As expected by India Ratings & Research (Ind-Ra) in its 2014 outlook on cement manufacturers, consolidation in the Indian cement industry continues.

Additionally, the agency expected heightened consolidation activity in South India, driven by the region's over capacity issues. The two acquisitions in the cement industry post January 2014 totaling USD 750 million are aligned to our expectation.

In 2013, the cement industry saw mergers and acquisitions of around USD 3.3 billion. These are part of a strong, long-term trend within the industry and are likely to continue in the near future.

The possible acquisition targets include cement companies or cement manufacturing facilities (which are part of over leveraged conglomerates) with cost-effective access to raw materials and energy or a locational advantage to optimise freight costs.

However, Ind-Ra believes facilities with limited viability due to a weak structural cost position will find few takers.

The agency expects low demand due to a continued weak economic activity and the upcoming elections to accelerate the consolidation activity in FY15. Cement production grew 2% in 3QFY14 from 5.9% in 2QFY14. The construction sector grew (major consumer of cement) 0.6% in 3QFY14 from 4.3% in 2QFY14.

Growth for the cement industry for 4QFY14 and 1QFY15 is likely to be in the range of 2%-3% due to subdued demand. Also, the profitability of integrated players and small players could come under pressure in FY15.

However, Ind-Ra draws some comfort from stable, low coal prices and steady exchange rates which will cushion margins.