risk appraisal-cement industry report

Risk appraisal –Cement Industry 1

INDUSTRY RISK ANALYSIS

CEMENT INDUSTRY

PERIOD OF ANALYSIS FY 2002-03

Abstract The paper attempts to analyse the historical trends observed in thecement industry and draw out inferences as to the dynamics thatoperate within the the industry. The study has touched upon thefollowing :-

a) Key economic features of the industryb) Degree of competition & evolving market structurec) Competitive analysis of the industry.d) Financial performance of playerse) Competition & Strategies at the firm levelf) Emerging trends & outlook in industryg) Risk profile of the industry

Analyst : Krishnan ChariDy Manager (Risk )UTI Bank Ltd


EXECUTIVE SUMMARY

1. Indian cement industry has a long history and contributes significantly tothe GDP of the economy. The industry comprises of 110 cement units ofwhich 40 are large. The total aggregate capacity for cement production ason FY 2002-03 is 130 million tonnes . At present the industry operates at83% capacity utilisation resulting in a total production of 107 milliontonnes. Domestically, the cement industry is very competitive . Though50% of aggregate capacity is controlled by major business groups such asACC, Gujarat Ambuja ,L&T, Grasim, India Cement etc. the rest of thecapacity is still fragmented among independent cement units.

2. Globally cement industry contributes very little to international trade andaccount for 6 to 7% of the total world trade. As cement is a bulkcommodity , movement over long distances is uneconomical and requiresspecial bulk material carriers. Due to this reason, international trade isconcentrated mainly in cement clinker and countries which are poor inlimestone reserves import clinker for processing it into cement.

3. The demand supply imbalance continues to exist resulting in excesscapacity plaguing the industry. The demand for cement in the WesternStates during FY 2001-02 was sluggish on account of delayedimplementation of public projects and lack of private investments.However, the demand in Eastern and Southern States has been buoyant onaccount of civil constructions, road projects, rural infrastructure andhousing constructions by agricultural class. Following the regionalpatterns in demand variation in prices were maximum viz; 10.84%, in theEastern Region and minimum viz; 5.63% in the Western Region. Thoughthe overall macro economic situation has not dramatically changed duringthe FY 2002-03, towards the second half, construction activity is reportedto have gone up by 7.2% as against 2.7% in the second half of FY2001-02.This is indicative of a slight recovery on account of improved Governmentoff take of cement for rural and urban infrastructure projects. For thecoming fiscal 2003-04 demand from Eastern and Southern States isexpected to lead the overall aggregate demand for cement. Continuedsigns of recovery however will depend upon Budgetary policy for 2003-04.


4. Price realisations have been low due to excess capacity in industry, costescalation by way of freight rates, power tariffs, due to inadequate bulkhandling terminals/transport carriers and frequent revision in electricitytariffs by SEBs have resulted in increased pressure on net margins ofcement units. A sample of 26 large cement units shows signs of financialdistress across the spectrum of the industry. Companies especially theleaders such as ACC, Gujarat Ambuja, L&T, Madras Cement, GrasimIndustries, etc. are working towards cost effective logistics, brand buildingand process improvement in order to manage costs and improve theirbottom lines.

5. The industry was fragmented with large no of firms with capacities of 1million tonnes and below. As mentioned above, the excess capacitysituation led to increased pressure on net margins. The market structurebegan to evolve since 1996 through mergers and acquisitions. The ongoingconsolidation though slow, is expected to result in few business housescontrolling capacities across various regions. In the long run, the likelymarket structure will be oligopolistic in nature where firms/ businessgroups would compete by way of product differentiation and adoptdifferential pricing strategies.

6. The emerging market trends are, focus on blended cements, specialcements such as Ready Mix Concrete, shift towards cement beingpositioned as a retail commodity and increased investment in materialhandling terminals.

7. In a nutshell, we may infer that players with deep pockets , whoincreasingly focus on enhancing operating efficiency, achieve highereconomies of scale are not dependent on few regional markets but havemore or less national presence , have good distribution network, possessstrong brand recall will survive in the long run.

On the risk rating framework, the cement industry scores 63 points andhas been awarded a rating of UB-BBB indicating moderate safety with ahigher impact of risks emanating out of business, earnings, marketstructure and government policy.

8. The present portfolio of the bank comprises of mid sized players in theindustry concentrated in southern markets. The Bank must broad base itsexposure in cement industry by exploring relationships with industrymajors and also diversify its regional exposure in this industry.


TABLE OF CONTENTS

Index Sections PageA Key Economic features of cement industry 5B Competitive analysis of the industry 16C Key success factors for players in the industry 21D Financial performance of large cement units 22E Strategies at the firm level 23F Emerging market trends & future outlook 24G Portfolio concentration risk ( at industry level) 26H Risk profile of the industry 27I Industry rating 29J Risk of bank’s portfolio 31

Annexures1 Cement Industry rating sheet2 Concentration risk in industry portfolio3 Banks credit exposure to cement industry as on 31 Dec 20024 Financial analysis on a sample of large cement units5 Cement market majors6 Degree of Concentration of market power in industry7 Econometric model for Cement demand estimate.


A ) KEY ECONOMIC FEATURES OF CEMENT INDUSTRY :

1. Economic Importance of Cement Industry :

Percentage contribution to GDPThe economic importance of cement industry emerges from its sectoralcontribution to the GDP of the country and partly also because Cement hasbeen the key ingredient for construction activities in a wide range of sectors.Infrastructure and commercial construction activity account for 75% ofcement off-take while housing construction accounts for 25% of cementconsumption. As construction activity on the whole contributes 5.51% toGDP, cement being a direct response to construction activity is also a majorindustry .

2. International Trade :

Since cement is a basic commodity with virtually no substitute, it is usedworldwide for construction purpose. Only countries that have adequatelimestone reserves are producers of this commodity while others importcement or clinker . In FY 2000, the worlds largest cement producing countrywas China with a total production of 520 million tonnes.

Cement is a low value bulk commodity and freight costs are significant factorin determining the landed cost of cement. Higher freight costs result in lowervolumes of international trade in cement. The overall world trade in cementfalls in a narrow range of 6 to 8% of the total world trade. Major importingcountries happen to be developing nations where public sector investments ininfrastructure projects are high. However, Middle East imports its entirecement requirements due to a non availability of lime stone reserves and alsodue to demand from oil well construction projects. India’s share in bulkmovement of cement in international markets was around 1% in 1999 which isvery low and leaves sufficient scope for improvement.

