Cementing India's Urbanization: How the Cement Sector is Fueling the Nation's Development

Industry Overview

India is the second-largest cement producer globally, with an installed capacity of 570 million tonnes per annum (MTPA) as of November 2023. The industry is primarily driven by private players which control 98% of the total capacity. The top 20 companies account for 70% of the total production, indicating industry consolidation over the last few years. Geographically, the southern and western regions have a higher concentration of large cement plants, housing 77 out of the 210 large plants in the country. The Indian cement industry is expected to grow at a CAGR of 4-5% through FY27, reaching 450.78 MT.

The Indian Cement Landscape

Northern Region (20% of grinding capacity and 24% of clinker capacity)

Over FY06-23, demand grew at 7% CAGR, while capacity addition grew at ~9% CAGR, keeping utilization below 80%. An additional 21MT capacity is expected over 4QFY24-27E, as demand is projected to improve from urban and rural housing. The region's capacity is expected to reach 146MTPA by FY26E, implying a CAGR of 7.3% versus a demand CAGR of 7.7% over FY23-26E.

Central Region (13% of grinding capacity and 12% of clinker capacity)

Over FY06-23, demand grew at 5.5% CAGR, while capacity addition grew at 7% CAGR, keeping utilization below 80%. An additional 19MT capacity is expected over 4QFY24-27E, as demand is projected to improve from overall development and religious tourism. The region's capacity is expected to reach ~86MTPA by FY26E, implying a CAGR of 7.6% versus a demand CAGR of 8.3% over FY23-26E, which shall increase utilization to ~80% in FY26E.

Eastern Region (20% of grinding capacity and 13% of clinker capacity)

The Eastern region has become the driver of all-India cement demand growth over the last few years. Cement demand in Eastern India (including the North East region) has been growing in double digits since FY15, except during the COVID-19 period. Industry capacity utilization has improved from 60% in FY17 to 72% in FY23. Over FY06-23, demand grew at 9% CAGR, while capacity addition grew at 10.5% CAGR. An additional 40MT capacity is expected over 4QFY24-27E, as the long-term demand story remains intact. The region's capacity is expected to reach 168MTPA by FY26E, implying a CAGR of 11.5% versus a demand CAGR of 8% over FY23-26E.

Western Region (13% of grinding capacity and 12% of clinker capacity)

Over FY06-23, demand grew at 4.4% CAGR, while capacity addition grew at 6.9% CAGR, keeping utilization below 60%. An additional 15MT capacity is expected over 4QFY24-27E, as urban real estate trends, such as the requirement for bigger houses, second homes for retirement, and higher affordability, have driven volumes in urban real estate markets over the past two years. This has generated strong demand for cement in the western region, which also benefits from demand spillover from the northern and southern regions.

Southern Region (33% of grinding capacity and 39% of clinker capacity)

Over FY06-23, demand grew at 5.1% CAGR, while capacity addition grew at 8.1% CAGR, keeping utilization below 60%. An additional 35MT capacity is expected over 4QFY24-27E, as demand is projected to improve from individual home buyers, the housing segment, and infrastructure. As demand improved sharply post-COVID-19, producers aim to increase capacities to retain their capacity share. The region's capacity is expected to reach 220MTPA by FY26E, implying a CAGR of 5.9% versus a demand CAGR of 7.3% over FY23-26E.

Key Drivers and Investment Thesis

Strong Correlation with GDP growth: Over the last 30 years, the long-term average cement demand growth in India has been 1.1-1.2 times the GDP growth. The cement-to-GDP growth rate varies depending on industry-specific factors such as demand, supply, and pricing power. Over the last four years, despite the COVID-19 disruption, the cement industry added 113MT capacity to reach ~585MTPA.

Utilization to reach ~70% by FY27E: Cement industry utilization dipped to ~63% in FY21, then improved to 67% in FY23. With strong demand growth expected over the next few years, utilization will improve to ~70% by FY27E. Industry utilization remains at lower levels, as capacity grew faster than demand and production over the last 5 years.

Mass Rapid Transport System (MRTS) has emerged as an effective means of mobility for citizens in Tier-1 and Tier-2 cities, with Metro being a major player. According to industry officials, ~70km of metro requires 2.6MT of cement, translating into ~24MT of incremental cement required for ongoing metro projects of ~632 km.

