Interim Report - II

1/27/2016

Strategic Management Project

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20
21
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24

Group-4

0027/52
0040/52
0052/52
0058/52
FP/07/15
FP/12/15

Akancha Anima Tirkey

Amerla Giridhar
Ananth Babu L
Anisetty Naga Rohith
Himanshi Rajora
Shalini

Overview of Cement Industry In India:

India is the second largest cement producer in the world with production capacity of nearly 390
million tonnes (MT) and accounts for about 6.7% of world cement capacity. The cement
production capacity is expected to reach 550 MT by FY 20.Of the total production capacity,
private sector accounts for 98% of the total capacity and rest lies with the public sector.
Indias cement production increased at a compound annual growth rate (CAGR) of 6.7 per cent
to 270.32 million tonnes over FY0715. As per the 12th Five Year Plan, production is expected
to reach 407 million tonnes by FY17.
Introduction of Ambuja Cement Company
Ambuja Cements Ltd, a part of the global conglomerate LafargeHolcim, is one of the leading
cement companies in the Indian cement industry. Ambuja has a cement capacity of 28.75
million tonnes with five integrated cement manufacturing plants and eight cement grinding
units across the country. It is the first Indian cement manufacturer to build a captive port with
four terminals along the countrys western coastline to facilitate timely, cost effective and
environmentally cleaner shipments of bulk cement to its customers.

Porters Five Forces Analysis

Porters Five Forces Analysis provides a competitive forces framework that allows us to better
understand the different dimensions that govern competition within an industry. Porters five
forces are
1. Competitive rivalry - HIGH
There are many large players in the industry and it needs with huge capital investment in
production units, therefore, they start aggressive competition. Also, the differentiation in types
of cement is marginal, hence the switching cost to customers is not high, so firms compete
intensely to gain market share. Also, sometimes problem of overcapacity comes into play. This
leads to a price war and competition intensifies.
2. Threat of substitutes - LOW
In India, cement is the ultimate material used for almost all type of construction work.
Bitumen is one of the substitutes of cement but these days cement is even replacing bitumen.
Another substitute for cement is engineering plastic. This also cannot replace cement in many
areas of work. Hence, there is practically no material to substitute cement.
3. Bargaining power of buyers - MODERATE
In the cement industry, the bargaining power of buyers is moderate because the majority of
buyers are bulk buyers. These buyers can bargain with the cement companies. However, their
bargaining power is not very high as their purchases form a small part of the total production of
the companies. Hence, they cannot exert much influence on the manufacturers.
4. Bargaining power of suppliers - HIGH

In this industry, the suppliers exert a very high power. This is so because the raw materials form
a very large part of the process in the manufacturing of cement. Shortage in supply of raw
materials can cripple the whole plant and can lead to huge losses.
5. Threat of new entrants - LOW
Cement industry is a highly capital intensive industry with long gestation period. Also, the
market is experiencing the problem of over-capacity in recent times. The existing players are
also expanding their production capacity to meet future demand. All these factors act as a
deterrent to new entrants even though labour and manpower is freely available.

Reasons for differing with the Analyst:

We would like to change the analyst rating of Ambuja Cements to SELL from HOLD. We have
identified some of the key reasons for the same.
1. Growth prospects of the cement industry Not so attractive:
Overall the demand growth is showing a decline due to slowdown of economy.
Supply continues to exceed demand. The cement industry cranked up 119
million tonnes (mt) of incremental capacities over the past five years versus ~78
mt over FY05-10, anticipating super-high demand. However, the expected
demand failed to fructify, triggering overcapacity, with utilization rates
plummeting from 89% in FY10 to 74% in FY15. Currently, utilization levels for the
cement sector are close to a historical bottom at around 70%.
Currently, tax component on cement industry is almost 55-60% on ex-works
selling price.
Through there are many government schemes which boosts spending and
demand for cement, How much of that translates into action on the ground
remains to be seen. Unless the core manufacturing and infra sectors post robust
growth, the cement sector will continue to be unattractive for investors.
2. Ambiguous Management:
The lack of clear policies on Indian operations post the global merger of Holcim
and Lafarge can be seen as a key risk. Currently, there is news going around
saying, French cement maker Lafarge SA has decided to sell all its assets in
India. Meanwhile, the proposed change in structure of holding of ACC and
Ambuja under the Holcim Group, is also pending approval of the Foreign
Investment Promotion Board (FIPB) and, hence, lacks clarity.
3. Key Financials continue to take a downward turn:
Ambuja cements top-line fell by 4.2% yoy to `2,095.2cr, impacted by weak
demand and fall in realization.
Realization was down by 5.8% yoy due to pricing pressure in its key markets of
North and West regions.
Profits were lower due to a weak operating performance coupled with higher
depreciation expenses and lower other income.
The estimated growth rates for both the Cement industry as well as Ambuja
Cements remains to be negative.