USA is the major international market for cement and is supposed to beconsuming around 20% of international production of cement. Majorexporters to USA are Europe, Latin America, China and Canada. South EastAsian countries also account for significant trade in cement. Cement tradebetween Japan and South East Asia is a significant part of international trade.Clearly international trade of cement is divided between the west and theeast on account of lead distance and bulk transport cost. Note : Holderbank(Switzerland), Lafarge(France), Heidelberger (Germany), Cemex(Mexico), ChichibuOnada (Japan), Italicementi Group (Italy) and Siam Cement (Indonesia)are major


international cement companies. Internationally Lafarge owns many cement plantsover different countries by way of acquisition. In India too over the last two years,Lafarge and Italicementi have already made inroads through acquisition andstrategic alliances.

India exports cement as well as clinker to neighbouring countries. The majorcement exporters are among the top five producers of cement namely L&T,ACC, Gujarat Ambuja , J .K Industries and India Cements. Exports of Indiancement and clinker are mainly to countries such as Nepal, Bangladesh,Srilanka, Mauritius, and South Africa . During the last four years , the growthrate in clinker and cement exports was at CAGR of 3.31% and 18.02%respectively.

Bottlenecks in Indian exports of cement : Besides loss of pricecompetitiveness, structural factors that hinder the growth of cement exportsby Indian industry are :

a) Low rate of ship loading. Cement is packaged in bags and is normallydispatched as break bulk cargo which is not cost effective. Given thelack of adequate bulk handling terminals, the industry is not able toreap the benefits of bulk transport of cement.

b) Inadequate storage facilities at almost all Indian ports necessitates largequantities of cement to be moved at short notice through rail. As thereis already delay in wagon availability, the transport of cement to portsis delayed from the hinterland thereby inflicting higher costs especiallyhigher demurrage charges to be paid for waiting ships. Howevercompanies having production facilities near the coastline such asGujarat Ambuja Ltd have managed these bottlenecks by owningcaptive ports and material handling facilities. This proves the pointthat unless sufficient investments are made in logistics to gain costcompetitiveness, boosting exports is not possible by Indian cementunits.

3. Product standardisation ..Cement is a low value , high bulk commodity and is the key building materialin construction activity. Cement is a highly standardised product withvirtually no substitute as of the present date despite research taking place inalternative construction materials for low cost options.


There are various types of cement further classified into different grades .However the major types of cement manufactured in India can be classified asto their generic uses and quality as under :

BroadCategories ofCement

Uses As % of totalcementproduction

OrdinaryPortlandCement

Useful for all types of civil engineeringworks. Sub categories of OPC haveapplications for urgent requirements(such as airport highway repairs),cementing of oil wells, constructionworks under marine environmentswhich require strong corrosionresistant properties.

62.0%

Blended Cement Blended cement find applications inmarine construction.

37%

SpecialityCement

Speciality cement is used in places ofsevere chemical attack and also inunderground activity where thesulphur is present.

0.80%

Ordinary Portland Cement is manufactured in different types which are putto specific uses due to certain properties . OPC is available as Moderate heatportland cement (MHPC), Rapid hardening cement ( RPC), Sulphate ResistantCement (SRC) , Oil Well cement (OWC), White Cement .Blended cements are manufactured by use of man made compounds such aspozzolona, slag and sandstone.. Blended cements are of different types suchas Portland Blast Furnace Slag Cement (PBFSC) and Portland PozzolonaCement. These cement varieties are more sulphate resistant and are used inconstruction structures which face attack from sulphate elements.

Among the speciality cements, Ready Mix Concrete(RMC) is a recentinnovation in cement product which finds as the name suggests ready to useapplications in infrastructure projects. Internationally, RMC accounts for95%of the cement type used for infrastructure projects. However in India itaccounts for only 0.5% of the speciality cement produced.

Cement quality is measured in terms of its strength which is a function of thequality of clinker and the superiority of the grinding process. Higher gradecement varieties posses higher strength. The international quality of cementhas been on the rise since 1950’s and as of today is in the category of 55 (28day comprehensive strength). Against this the quality of Indian cement is


around 33 (28 day comprehensive strength). Lower quality of Indian cementcan be attributed to lower quality of coal and also that the present basicoperating practice of construction business in India does not favour higherquality of cement . In India, depending upon the pace of construction activitythe standard quality of cement used is of 33 grade.

4. Process technology : Cement manufacturing in India has a long historyand process technology is well established.

The Wet Process, Semi Dry Process and Dry Process are the three types ofprocess technologies available in manufacturing of cement. Among these, DryProcess Technology is widely used by cement manufacturers as it iscomparatively energy efficient and also is a less polluting technology.

5. Demand supply dynamics : The demand for cement is driven by the paceof construction activity in the private and public sector. The segments whichinfluence aggregate demand for cement are infrastructure projects,commercial projects and housing sector. With virtually no threat of substitutethe proportion of cement in construction activity is large. At the macro level itis generally observed that the demand for cement is strongly correlated withthe growth in GDP. The correlation coefficient works out to be around 0.81which indicates high degree of association. Approximately 40% of theconstruction activity is influenced by the government expenditure ( throughexpenditure on ports, railways and other civil structures such as roads andbridges) . As government and private expenditure vary from State to State ,demand is regional in nature and is influenced by economic activity in eachState.

Regional trends in demand growth is as under :We trace the growth in cement demand over two phases of economicgrowth/business cycle the period 1991-92 to 1995-96 consisting of the growthphase and the period covering 1996-97 to 2000-2001 which depicted arecession phase. The regional growth in demand measured in compoundedannual growth rates ,indicate a wide shift in demand across regions.

Region( states)

CAGR ofcementdemand1991-to-1995

CAGR ofcementdemand1996-to-2001

Eastern States 0% 13.12%Northern States 8.82% 9.73%Southern States 16.98% 6.44%Western States 35.45% 4.54%


Observations are as under :

There is a significant shift in demand for cement between States. TheEastern States which experienced virtually no growth in the better partof the business cycle have a CAGR of 13.12% in cement demand duringthe sluggish phase of the economy. The major shift can be attributed tothe increased thrust by the central budgetary outlay on Eastern Statesas well as north Eastern States leading to increase in constructionactivity.

The impact of economic slow down is much severe in the WesternRegion partly on account of reduced business investments , slow paceof infrastructure projects and also natural calamities during the year2001-02.

