In the past couple of my write ups I have tried to bring you the potential growth momentum invisibly present in the Indian sectors. I hope I was able to give all investors from corporate finance to individual retail investors a probable idea on their investments plans.
As we all know that Indian infrastructure is poised for huge growth in the coming decade particularly with the 12th –Five year Plan, where investments in this sector will bring the growth not only for Indian economy but also for the global economy too. With infrastructure we bring growth of and demand of steel and cement. These two are the prime inputs of infrastructure. In other words these two sectors are the eyes of Infrastructure. Demand of cement will be increasing in the coming quarters. Infrastructure is not only the reason behind demand but also Real Estate will be another momentum builder for cement. Without making any further analysis of finding out from where the growth of the Indian cement industry will come we will try to hit the “BULL’s EYE”
In 2011 we find a golden era for the Indian cement sector. Those speculators who are speculating that the industry is facing excess supply and low demand are just betting on the short term outlook and now enabling to foresee the long term huge potential of growth waiting outside the door.
If we look towards the probable (M&A), we find another round of good growth for the domestic market.
Mergers and Acquisition (M&A), PE deals
The cement industry is pushing for increased use of cement in highway and road construction. The Ministry of Road Transport and Highways has planned to invest US$ 354 billion in road infrastructure by 2012. Housing, infrastructure projects and the nascent trend of concrete roads would continue to accelerate the consumption of cement.
Where we need change?
But apart from these growth and investments opportunities we find a number of hindrances for the growth of the sector. Coal is one of the biggest problems. It’s not that India doesn’t have coal blocks but it’s the mining and environmental policies which makes the delay in getting the coal from the blocks.
A very quick proof of the upcoming demand of cement industry is being found from the requirements of the raw material required for Cement production. Jindal Steel is going to open 129000 tones cement production capacity and for this they will need coal. This have made them to acquire the Canada’s CIC Energy Corp. for $414 million (Canada $422 million). The deal involves JSW picking up a 100% stake in the coal mining and power firm which owns 2.6 billion tonnes of coal reserves in the Mmamabula region of Botswana.
This buyout only reveals that flow of funds is moving from Indian investments to other pockets. If the money spend for global acquisition was deployed in the domestic process of cola fields then imagine and work out the growth mining and other industrial ancillaries would have achieved. We need to work out on mining and environmental policies otherwise Indian economy and industrial growth will not be able to pick up the pace of growth.
Historically the Cement Industry has witnessed growth of:
• Until 2008, cement production in the ten countries in question grew by more than 10% each year, as cement plants strove to meet growing demand.
• As a result, output in 2007 exceeded the figure observed four years before by more than 50%.
• In 2008, however, the 90 cement plants operating in the region reduced production levels to just over 90 million tones – with Russia accounting for 60% of total output – in order to adjust to the more modest demand for, and increased imports of, cement to the region.
• This was followed by a 17% reduction to fewer than 76 million tones in 2009, as construction activity declined substantially.
Where others capitalize?
We often do comparison with Chinese economic growth. One must remember they have easy guidelines for promoting investments in their economy. China’s cement industry for the rapid development of domestic production capacity could lead to a surplus situation, at all levels within and outside the industry have been discussing with the call for the domestic large-scale cement enterprises to go abroad, to foreign investment. They have grown well within the house and plan to move further. China’s cement enterprises go out consists of three levels: Firstly, the cement exports, and second, cements technology and equipment companies go global, three cement manufacturing companies invest and build factories overseas. We need strategies like this to grow and expand Indian cement industry.
Go for a Long Drive@Clear the Haze.
At the end I would like to advise investors and corporate finance and private equity investors do open their eyes and look for the invisible growth of the future of cement industry. There are plenty of investment opportunities in hand at present and will be more in the coming quarters. Demand fluctuates but that does not mean it will not increase beyond the ordinary level. Once it start picking up it might be impossible for the existing production capacity to entertain the growth. Invest with long term mindset and don’t go for the words of short term. If one can understand that if Sensex needs to surpass and reach higher figures Indian infrastructure is the only wheel and that wheel needs the support of cement, steel and finance to keep rolling the wheel. 30000 Sensex is possible and Indian GDP growth of 10% is achievable provided we change the outlook towards the growth. We had enough of conservative outlook. We need to have a bold and a cautious outlook so that we don’t miss any opportunity of the long term
Indraneel Sen Gupta
Financial, Economic Writer and Research Analyst.