its moisture absorbing nature, producers can’t stock it, waiting for demand to pick up.

Strong demand

The western part of the country seems attractive from this angle, with a lower volume of new capacity additions and higher potential for demand growth. According to a report compiled by CMIE, Gujarat has attracted fresh investments to the tune of Rs 3.5 lakh crore between January and March this year, following the Vibrant Gujarat Investors Summit. As they are flagged off, these projects may add to cement demand.

Military projects in Rajasthan have helped higher off-take in this region too. The Western region also takes the least share in new additions this year, with only 9 per cent of the 50 million tonnes of scheduled new additions coming up here.

India Cements, a predominant player in the South is entering the West, with a one-million-tonne grinding unit at Parli, Maharashtra, which is in progress, and another 1.5-million-tonne capacity in Rajasthan. Jaiprakash Associates is the other player planning expansion in this region. The North is another pocket where cement demand is expected to be strong following construction activity related to the Commonwealth Games. Year-to-date 2009, total despatches in the region were 15.53 million tonnes, a healthy 15 per cent higher than the last year. The prominent players in the North and Western regions are UltraTech, Grasim Industries, ACC, Shree Cement and JK Lakshmi Cements. The Eastern pocket has also reported an 11 per cent consumption growth on a year to date basis.

CAUTION IN THE SOUTH

The South, which for most part of 2008 was among the most attractive markets due to strong prices and above-average demand growth, is now showing signs of weakness. Increased capacity additions in the past two quarters have brought down the capacity utilisation rate to 84 per cent in the region by April (91 per cent in the North and 98 per cent in the West).

However, prices still continue to be at an all-India high of Rs 276 per bag. They might undergo some correction in the months to come following higher supply. Further, this region is expected to see the highest increase in cement production volumes this year as over 50 per cent of the new capacity additions have been lined up in this region.

The Southern cement market is predominantly of players such as India Cements, Madras Cements, Dalmia Cement, Andhra Cement, Chettinad Cement and a few other smaller players.

RAJALAKSHMI SIVAM

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