Indian Cement Industry: Set to grow

The one Indian industry which is set for growth over the coming years is the Cement Industry. The world’s second largest cement producer (after China) reached its total installed capacity to 231 million tones after adding 11 million tones of capacity during the first half of 2009.

The main characteristics of this industry is that it is highly fragmented, cyclical and highly capital intensive. There are around 125 large and 300 small cement plants. Some of the leading cement manufacturers are UltraTech/Grasim combine, Dalmia Cements, India Cements and Holcim. Returns depend on the vibrancy of the economy as a whole as it directly affects the sales realization and capacity utilization.

The industry is heavily dependent on 3 sectors; coal, power and transport. Energy and freight are the two major cost components. Over the last few years, while the proportion of energy cost has increased marginally, freight costs have declined.

Increasing government expenditure on infrastructure sector and rising demand for commercial and residential real estate development has resulted in higher demand for cement in the country. According to a report by the ICRA Industry Monitor, the installed cement capacity is expected to increase to 241 million tones per annum by the end of 2010. It also expects that driven by higher domestic demand and increasing utilization, India's cement industry may record an annual growth of 10% over the coming years.

Taking cue of the global economic slowdown which was affecting cement companies in India last year, Government’s initiative to re-impose counter-veiling duty and special counter-veiling duty this year will help provide a level playing field for domestic players. Moreover, it also appointed a coal regulator to facilitate timely and proper allocation of coal blocks to the important sectors like cement. As coal is one of the prime raw material used in cement production, this seems to be a positive move.

Growth potential of cement industry can be judged by the fact that the per capita cement consumption (156 kg) in India is still well below the global average consumption (396 kg). This gap can be expected to be covered in the coming years. Besides, housing sector accounts for almost 50% of the total cement consumption in the country and the large young population will ensure that the demand for infrastructure stays put.

The rising cost of energy, transportation raw material continues to pressure the industry as a whole. To sustain profitability, companies will have to explore alternate source of energy while at the same time enhance their operational efficiency.

Industry experts opine that the cement industries should now increase their focus on investing adequately in developing human resources that will be capable enough to address the professional needs of construction industry including advanced technologies and construction practices, project management construction and litigation.

Some of the concerns facing the Indian Cement Industry

REITs: Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is like a mutual fund that invests only in real estate. It can buy, manage, sell and develop real estates. It breaks down the ownership of real estate properties into units that are sold to investors. As per Draft Securities and Exchange Board of India (SEBI) (Real Estate Investment Trusts) Regulations 2008, REITs should carry a minimum net worth of rupees three crore at the time of registration, increasing to rupees five crore within three years from the date of grant of registration. As per the draft regulation, REITs should distribute 90% of its income (generally rental income) to its investors as regular dividends. By investing in REITs investors can reap the benefits of investing in real estate without going through the long and tedious procedure, besides REIT units can be easily liquidated unlike traditional properties.


REITs are typically established by sponsors that then enter into management agreement with Real Estate Asset Management Companies for managing their REIT schemes. Public is then invited to subscribe to the units of their schemes. Units under REIT schemes must be mandatorily listed on any recognized stock exchange within a period of six weeks from the closure of the scheme.


Broadly, REITs are classified as equity, mortgage or hybrid REITs. Equity REITs are the most common form of REIT especially in the US, the world’s largest REIT market. While Equity REITs earn revenue in the form of rents and leases by buying, developing or owning properties, Mortgage REITs earn interest from financing property deals.


Some REITs can also be sector specific that invest only in commercial buildings (malls, office buildings, warehouses, community centers or entertainment centers) or residential buildings. Investors can choose schemes based on their risk appetites. Some of the key ratios to judge an REIT’s performance are NAV (Net Asset Value), AFFO (Adjusted Funds from Operations) and CAD (Cash Available for Distribution)


An advantage of investing through REIT is that they hire professionals and legal experts that make sure that the property they are investing in has a free title and is free from any legal mess. Moreover, as REITs invest in many sectors like retail, commercial and residential properties, investors can reap the benefits of diversification which they may be unable to do within their available resources.


In 2007, SEBI had introduced a draft regulation for REITs. Legislations governing the establishment of REITs were expected to be introduced by the end of 2009. However, the current bearish mood and lack of investor confidence in real estate markets seems to have forced the Indian Government to push away introducing any legislation as of now.


Given the lack of transparency and standardization in pricing of real estate properties, raising funds from capital markets is a major challenge for REITs that continue to deploy high level of debts to improve their returns. RBI too continues to maintain a cautious approach while lending to real estate sectors. Besides this, higher transaction costs and delays in obtaining approvals are creating bottlenecks.


Following are some of the reasons to believe that REITs will be a success in India.

1. Demand for residential and commercial spaces have picked up after a lull in 2008.
2. In India, Average rental yields are much higher (8.5% to 10%) compared to other countries (Japan: 3.5%, Singapore: 5.2%, Hong Kong: 5.7%).
3. Development yields are comparatively much higher in India compared to other developed countries.
4. Increasing urbanization and growing income will make sure that the demand for real estate attracts investment.


Experts suggest that awareness, expanded credit availability and increased adoption of REITs in India will increase the flow of information regarding rent and valuations resulting in improved transparency in pricing of properties. By gaining access to capital markets and exit routes REITs can improve margins and can reduce their overall cost of capital.