Demand supply dynamics in different regions for the period Aug 2001 to Aug2002 can be tracked as under :

WesternRegion

Prices in the Western Region witnessed continuedpressure as a result of weak demand and oversupplysituation in both Gujarat and Maharashtra. Thiscoupled with lack of investments in Maharashtraadversely affected the off take in the WesternRegion.

SouthernRegion

While cement demand continued to be buoyant inAndhra Pradesh on account road projectsundertaken in the State, demand in Tamilnaduremained subdued mainly due to lack of investmentfrom the government and slow implementation ofcommercial projects . However, the supply situationoutsripped the demand causing downward pressureon prices.

NorthernRegion

Demand in the Northern States namely UP, Punjab,Haryana and Himachal Pradesh was driven byagricultural and housing segments.

Eastern Region Demand for cement in Eastern States remainedbuoyant leading to very little change in cementprices.


The demand drivers for various regions for the coming fiscal FY 2003-04 isbroadly mentioned as under :

Region( states) Demand DriversEastern Region General housing demand and civil

constructionsNorthern Region General housing demand arising from

agricultural sector.Western Region Demand growth will depend upon the

private investment growthimplementation of general infrastructureprojects and also incrementalgovernment off take.

South Region The quadrilateral projects in the south areexpected to continue till 2003-04. Themain demand drivers will continue toarise from these projects as it has beenduring 2002-03.

Demand-Supply imbalance :

We expect the demand for the FY 2003-04 to be led by the Eastern & SouthernRegion. However we find some capacity additions taking place in regionswhere existing demand conditions are already sluggish. Capacity additionsduring the year was mainly in the States of Gujarat and Karnataka. Theimbalance in demand is expected to continue and persist through the yearend 2003-04 and follow through the coming fiscal 2003-04 unless generalinfrastructure projects and commercial investments take a big leap.

Price elasticity of demand :

As mentioned above, demand for cement is mainly driven by generalconstruction activity. Retail sale of cement is very less, normally cement issold in bulk quantity and mostly through tender mechanisms in case ofgovernment off-take for infrastructure projects. Prices of cement thereforevary regionally and are also strongly influenced by supply co-ordination bycement units. Post deregulation has also witnessed branding of cement whichhas its impact on price elasticity of cement. Statistical measures such as theCorrelation Co-efficient conducted on regional demand and price movementsin the North, West, Eastern and Southern States indicate very low degree ofassociation.


In view of the fact that there are no substitutes and that price elasticity ofdemand is low, the cement units have been building brands to maintaindemand for cement in a sluggish market.

6. Demand Forecast :Based on the quarterly data available on cement demand and GDP estimatessince 1996-97 to 2001-02, we regressed the cement demand ( as a dependentvariable) on the GDP at factor cost( the independent variable). The regressionmodel estimated for cement demand over the short run was as below

Ye= [ ] eiGDPLoga ++ )(βWhere Ye is estimated quarterly demandRegression constant (intercept) =aβ is the regression estimateGDP is the quarterly gross domestic product at factor cost.Ei is stochastic random disturbance The semi log function has been chosen by transforming the explanatory variable GDP into alog scale in order to scale down the computation . However such a variable transformcontinues to maintain the linear relationship among the variables and satisfies the test ofgoodness fit. The R2 works out to 66.25%

The details of the regression calculation are shown in annexure - 7. Thedemand for the quarter Jan to March 2003 estimated through the above modelwas 27.02 million tonnes under 95% confidence interval with a significancelevel of 0.025% ( two tailed test). The interval estimates for quarterly demandwas 31.50 million tonnes as the maximum possible and minimum demandestimate was 22.58 million tonnes. Aggregate cement capacity in the industryis 130 million tonnes. Present operating rate i.e FY2002-0-3 in the industry is83% of installed capacity which works out to 107 million tonnes. Consideringno increase in capacity and 4% growth in GDP during the quarter, cementdemand may be aggregated at 108.08 million tonnes for the ensuing year FY2003-04. Going by the above assumptions the demand supply imbalance isexpected to get corrected by the end of FY 2003-04.

Note : For purpose of demand estimates keeping in line with the historicaldata the GDP growth factors was assumed at 4% over the estimated quarter.

7. Size distribution of players & degree of competition : The overall marketsize comprises of around 40 large cement units which have capacity of morethan 2 million tonnes. The aggregate growth in industry turnover over the lastfour years was at 7.50% CAGR. The sluggish growth in aggregate volumesof cement can be attributed to economic slow down over the last few years.


While volumes have been laggard , the pressure on margins due to low pricerealisations and cost escalation has forced cement units to consolidate .

Cement industry is highly skewed in favour of the large units owned bymajor groups such as L&T, Grasim, Gujarat Ambuja, India Cement , B.K Birla,K.K Birla group, Ramco ,Rajan Raheja , Bangur Group & Lafarge . Theexistence of mini cement plants are due to pre librealisation motives by theregulators to counter concentration of large units in the industry. However,mini cement plants contribute very little to the industry in terms ofcompetition.

The consolidation wave in the industry began since 1996 and continues un-abated till date. The consolidation has been through mergers with exceptionsof some strategic alliances and acquisitions into the market by foreign playerssuch as Lafarge and Italcementi. The extent of competition is still significantand throws up vast opportunities for further consolidation. In this study wemade use of Entropy Index( Er) to measure the degree of concentration in theindustry. The index moves around a value of 1 to 0 measuring increasedcompetition as (Er) tends to 1 and higher degree of monopoly/concentrationof market power as it tends to 0. The Entropy Index for the Cement Industryusing 2001-02 data for 40 large units measures to 0.79 indicatingcompetitive situation in the industry. This is also justified by the fact thataround 50% of the cement capacity in the industry is held by a few largegroups. The remaining share of the market is still fragmented. Themathematical model for Entropy Index is given in the annexure -6

8. Cost, Pricing & Profitability :The factors that influence the cost structure of the industry are the proximityto basic feed stock i.e limestone, demand supply imbalance in availability ofcoal & power and revision in tariffs rates for logistics . Lack of bulk materialhandling & storage terminals lead to delay in dispatches and higher transportcosts. In many a times the units end up paying higher demurrage charges forwaiting ships in case of export consignments. Spatial features of cementplants also influence the cost structure. Cement units are normally clusteredaround limestone reserves and have an advantage in terms of limestoneclinker availability while those located along the coast line have to transportclinker from long distances to processing units entailing a higher cost. Alsothe quality of limestone and clinker differ regionally which impact processingcosts.


