Cement: Pre-budget sector analysis

Infrastructure spending - The ongoing road construction project, the proposed airport privatization and river linking projects are fundamental long-term growth drivers for the industry. The Golden Quadrilateral project is already in its final leg, albeit delayed. Accelerated spending in infrastructure is likely to mute the cyclicality aspect of the cement business.

Housing demand support - Cement demand has remained healthy also on account of strong support from the housing sector. Considering the steep shortfall in dwelling units in the country, prospects for the sector are promising. This is also helped by the low interest rate regime.

Demand-supply dynamics - Unlike the last decade, the oversupply situation in the cement sector is likely to reduce thus bringing along with it some extent of pricing power. So, the operating profit growth is likely to be faster than the topline growth in the long-term.

Consolidation trigger - The industry is lot more consolidated now that it was ever in the past. It is estimated that the top five players account for almost 60% of capacity. Fragmentation reduces pricing power and consolidated operations improve efficiency apart from providing pricing power.

Other positives - Among other positive factors for the Indian software industry, the major ones are - large availability of talented manpower, cost advantage and geographical advantages (time-zone advantages).

Slow progress of reforms - Infrastructure spending, in the recent past, has been largely restricted to the government. The private sector has not been provided adequate impetus, which impacts the overall growth of the economy. Liberalizing FDI in the public infrastructure sector could provide a big fillip. But this has been slow to come by.

Entry of new players - Global majors like Cemex and Holcim are eyeing emerging markets (including India) for growth. Though smaller players could close down operations, entry of new players could restrict the pricing power. Fragmentation could increase. Lafarge is already one of the top six players in the country.

Susceptibility to coal and oil prices - Cement is a commodity business and any company's ability to maintain margins is dependent on the pricing environment apart from factors like access to coal and stable transportation cost. The rise in coal prices and hike in petroleum product prices could pressurise margins.