Sizing up African cement stocks: PPC, Dangote, ARM – Surendra Bhatia

If you believe Africa is on a steady developmental trajectory, cement stocks must surely be in your sights. As Francis Daniels, who runs the Africa Opportunity Fund, told Biznews recently: when you look at a skyline like Lusaka's you must come to the conclusion that large buildings are going to start popping up. That throws up all sorts of investment opportunities in property development – many of which need cement.  As many South African companies have learnt the hard way, there's often more than meets the eye to making money in Africa. This is the case even for an obvious money-spinner like cement. As Surendra Bhatia of Nairobi stock exchange-listed Athi River Mining (NSE: ARM) explains, it was a tough year domestically but diversification across the continent has more than made up for Kenyan woes.  He sings the praises of South African competitor PPC (JSE:PPC) and Dangote (DANGCEM:NL), a public Nigerian company.  ARM operates in several African markets. – JC

ALEC HOGG: Athi River mining has released its full year results. The company announced an increase in revenue – quite a healthy one at 24 percent – despite weakness in Kenya's construction sector. That was for the year-to-end December. Joining us from Nairobi is Surendra Bhatia who is the Deputy Managing Director of ARM, not to be confused with Patrice Motsepe's ARM in South Africa. Surendra, I presume that the difficulties you had in Kenya were related to the attack on the shopping centre.

SURENDRA BHATIA: Well, I think 2013 was a challenging year. Initially, there was the election period, which was there and then subsequent to that, we of course had the attack on the mall. Generally, just as the economy was picking up, we had the second unfortunate incident, and that rather slowed down the investment in the economy, and the economy generally grew very little in that period. In particular, the investment in the construction sector slowed down considerably, so yes, 2013 was a challenging year for the construction industry and for the cement industry. However, we are happy to say that Athi River Mining – ARM Ltd – did maintain its sales and its cement market share in 2013.

ALEC HOGG: Well, that's one of the benefits of having diversification in Tanzania, as well. We'll get into that in a moment, but we do get reports that the Kenyan tourism industry is still suffering. Are you seeing that it's now starting to lift its head?

SURENDRA BHATIA: Yes, in 2014, in the first two months, the general feel we've gotten from the industry and the various sectors operating in the economy, is that 2014 seems to be coming back to normal. The economies are once again growing. The tourism: you are correct. It's still slightly constrained as compared to the other sectors, but generally, the economy is coming back. It's on the run once again and we expect 2014 to be a good year for the economy and for the industries in general.

GUGULETHU MFUPHI: Surendra, your cement sales have contributed strongly to the group's numbers. How are you able to defend your market share against the likes of Dangote Cement, or the likes of South Africa's PPC in future?

SURENDRA BHATIA: I think every company has some strategic competitive advantage. Athi River Mining has grown its market share for the last ten years consecutively. We have had new entrants who have come into the market. Each entrant has its own competitive strength, we take each competitor on their own competitive strengths, and we try to build on our competitive strengths. Dangote and PPC, we have heard, want to come into the market. Dangote is a very powerful group in cement operations, Africa-wide. We will just have to take them as another competitor and ensure that we build on our competitive strengths so that the new competitors and the new entrants to the market are not able to take our market share. One of our strongest competitive advantages is that the technology we employ is the most energy efficient technology in this part of the world. Our manufacturing cost can be compared to the best in the world and the best in the industry. We hope to build on these strengths so that we can take on the new competition and ensure that we can give a high quality product at a very competitive price to all our customers.

ALEC HOGG: It's very interesting. The last South African company that came in like a lion was Altech, and it left East Africa like a lamb. Do you think that it could be a similar situation here? PPC is pretty aggressive, but what kind of profit margins do they generate, relative to yours?

SURENDRA BHATIA: I think PPC is a very strong company. They have a very strong background in the cement market and therefore, they have many competitive strengths, too. The PPC margins, if you compare us, would make their margins significantly higher, but then actually, you cannot compare PPC and the Kenyan cement manufacturers. The reason for that is that the cost of manufacture in the two countries is totally different. Just as an example, the Kenyan cement manufacturers import their coal from South Africa. PPC has coal at their doorstep so definitely, the margins PPC makes in South Africa are going to be superior to the margins the Kenyan cement companies are making. I feel that all the Dangote's as well as the PPC's are very strong people in the cement industry. They have experience in the cement industry for a much longer time than some of our manufacturers in Kenya do. I don't expect that what you just said would happen again. We would expect good healthy competition from all these new competitors.

ALEC HOGG: Very good insights you've given us there, Surendra, because there is a perception perhaps, that you enter new markets when the margins are high, but as you've said, you have to work on lower margins and it will be interesting to see how long it lasts and how the competitive environment would transform itself. If you just looked at the strengths or the stranglehold you have on the East African market at the moment, it would no doubt have been helped by the improving situation you're having in Tanzania.

SURENDRA BHATIA: Yes, Tanzania's market growth has been very strong in 2013. The Tanzanian market is growing faster than Kenya, and the Tanzanian economy has been driven by the investments in the gas sector, the investments in the middle industry, mining industry, as well as investments in the infrastructure segment. The per capita consumption in Tanzania is still lower than it is in Kenya. In Tanzania, the per capita consumption is just between 65 to 75 kg's per person per year. Kenya is far ahead at 95 kg's per person per year. Tanzania is therefore struggling from a relatively smaller base and therefore the growth prospects in Tanzania are very strong, given the investments in the various sectors of the economy, which are taking place there.