On analysis of the cost structure of the industry, the following were thefindings :

Analysis of the major elements of cost structuremeasures of volatility (Variance over 1992-2002) period

Average CostStandardDeviation

Co efficientof variance

CAGR(over 10yrs)

Rs per Bag Rs per bag Volatility Coal 9.97 0.93 9.29% 3.25%Freight-Coal 6.39 0.93 14.62% 4.31%Power 17.35 4.43 25.55% 10.48%Limestone 2.34 0.50 21.47% 5.96%Packaging 6.55 1.25 19.08% -4.20%Freight-Cement 25.94 4.38 16.90% 6.16%Wages 8.04 1.61 20.04% 8.74%

Source : CRISINFAC ReportsNote : Coefficient of variation measures the dispersion around the average quantity in

percentage terms. In the above context it indicates volatility in cost around averagecost of cement per bag in percentage terms.

The above cost behaviour indicates that the cost of power, and freight havebeen the most volatile ( as measured by the coefficient of variation) than coalcosts . Volatility in power costs can be attributed to the consistent rise inpower grid tariffs. The industry has shown a major preference for captivepower generation which can be seen in a decline of power consumed throughgrid power from a level of 80% in 93-94 to 60% in 2000-01.

Logistics holds the key for cement industry as both its inputs and output arebulk commodities. Approximately the proportion of cement moved throughrail and road are 39% and 61% respectively in the year 2001-02. Due to lack ofadequate wagon availability and higher lead distance ( around 350 kms ) incase of road transport , freight costs continue to be on the higher side.Transport by sea route has been economical and some of the coastal basedcement units such as Gujarat Ambuja Ltd have been using this routeeffectively. However, the cement units in the hinterland continue to carry thebrunt of uneconomical logistics. The industry lacks adequate bulk handling &storage terminals which can reduce the cost of cement dispatches .


9. Pricing :

As discussed above price elasticity is low with respect to demand. Also theprice movements are more influenced by supply co-ordination and therefore,differ regionally. Again an analysis of the variation in cement prices per bagover the last eight years in four regions show very low percentage change inprices. On comparing the variation in cement prices against that ofmanufacturing cost it becomes clear that the cement producers have not beenable to pass on the escalation in cost to the consuming segments.

Region wise movement in cement prices:Measured over (1992-2002) period

ReigionsAverage

PriceStandardDeviation

Co efficient ofvariation

Rs per Bag Rs per bag % volatilityNorthernRegion 136.00 8.31 6.11%SouthernRegion 159.25 11.87 7.45%WesternRegion 145.75 8.21 5.63%

Eastern Region 142.50 15.45 10.84% Source : CRISINFAC reportsNote : Coefficient of variation measures the dispersion around the average quantity in

percentage terms. In the above context it indicates volatility in cement price aroundaverage price of cement per bag in percentage terms.

From the above table we can observe that maximum price variation has beenin the Eastern Region comprising of the Eastern States where demand forcement has been buoyant. The Eastern Region is expected to lead the overalldemand for cement for the coming financial year FY 2003-04


10. Financial Performance & Profitability :

Trends in profitability of the industry is assessed as under :

Cement Industry Aggregates Year 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01PBDIT 22.42% 18.46% 16.50% 17.05% 15.94% 10.91%Net Margins 9.25 4.4 -0.51 -2.24 -3.3 -22.85%ROCE 27.73 19.88 15.17 15.66 15.35 12.52Raw material days 171 201 213 194 160 204WIP days 13 13 17 18 17 27Finished Goods Days 13 15 16 14 15 21Debtors Days 25 26 29 30 30 46Creditors Days 42 40 37 38 40 74

Source : CRISINFAC reportsThe aggregate performance for the industry has been consistently falling withrespect to operating margins and overall return on capital employed. Thepressure on margins can be attributed to falling cement prices on account ofexcess capacity and sluggish demand conditions. The increase in power andfreight costs have also been responsible for erosion in the bottom line of theindustry players over the period FY 1995-96 to FY 2000-01.

During the FY 2001-02, the performance of sample large companies ( 26 units )were analysed which showed sharp decline in net margins though operatingmargins were better. However reduced holding levels of inventory and bookdebts during the year 2001-02 indicate better working capital management.Nevertheless, the overall bottom line of the industry will be under pressureunless excess capacity gets corrected. It is however estimated that the balancewill be restored by 2004 considering that the demand for cement off take isexpected to be buoyant in the current fiscal.

11. Value Chain in the Industry :

Value chain in the cement industry comprises of raw material suppliers(mostly the few public sector coal units ), manufacturers, C&F agents,wholesale and retail dealers . The retail sales of cement accounts for only 30%of the total sales, the rest is accounted for sales to institutional buyers. Thevalue chain therefore is dominated by institutional players .


B) COMPETITIVE ANALYSIS OF THE INDUSTRY

Using Porters model for industry analysis :

We have used the porters model framework in order to assess the factorsimpacting the industry performance and to understand the structural changestaking place in the industry.

The impact of the economic and structural factors on the cement industry isanalysed on a scale defined as under :Low ,Moderate,High.In case the impact is favourable it is mentioned “Positive “ or else it isindicated “Negative”.

PORTERS FRAMEWORK FOR INDUSTRY ANLAYSIS

1. Bargaining position of suppliers :Factors that increase the bargaining power of suppliers.1. Coal, Limestone, power and logistic services are the key determinants in

terms of aggregate essential supplies to the cement industry. The supply ofcoal is dominated by few public sector units who allocate linkages tocement plants quarterly/annually. The limestone reserves are within thecontrol of the State governments which seek royalty on mining oflimestone. Railways is a major option for movement of cement apart fromroad transport and sea route. Power supply is mainly through the gridand still a large proportion of power consumed by the industry is from thegrid. In all, key supplies/logistic services to a majority of cement units arecontrolled by very few players.

2. At present cement units domestically as well as world over have very fewalternatives to coal as a burning fuel in the cement process. Other fueltypes such as LNG or Naptha are costly propositions. As coal producersare PSUs their productivity is low and also their produce is beingdistributed to other State corporations such as SEB, etc. The demand oncoal linkages by other sectors is also high. Further, as there are manycement units, competition for attaining coal linkages is intense and issubject to heavy lobbying by cement units.

