<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Fight For Survival: Many cement manufacturers are shelving expansion plans due to sudden decrease in demand (Bivash Banerjee)
Major cement manufacturers’ recent announcement to cut prices by up to Rs 7 per bag — in response to a 4 per cent cut in cenvat by the government — signifies the industry’s seriousness in tackling the current downturn. However, Vinod Juneja, managing director of Binani Group, is not too optimistic. “The full impact of the cenvat cut, which would have reduced prices by about Rs 5 per bag, is now juxtaposed by an 8 per cent hike in railway freight,” he says. “Thus we may pass on around Rs 3 to the consumer.”
The cement sector, which was on a high till the end of last fiscal, has suddenly witnessed a drop in demand. Until recently, the unrealistically buoyant real estate, which consumes 65 per cent of cement production, and infrastructure sectors have helped the cement companies grow rapidly. Promoters had jumped the gun and announced huge capacity expansions. However, with the slowdown setting in, companies are now reconsidering their plans, and analysts are painting a listless picture for the next few years. “As of now, prices remain stable for most of India, but the decline in the North is worrying,” warns cement analyst Giriraj Daga of Khandwala Securities. “Worsening demand-supply equation would exert downward pressure in the coming period.” While the demand in eastern and southern markets remains stable, the northern region, which constitutes the biggest market, has seen a major slowdown.
“We have fully tied up our funds requirement for new projects,” admits N. Srinivasan, managing director of India Cements. Cement companies are likely to lose on both utilisation and realisation fronts. Binani’s Juneja says if there is any drop in the price, average realisation will definitely drop by Rs 3-5 per bag. As such, those with deep pockets may survive while a further consolidation in the industry may be necessary. However, Hari Mohan Bangur, managing director of Shree Cement feels that realisation is dependent on liquidity, economic growth, rural spending and taxes. “The industry can’t increase demand. It must come from economic activities,” he says.
The industry admits in unison that all expansions are on hold. Religare Securities analyst Manak Gaushal says, “Delays in commissioning new capacities would be the only way to keep the demand-supply tight in 2008-09, provided there is no interference from the government.”
{mospagebreak}
However, companies such as Ultratech and Holcim, which owns brands like ACC and Ambuja, refused to comment on the scenario.
Past Imperfect
When inflation started rising due to higher cement prices, the government stepped in. The demand grew by around 9 per cent for more than five years, a notch above the growth of production at 8.6 per cent. The higher average capacity utilisation rate of 96 per cent in 2007-08 (against 80 per cent in 2002-03), and a sharp rise in average cement prices from Rs 145 per bag in 2002-03 to Rs 245-250 per bag early this year gave the industry confidence to go ahead with expansions. From a total capacity of 175.7 million tonne per annum (mtpa) in 2007-08, major cement players wanted to add 46.4 mtpa in 2008-09 and another 40.1 mtpa in 2009-10. Binani Cement planned a 2-mtpa green field project in Gujarat.
Then slowly reality set in. The monetary measures aimed at lowering inflation, revised GDP growth estimates of 6-7 per cent and the global credit crunch left most of the cement players, who had expansion plans, in the lurch.
The industry had a volume growth and an increase in realisation till September 2008 quarter leading to an overall growth of 15.2 per cent year-on-year growth. But, there are indications of an uncertain future with a squeeze of 3.9 per cent y-o-y in EBITDA margins, due to a steep rise in raw material costs, power and fuel costs (up 42.4 per cent), freight costs (up 18 per cent) and a tightening monetary environment.
As prices were put on hold due to cost-push inflation worries, expansion plans worth over Rs 12,000 crore announced by the industry, sent the interest cost on most balance sheets up by 33.1 per cent. “We are worried about the rupee going beyond 50 against the dollar as our borrowing costs will increase manifold,” says Juneja of Binani.
Pawan Burde, cement analyst at Angel Broking, notes that most cement stocks, currently at their 52-week lows, have underperformed the Sensex in the range of 12-16 per cent. “These stocks, which commanded one-year forward valuations of $150-250 at the top of the cycle have now now collapsed to $80-120 EV/tonne,” he says.
Silver Lining
Cement makers are leaving no stone unturned to tide over the crisis. Srinivasan says, “Better operational efficiency coupled with benefits on freight may help, as our variable costs are well under control.” Decreasing cost of coal, proximity of new grinding plants to resource locations and power plants may boost blending ratios. Most cement companies are turning to efficient plant and freight cost management and are setting up captive power plants. Binani, for example, has tied up with Indian Railways, which got its siding unit at the company site. Shree Cement is adding a grinding unit near Gurgaon. Many, like Binani, are hiking exports of clinker to add value.
Feeling The Heat
Problems facing cement makers:
Sudden decrease in demand due to the slowdown
Steep rise in input and transport costs
Increasing borrowing costs due to the falling rupee against the dollar
However, a closer look at the current scenario brings out a host of opportunities for cement companies. A low per capita consumption of 148 kg compared to the world average of 260 kg gives companies a long-term opportunity. A low inflation scenario might make The Reserve Bank of India pull back restrictions on lending and ease overall monetary conditions. Similarly, a drop in crude prices by nearly 100 per cent will cut down freight costs. New captive power plants are likely to help lower input costs.
The Rs 20,56,150-crore investment in infrastructure as announced in the 11th Plan can lend considerable support to the cement industry. “However, lack of clarity on the execution of these projects and a delay of 3-4 months in disbursement may take us to next June quarter, following which I see a major drop in demand,” says Juneja.
Moreover, the government’s recent fiscal stimulus, wherein the public sector banks will announce a package for home loans up to Rs 20 lakh, may be favourable for the cement industry. So, the industry is pinning its hope on the effectiveness of the government’s plans.
s.menon@abp.in
(Businessworld Issue 09-15 Dec 2008)