Real Estate Revival: The real estate sector emerged as the second-largest sector in 2023, witnessing a record-high of INR 66,400 Cr. across 55 deals, reflecting a 15% year-on-year increase compared to INR 57,700 Cr. across 95 deals in 2022, marking the highest-ever value of PE/VC investments in this sector.

Rising Urbanization: 39% of India's population is expected to reside in urban areas by 2030, compared to 35% currently. The average size of Indian households declined from 5.3 members in 2011 to 3.1 members in 2022. Industry experts expect smaller households to add 6-7 million houses every year.

The Pradhan Mantri Gram Sadak Yojana (PMGSY), launched by the Government of India in 2012, aims to provide connectivity to unconnected habitations as part of a poverty reduction strategy. According to the latest figures from State Governments, about 1.67 lakh unconnected habitations are eligible for coverage under the program, involving the construction of about 3.71 lakh km of roads for new connectivity and 3.68 lakh km for upgradation, resulting in higher demand for cement.

National Infrastructure Pipeline (NIP): This initiative, with an expanded scope of 9,305 projects, entails substantial investments in infrastructure development, directly benefiting the cement industry.

Pradhan Mantri Awas Yojana (PMAY): This scheme promotes affordable housing for economically weaker sections and low-income groups, thereby driving cement consumption in rural and urban areas. Under this scheme, the aim is to build over ~5 million houses every year.

Major Players in the Cement Industry

Ultratech Cement

A flagship company of Aditya Birla Group, Ultratech Cement is the largest manufacturer of grey cement, ready mix concrete (RMC) and white cement in India. With ~22% capacity market share and ~82% utilization, Ultratech is in a dominant position to benefit from impending strong demand growth over the next few years. In December 2023, UltraTech Cement acquired Kesoram Cement from Kesoram Industries for INR 7,500 Cr.. In October 2023, UltraTech Cement announced planned new capital expenditure (CAPEX) investments worth INR 12,800 Cr. to grow its production capacity, beginning in FY26.

ACC

ACC Limited (ACC) is India's leading player in the building material space with pan India manufacturing and production capacity of 36mtpa well spread across regions. The company has 25% capacity market share in East and South each while Central, North and West account for remaining 50%. It had 17 cement manufacturing units with an installed capacity of 36 MTPA as of March 2023, 85 ready mix concrete plants, and a vast distribution network. The estimated revenue CAGR is seen at 11% in FY23-FY26E, primarily led by volume CAGR of ~10%

Ambuja Cements

Ambuja Cements is one of India's largest cement producers with a production capacity of 31.5 million tonnes per annum (expected to reach ~46.7 million tonnes per annum within the next two years). Its key markets North, West, and Eastern India have capacity share of 42%, 36%, and 22% respectively. The company has an attractive geographical positioning, market-leading brands, a large network of dealers/retailers (trade sales >80% of total volume), and strong balance sheet with net cash of ~INR 10,000 Cr.. Consolidated cement revenue is expected to grow at a CAGR of 14% in FY23 FY26E, primarily led by volumes which is expected to grow at a CAGR of ~9% at a consolidated level.

Shree Cement

Shree Cement has consistently added cement capacities over the last two decades to reach 53.4 million tonnes per annum in 3QFY24. For this, the company adopted its tried and tested organic route of capacity addition and successfully multiplied its cement manufacturing capacity 2.5x from 18 million tonnes per annum in FY14 to ~54 million tonnes per annum as on Dec'23. The company also started work on 12 million tonnes per annum cement capacity expansion projects in Rajasthan, Uttar Pradesh, and Karnataka for a total investment of INR 7,000 Cr..

Dalmia Cement

Dalmia Bharat Ltd. is India's 4th largest cement producer having a strong presence in East and South India. Over FY05-23, the company grew from a 1.2 million tonnes per annum single location cement company in the South to a 44.6 million tonnes per annum player (through organic and inorganic expansions) with 15 plants in 11 states across West, South, East, and North East regions. Dalmia Cement is also one of the largest producers of PSC (Portland Slag Cement) in India with ~16% volumes. It aims to become a pan India player with planned capacity expansion at 14-15% CAGR to reach 110-130 million tonnes per annum capacity over the next decade.

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