3. The proportion of cement units that are located in the hinterland are themajor consumers of coal. The cement units are large in number ascompared to the no of units that supply coal through linkages.


4. Switching costs from one supplier to another for any cement units is veryhigh as coal linkages are attained through long term contracts and many atimes cement units will have to lobby to get the best of these linkages.

Impact of bargaining power of suppliers on cement industry.-Negative- High

1. Lower availability of quality coal thereby forcing units to import coalat higher costs. As many cement units are located around clusterstransport cost of moving imported coal to the plants in hinterland ishigher. Therefore, these units have few options available but todepend on PSUs for coal supplies.

2. Freight costs are on the higher side as railways have been consistentlyrevising their freight rates upwards . Also the non availability ofadequate wagons pose a problem for the dispatch of cement.

3. Coal linkages have to be lobbyed for which has its implied cost.4. Frequent fluctuations in power supply and increase in grid tariffs have

induced cement units especially the large ones to install captive powerplants entailing additional capital expenditure.


2. Bargaining power of consumersFactors that increase/decrease the bargaining power of consumers1. Cement being bulk commodity is being largely consumed by the

construction sector especially the government, civil contractors andbuilders including project divisions of infrastructure projects in public andprivate sector. A small percentage is also consumed by the retail housingsegment. However this is confined to only certain states where residentialaccommodation is mostly in the form of independent houses. Overall thedemand for cement emanates from institutional consumers who purchasecement in bulk quantity. One could approximate that around 70% ofcement dispatch is in bulk quantity through the wholesaler, distributornetwork.

2. Cement units are large in number and the fragmentation of cement unitsregionally offers adequate scope for consumers to switch betweensuppliers of cement. The cost of switching between cement suppliers iscomparatively very low.

3. Normally cement purchases are made through tenders floated by thegovernment , PSU’s or the infrastructure projects whether it be private orpublic. Also civil contractors purchase cement by either inviting bids ornegotiation. As bulk of demand is generated by institutional consumers,the purchase methods adopted provide more flexibility to consumers thancement units.

Impact of the consumer bargaining power on industry –Negative -Moderate1. As Bulk sales of cement is through negotiation/tendering, the bargaining

power of consumers is relatively higher. In a surplus capacity situation,the relatively better bargaining power of consumers has added to thedownward pressure on cement prices.


3. Competitive position of the Industry :Factors that explain the structure of industry andcompetition among existing players :There are around 110 cement units scattered around different States of which40 are large units with a capacity over 1 million tonne. Of these 40 units, thetop 8 units hold 50% of the installed capacity in the industry. The competitiontherefore is intense. Cement industry is very capital intensive process andtherefore possess high exit barriers to individual players in the industry.

The market shares of cement majors for the last two years are as under :

Cement Market Majors % mkt share Company Name 2001 2002ACC 11.41 12.21Larsen and Toubro 11.47 11.06Grasim (A.V Birla group) 10.89 10.26Gujarat Ambuja 8.36 8.74India Cements 7.61 6.30Century Textiles(B.K Birla group) 5.48 5.05Birla Corporation Ltd ( M.P Birla group) 4.08 4.01Jaiprakash Inds. 3.90 3.94Source : CRISINFAC Reports

Graphical representation in annexure -5


Impact of competition on industry –Negative-High1. Competition in the industry is intensive and there is substantial pressure on

margins of the players impacting their bottom lines. The situation hasaggravated due to ,current sluggish demand conditions ,excess capacityand increasing costs.

4. Threat of New EntrantsFactors that influence threat of new entrants.1. The minimum economic size for a cement plant is 2 million tonnes.

However, the industry being fragmented there are many units within arange of 1 million tone to 2 million tonnes. The capital cost involved inputting up a green field cement plant is Rs 3600 per tonne and thereforefor a 1 million tonne plant it works out to Rs 360 crores which is high byany standards.

2. As cement capacities are scattered regionally, national presence can beattained by a corporate group only if it can control capacities acrossvarious regions and gain by differential pricing in each of these markets.Companies with multi regional presence will be able to commanddifferential pricing in various markets due to region specific demandconditions. Though there are no major cost advantages to existing players,their proximity to clusters where feedstock is available and their abilitylobby with coal producers and the government for obtaining extensivelinkages are in favour of domestic players in the industry.

3. Inadequate availability of bulk material handling terminals hindereffective movement of cement to target markets. The industry requiressufficient investments in these segments as cement companies in thehinterland are the most affected on account of lack of bulk cementhandling terminals. MNC’s will be in position to infuse capital needed forsuch infrastructure.

4. Cement majors have been successful in penetrating rural and semi ruralareas are through a well layered distribution network of wholesalers andretailers while new units will take time to set up such vast distributionnetwork.

Threat new entrants- Moderate-Positive1. Higher capital cost, additional investments in logistics & distribution

network act as sufficient disincentive for new units to be set up.

2. Existing players are already concentrated around different clusters andtherefore, the lead distance ( which is at present 350 kms) from the site ofraw material and targets markets is expected to be high resulting in highersupply chain costs to the new units


3. Extent of competition among existing players is high which has resultedin falling operating margins.

4. Given the above factors, it can be seen that the only incentive for newentrants would be to gain ownership of large capacities in differentmarkets and follow a differential pricing strategy in accordance with theregional demand supply dynamics. It is evident that the bargainingpower of cement producers is very low and therefore, they can benefitonly by controlling supply through co-ordination.

5. Under these circumstances, new entrants especially the global cementmajors have preferred the strategic acquisition route than setting upgreen field projects. While this happens, existing corporate groups havebeen extending their control over regional capacities by mergers andamalgamations. Based on the above factors threat of new entrants byway of green field projects is considered to be moderate. However thethreat of average existing players emerging stronger after having takenover by MNC’s exists.

C) KEY SUCCESS FACTORS FOR PLAYERS IN THEINDUSTRY

Based on the above forces acting on the industry, the key success factors forany individual group/corporate for sustainability in this industry emerges asunder.

SrNo

Brief description of the KSF

1 Ability to produce blended quality of cement suitable for variousconstruction activities.

2. Adequate brand building of cement3 Thrust on exports in order to balance against domestic fluctuations in

demand4 Lowering the supply chain costs by effective management of logistics

and also identifying cheaper means of transport to reach targetmarkets thereby reducing the lead distance to markets.

5 Adequate investments in bulk material handling terminals .6 Low cost manufacturing efficiency by process consolidation.7 Self reliance in power consumption by putting up captive power plant.


D ) FINANCIAL PERFORMANCE OF LARGE CEMENT UNITSWe have analysed 22 cement companies were major segment of business iscement . The analysis has been done on the basis of financial ratios such as1. Net Working Capital to Total Assets2. Retained Earnings to Total Assets3. Earnings Before Interest & Tax to Total Assets4. Net Worth/Total Outside Liabilities5. Net Sales to Total Assets.

On the basis of the above financial variables, the Altman Z score for the yearsFY 2001 and FY2002 were arrived at. The analysis reveals that most of theunits excepting the diversified groups have strained financials which has onlyworsened during the year 2002. Cement happens to be a capital intensiveindustry and the asset turnover is low. Also due to higher operating costs andcompetition , the return on assets is very low resulting in less internalresources of these sample companies. The sample adequately explains theindustry situation of declining margins , higher cost conditions and lowerturnover of working capital.

For simplicity, in using the Altman Credit Scoring model , we assume that theco-efficients apply to Indian context and do not differ significantly.

Details of financial indicators of major players are provided in the annexure-4 :


E) STRATEGIES AT THE FIRM LEVEL

A brief review of strategies (to counter the forces acting on the industry)adopted by some of the leading firms in the industry is as under : The tablebelow indicates the segmental focus of dominant players in the industry.

Company Technology &process mgt

Energymgt

WorkingCapital mgt

Supplychain mgt

BusinessProductstrategy

Marketingstrategies

Resultimpact

ACC Ltd Debottle-necking& increasedthroughput

Captivepower

Receivablemgt

Review ofoveralllogistics

Divest innon corebusinessareas

Review ofdistributionnetwork

Costreduction

GrasimIndustries Ltd

Processoptimization

Alternative fuels

Improvesupply chain

Effectivedistributionnetwork

Reductionin logistic& mfgcosts

GujaratAmbujaLtd

Process andproductivityimprovement

SplitlocationplantInnovationthroughtransportingto inlandmarkets bysea route.

Shift frominstitutionalto retail sales

Improvesalesvolume &realisations

MadrascementLtd

Setting upworld classunits withlowest cost ofproduction

Achievingcompetitiveness inmanufacturing

ShreeCementLtd

pet cokesubstitute forcoal.

Receivable/credit mgt

Reducinglead time inroadtransport

Brandbuilding

PenetrateRuralmarketsUndertakedistancerealisationstudy toidentify newtargetmarkets

To focustrade salesof cementthaninstitutionselling.

L& T Processimprovement

Focus onRMC

Source : CRISINFAC Reports


1.Observations on strategies of dominant players :

a) Strategies of dominant players focus around process improvement, energymanagement , improved logistics, brand building and improving theproduct mix. Though cement is a commodity , the value chain has beendominated by institutional buyers, some of the players as indicated abovehave been trying to reposition cement as a trade product and have startedpenetrating rural and semi urban markets by retail selling. Brand buildinginitiatives of the companies support this strategy. As against coal, someof the players have started using pet coke as a substitute.

F) EMERGING MARKET TRENDS & FUTURE OUTLOOK

1. There is increased focus on Blended & RMC special type cementsby dominant players in the market such as Madras Cement, ACC,Chettinad Cement Ltd , India Cement Ltd , Grasim Ltd and L&T.Recently, RMC has been made as a mandatory use forinfrastructure projects in Mumbai( especially the flyover projects).Such policy support is also expected to be in place in Chennai andother metros. This product therefore holds a good promise for theindustry in the near future.

2. There are two specific problems in cement logistics, a) Around 80%of cement is sold through the dealer network and therefore cementtransport is normally as break bulk cargo whether in the hinterlandor through sea. b) Bulk cement handling terminals are inadequateand sufficient scope for improvement is present. Players are likelyto adopt the following strategies in the long run :-a) Focus on retail sale of cement through dealer network and put

up specialised bulk cement handling terminals for supportingproject sales/ exports. At present cement sales for bothwholesale buyers as well as small purchases are made throughthe dealer network resulting in a supply chain mismatch. Highervalue can be added by reducing distribution costs if the industrysplits the supply chain to focus on wholesale and retaildistribution where in bulk transport of cement will be the keycost effective mechanism.

b) Split location plants have been experimented with where clinkerplants are set up near coal /limestone availability and laterclinker produced is sent to grinding units in target markets forcement manufacture. Split location plants economises logistic


capacities and has found favour with units such as GujaratAmbuja.

3. Process of consolidation : Only a handful of players are likely toremain in the market and hence will enjoy superior pricing power. Thedomestic industry witnessed intense consolidation wave during thelast couple of years and the same is expected to continue over themedium term. The larger and stronger players in the industry haveadopted a focused approach for growing in future. They areconsolidating their positions by focusing on internal controls andadding capacities through acquisition route rather than by setting upGreenfield projects. The weaker / smaller players on the other handare finding it difficult to survive given the recent recession and havebecome prime acquisition targets for larger and stronger companies.

Only players with deep pockets , who increasingly focus onenhancing operating efficiency, achieve higher economies of scale,are not dependent on few regional markets but have more or lessnational presence, have good distribution logistics and possess abrand recall are likely to survive in the long run.


G) PORTFOLIO CONCENTRATION RISK ( AT THE INDUSTRY LEVEL)

In order to measure portfolio credit risk the industry has been viewed as aportfolio of assets with an objective to measure the co-variance as betweenreturns of various units within the industry . The hypothesis being that if theportfolio correlation co efficient works out to be negative, then we infer thatthe industry players have weak co-variance between themselves and do notbehave alike in terms of returns. This would mean less concentration risk asthe asset portfolio in terms of the industry as a whole is well diversified.Contrary to this if the correlation coefficient were to be positive, we infer thatthe industry as a portfolio of assets is not well diversified and fortunes of theplayers in the industry have strong co-variance leading to higherconcentration risk. The magnitude of the co relation coefficient also indicatesthe degree of co-variance between the asset returns.

The sample comprised of 26 large cement units and were then divided intothree asset classes depending upon the market share which were used asweights. It is to be noted that the analysis was under static conditions basedon data for 8 years FY 1992-93 to FY 2001-02. Use of measures of dispersionespecially the Mean-Variance-Co-variance frame work was made in order toassess the concentration of credit risk in the industry. The objective was toassess the credit risk in terms of the co-variance of asset returns viz Return onCapital Employed as between each of these asset classes.

The variance co-variance model used is shown in the annexure no-2

The resulting correlation co efficient for the industry sample comprising of 26companies was positive and had a measure at 0.24.

The positive portfolio correlation –coefficient indicates that the returns of thesample companies i.e 26 large units moved closely with each other. A positivecorrelation also indicates that all players experienced similar fortunes andtherefore there is concentration of credit risk. However as consolidation in theindustry continues, it is expected that few large players may emerge whowould be competitive. It is possible therefore that the industry correlationcoefficient may move towards a negative sign indicating diversification ofcredit risk i.e the possibility of some units outperforming others in theindustry. Such a phenomenon will indicate that the industry portfolio is welldiversified . Details of the framework have been provided in the annexure-2.


H) RISK PROFILE OF THE INDUSTRY

Sr no Risk Factor Rationale1. Business Risk Volumes in cement industry is dependent on the

level of general construction activity which inturn is a function of general economic activity.Volumes in cement industry over the last twoyears have been affected by lower GDP growthwhich declined from 6.1% in the 1st quarter of2000-01 to a level of 4.4% in 1st quarter 2001-02.Like wise construction activity is a majorcontributor to GDP slipped from 8.4% in 1st

quarter of 2000-01 to 2.5% in 1st quarter of 2001-02. However current estimates by CSO for thesecond quarter of 2002-03 indicate that despite abad performance by agricultural sector, theindustrial growth , especially , in the constructionsector was recorded to be 7.2% in 2002-03 asagainst 2.7% in 2001-02. This rise in constructionactivity is supposed to have pepped up thedemand for cement and steel. The recovery is onaccount of government expenditure on roadprojects.

Continued signs of recovery for the coming yeardepends upon incremental demand arising out ofincreased budgetary outlay by the governmenton public infrastructure projects in both rural andsemi urban centres as well as private investment.

With respect to international trade, thecompounded annual growth rate in clinkerexports for the over the last four years was 3.31%in quantity terms. As against this thecompounded annual growth rate of cementexports over last four years was 18%. Howeverwe are of the opinion that medium term growthin exports will be possible only if substantialinvestments are made by industry players in bulkmaterial handling terminals at the ports andhinterlands to ensure cost effective logistics.


2 Earnings Risk While volume growth for the industry as awhole is not yet buoyant, existing imbalancebetween demand and supply and intensecompetition among players will continue to keepprices and margins under pressure in the nearterm.

3 Financial Risk The financial aggregates for the industry indicatelower turnover, low margins, cost escalation andresultant lower cash flow generation. The averageAltman Z score of 26 large cement companiesindicate financial distress. A detailed working ofthe credit score as per Altman Z score model ispresented in the annexure-4

4 Foreign exchangerisk

Cement industry is not a major foreign exchangeearner. However import of coal is evident in theindustry due to its better quality as domestic coallinkages do not ensure better quality which isvery essential for attaining efficiency in cementmanufacturing. Though international coal priceshave been stable over the recent past, rise inimport prices on account of price fluctuations ordevaluation of domestic currency could affectthe bottom line of the industry.

5 Market Structure There is still enough competition in the industrydespite consolidation in the previous years. Themarket structure will continue to evolve andpossibly emerge with five or more businessgroups operating multiple cement units all overthe country. Continuation of this competition inthe market will affect industry profitability.

6 GovernmentPolicy

Future demand for cement depends to a greatextent on the budgetary outlay for infrastructureprojects and also the incentives for inducinghousing demand. The expectations on 2003-04budget and central plan outlay will be the keydriver for demand in this industry. Also higherincidence of indirect taxes and royalties levied bythe state governments/central governmentscontinue to distort price formation in the industrythereby lowering the price elasticity.


7 Environment Risk Globally cement industry has been addressingitself to sustainable development initiatives. Theindustry has environmental effects by way ofparticulate emissions. The present state oftechnology especially in large cement plantshave curbed particulate emissions to a greatextent. However mini cement plants continue tobe a major concern in terms of environmentalpollution. Incidence of pollution also increases ifunits produce cement based asbestos.


I) INDUSTRY RATING

Consequent upon the analysis, the industry has been rated on the basis of thefollowing parameters :

Parameters ScoreAssigned

MaximumScore

Business Risk 20 30Earnings & Financial Risk 2 5Foreign Exchange Risk 3 5Market Structure &Competition

9 15

Entry barriers 10 15Government Policy 15 25Environmental Risk 4 5Total Score assigned 63 100

Total score assigned 63

Rating awarded UB-BBB Moderate SafetyIndustry performance is marked by low profitability on account ofincreased competition, excess capacity and economic recessionresulting in a clear demarcation between the strong and weakplayers .The market structure is evolving and will result in fewplayers dominating national presence. The resultant structure isexpected to be oligopolistic in nature. Since the industry has a strongcorrelation with macroeconomic development, the performance ofthe industry is susceptible to general economic cycles . Anyimprovement in macroeconomic aggregates in the short run willpush industry volumes.

Detailed working of the industry rating is provided as an annexure-1


J) RISK PROFILE OF BANKS PORTFOLIO

Risk profile of the banks portfolio is assessed by arriving at the credit score byapplying the E.D Altman’s model for financial distress .

Obligor Z ScoreFY2001

Z Score

FY2002

IntRating

ExtRating

TotalExposure

Exposure as% of capitalFunds

Dalmia Cement(Bharat) Ltd

1.43 1.59 UB-BBB

LAA- 80.19 8.87%

ChettinadCement Ltd

0.83 0.62 Notrated

n.a 32.27 3.57%

Shree CementLtd

1.55 1.15 UB-AA n.a 52.38 5.79%

India CementLtd

0.75 0.74 UB-D D 2.83 0.31%

KesoramIndustries Ltd

n.a n.a UB-A n.a 38.48 4.26%

OCL 1.77 1.72 UB-A n.a 23.87 2.64%Jaypee CementLtd

n.a n.a UB-BBB

n.a 31.25 3.46%

Madras CementLtd

1.16 1.00 NotRated

AA 34.55 3.82%

SanghiIndustries Ltd

n.a n.a D n.a 21.00 2.32%

Note :

As per the Altman model, the company will be classified as a distressedcompany if the Z score lies below 1.80 and non-distressed if it lies above1.80. However we are working to arrive at corresponding value of Z scorein Indian scenario by working on sample of good companies and defaultcompanies.1. The banks regulatory capital fund is taken as Tier I +Tier II aggregating

to Rs 904 crores as on 31.03.2002.2. Credit score for Kesoram Industries Ltd has not been computed as it is

a diversified entity.3. Z score for Jaypee Cement Ltd has not been computed as the units has

been recently hived off as a separate entity during 2001-02. Anindividual performance can therefore be judged once the FY 2002-03results are out.

4. Z score of Sanghi Industries has not been computed die to lack offinancials.


Observations :

The average credit score of the industry sample comprising of 22 large cementcompanies excluding mini cement plants deteriorated from 1.12 in FY 2000-01to a level of 1.04 FY 2001-02 . As stated earlier we are working to arrive at avalue for Z score denoting distress in the Indian context. We need to takecognisance of the low score of 1.04 for the cement industry , as it has come outof the study and we need to have a closer look at the exposure. The dispersionaround the average for the industry sample was 67.02% ( as measured by theco-efficient of variation) for the FY 2001-02 indicating higher volatility amongfinancial parameters within the sample. Considering the fact that the averageZ score of the industry sample is itself low, the deviations from the averagehave been much worse indicating higher credit risk.

The Banks credit exposure to the cement industry totals to Rs 316.82 croreswhich is 35.04% of the total capital funds of the bank.

The credit scores when mapped along the Banks internal ratings showsignificant differences. These difference arise on account of subjective ratingsincluded in the obligor rating model that our Bank adopts. However we areof the opinion that the differences need to be narrowed especially on thebusiness parameters by re-rating the exposures after the 3rd quarter of FY2002-03 and 1st quarter of the coming fiscal FY 2003-04 as by then thebudgetary policy and the review of Economic survey would indicate theexpected buoyancy in demand for cement.

A brief about specific cases of delinquency in the Banks our cement industryportfolio:

1. India Cements Ltd : India Cements followed a strategy of acquisitionsto add capacities which were predominantly debt financed. Theleveraged acquisitions were made during the sluggish phase in orderto acquire more market concentration. However higher debtproportion coupled with declining realisations in Southern Statesresulted in reduced cash flows. The higher debt servicing burdenfinally resulted in delinquency.

2. Sanghi Industries Ltd : Sanghi industries is a cement plant which islignite based which is reported to be advantageous to the unit.However due to cost escalations, the project finances have beenrestructured frequently and therefore has not yet been commercialised.


PORTFOLIO VARIANCE CO-VARIANCE MODEL FOR ASSESSINGINDUSTRY CONCENTRATION RISK

Annexure-2 The statistical model used to measure the portfolio correlation coefficient fora portfolio comprising of three asset class is as under. The model can beextended to include as many assets as required. This model has been appliedto the industry as a whole as a portfolio. The statistical model is as under:

izarWiWzjzarWjWzijarWiWj

zWzjWjiWiarP

))(cov(2))(cov(2))(cov(2))(var2^())(var2^())(var2^()(cov

+++++=

P (Covar) indicates the portfolio covariance comprising of three assets

W indicates weights of the asset class (i.e the ith class in the portfolio)(Covar)ij indicate the co-variance as between the returns of the asset classes(i& j).

The portfolio correlation coefficient then is given by the following equation

))()(()(cov

PrSDzSDjSDi

arP=

SD indicates the standard deviations of the returns on the asset class (i) ,(j)and (z).The portfolio correlation coefficient is given by Pr which lies between –1 and+1. If the portfolio correlation co efficient moves towards +1 then it indicatesthat there is a positive & strong ( indicated by the magnitude) correlationbetween the returns of the assets in the portfolio. That they are not mutuallyexclusive. If the correlation coefficient moves towards –1 , then there is strongnegative correlation between the returns of the assets in the portfolioindicating that there is enough diversification in the portfolio. When this isused against the industry as a portfolio, we infer that a positive co relationindicates that all players behave like wise under given point in time. In case ofa negative correlation co efficient, the players behave differently and which iswhy there are some players who perform better than the industry. In certaincases the external environment and competition as in the instant case ofcement industry will be more overwhelming and may force distress among allplayers. A negative correlation must induce us to search for those better assets(companies) in the industry who have certain core competencies which makethem perform better.


MATHEMATICAL MODEL OF ENTROPY INDEX

The entropy index was first used by an P.E Hart , in his work “ Entropy andother measures of concentration “, Journal of Royal Statistical Society , SeriesA, 134,1971. The index was suggested by Hart to measure the degree ofconcentration in the cement industry. The entropy co efficient is a usefulmeasure of market concentration in the sense that the population of firms forwhich the entropy coefficient is being computed can be decomposed ordisaggregated into several groups, say on the basis of size, region ,productand the classification of industry , etc. to compute separate entropycoefficients for them, a weighted sum of such coefficients would then give theoverall entropy coefficient.

The mathematical definition of Entropy index is as under :

[ ]∑=n

ipiLogpiE )/1(.

The notation is defined as :-

1. E represents absolute measure of entropy index measured only on thebasis of market share.

2. N is no of firms in the industry2. A specific firm is represented by (i) which takes values 1,2,3 …..n3. Pi represents the market share.4. Log (1/Pi) is the weight attached to the market share of the ith firm in

the industry.

Interpretation :

The value of absolute measure of entropy index always lies between the

interval )(0 nLogE ≤≤ .

If a firm is a monopoly then it holds 100% share of the market. In such acase the above relation will result in absolute measure of E being equal to0. Therefore if market power is not concentrated and is perfectlycompetitive or monopolistic in nature then the entropy index ( in absoluteterms i.e based on only market shares will take values towards a limit ofLog (n). So more the entropy index the better the competition and lesserthe concentration of market power.


The above index is later modified for including the effect of no of firms inthe industry . The index then becomes the relative measure of marketpower/ concentration and is represented as under :

)log(nE

Er =

The value of 10 ≤≤ Er

The notation Er measures the concentration of market power in relativeterms i.e with respect to also the no of firms.

Again if the market is perfectly competitive it will be 1. Therefore marketpower will realistically lie between the two extremes.

Therefore from the above, there lies an inverse relationship between thevalue of Entropy index and the market concentration. If the value is higherand tending towards 1, the more the competition and if tends towards 0the higher the concentration.

We have used this measure in analysing the concentration in Cementindustry and found the measure to indicate adequate competition at allIndia level despite some degree of concentration at regional levels.

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