Registering a 13 per cent growth in H1FY19, cement industry is going back to the drawing board with expansion plans.
Even as cement industry is saddled with excess capacity of over 150 million tonnes (MT), and implementation of Insolvency and Bankruptcy Code (IBC) is in full swing leading to consolidation in the industry, the cement players are thinking it is the right time to chalk out expansion plans, via greenfield and brownfield projects. The trigger for this enthusiasm comes from the fact that the industry has grown at a scorching pace of 13 per cent in the first half of 2018-19 (H1FY19), heralding beginning of a new upward business cycle for the industry lead by demand growth.
'We are expecting a high double-digit growth this year. This would be the first double-digit growth after almost eight years since 2011 when the industry had seen a slow-down,' said Shailendra Chouksey, President, Cement Manufacturers Association (CMA) at the association's annual function in the last week of November. Chouksey is also a whole-time director with J K Lakshmi Cement.
Government projects such as infrastructure build-up, housing for all are 'game changers' for the sector. 'Various government initiatives are there, and the GDP of the country is growing, which would eventually translate into higher purchasing power. I think, we are going to sustain this kind of growth,' he added. Like any other manufacturing industry, cement industry is also prone to business cycles, though already it is a core sector industry generally influenced by the economic cycles or growth trends. At the CMA conference, KK Maheshwari, Managing Director, UltraTech Cement, said, 'In the first half of this year, the industry has seen a growth of 13 per cent. The industry did go through very tough times from 2010-2016, growing at less than 5 per cent. If you look at 2017-18, the growth rate was 9 per cent.'
Consolidation is in the full swing in the Indian Cement Industry. The pace has accelerated over the last four years. Like any other manufacturing industry, size matters in cement industry as well bringing in synergies. Taking this cue, cement majors also adopted inorganic growth in right earnest in the mid-2010s.
Jaiprakash Associates was the third largest cement maker in the country with annual capacity of 31.65 MT in 2014. It had sold 13.3 MT of capacity in 2014-15 to repay a part of its bloated debt. Thus, it has a long history of shedding assets over the last four years. Jaypee Group has sold 21.2 MT of its capacity to UltraTech Cement for Rs 161.89 billion. Lafarge sold 13 MT of capacity to Nirma, and Birla Corporation has acquired 5.5 MT of capacity of Reliance Cement.
A peek into these deals throws up some logical reasons - following robust growth in demand since 2006-2010, cement players have invested big time for building capacities. However, six to seven years of subdued growth in demand followed exposing the soft belly of several cement majors, who have built their capacities by borrowing extensively.
Cement business is largely dependent on regional demand and supply dynamics. Unlike in smaller European countries, in the Indian context, this is significant, because transporting cement over a long-distance becomes uneconomical, more so for the producer. 'We have already witnessed considerable amount of consolidation and going forward, we expect the trend to continue as producers look to strengthen regional capacity,' says Ashish K Nainan, Research Analyst - Industry Research , CARE Ratings Limited.
Keeping regional play in context, Nainan lists three factors which could trigger M&A in the sector in future:
Growing regional market share which is also important with a pricing perspective
Product mix: Premium products, pre-mixes are finding traction in terms of demand.
Consolidation may happen on these lines where product specific players with expertise in premium products could get acquired by larger players.
Other factors like mining rights for key raw materials like limestone could trigger M&A.
There are reports that Jaiprakash Associates is talks with some cement majors to sell its residual cement business with an installed capacity of about 5.5 million tonnes per annum (MTPA) in order to become a debt free company. (See expansion plans of companies in the box)
While announcing the July-September 2018 quarterly results, Dalmia Cement (Bharat) said that amalgamation with Orissa Cement (now OCL India) was complete. 'The company plans to list OCL in October-December 2018 (Q3 FY19) and expects the combined merged entity to be listed in early Q4 through a share swap agreement.'
Unlike the earlier buyout deals like Jaypee group, Lafarge and Reliance cement businesses, where debt played a minor role compared to lower demand and governance for taking their companies for sale the latest breed of consolidation after December 2017 is happening perforce under the hammer of NCLT with the advent of Insolvency and Bankruptcy Code (IBC), though cement industry per se is not passing through difficult times. In fact, the capacity utilisation of the industry rose from around 65 per cent then to nearly 70 per cent in October 2018.
The biggest asset brought under IBC process - Binani Cement - was resolved on November 19, 2018 when the Supreme Court dismissed the plea of a Dalmia Bharat Group firm challenging the National Company Law Appellate Tribunal (NCLAT) order allowing rival UltraTech Cement to acquire debt-ridden Binani Cement. The case was hanging fire since July 2017 when Bank of Baroda filed insolvency petition against Binani Cement in NCLT, Kolkata, overshooting the mandatory 180 days limit set by IBC for resolving the case, with both Ultratech Cement and Dalmia Cement (Bharat) group not relenting on the plum target.
UltraTech, an Aditya Birla group firm, has acquired Binani Cement through its revised and overarching Rs. 7,950.34 crore bid over an offer by Rajputana Properties. Within a day of the SC judgement Binani was made subsidiary of UltraTech.
Unde the deal, Binani Cement's 6.25 MTPA plant in Rajasthan, including an integrated cement unit and a split grinding unit, besides providing access to superior-quality limestone reserves, Binani's subsidiaries in China and the UAE also stand transferred to UltraTech.
With the addition of the Binani assets, UltraTech's network has grown to 50 plants across India and its overall capacity went up to 98.75 MTPA, with an additional four mtpa being commissioned. By then UltraTech was in the process of merging the cement business of Century Textiles and Industries, which had a capacity of 11.4 MTPA.
Earlier, Dalmia Cement group has bagged Kalyanpur Cement under the IBC process. Dalmia Cement said recently that it has completed acquisition of Kalyanpur Cements (1.1 MT capacity), and the subsidiary has been renamed DDSPL. The management has been able to revive clinker production from this plant and was in the process of starting commercial operations.
DBL had spent Rs 3.5 billion for the Patna-based Kalyanpur Cements. 'From asset pricing perspective, we feel that this is a better time to buy rather than build cement assets,' said Puneet Dalmia, managing director for Dalmia Bharat Group recently.
The company is still awaiting the National Company Law Tribunal and Supreme Court's final decision on Murli Industries, under the insolvency-driven process.
The process of insolvency resolution plan or IRP begins after any financial creditor makes an appeal in the adjudication authority under the IBC. Once the application is submitted, a resolution professional is appointed to constitute a committee of creditors - financial creditors and operational creditors - to work on a resolution plan to revive the debt-stressed firm in a time-bound manner or dissolve it - with a cap of 180 days. Under IBC, the resolution plan must have approval of at least 75 per cent of the creditors.
Not just expansion through greenfield or brownfield expansions, and mergers and acquisitions, but the Indian cement industry has also witnessed interest from private equity investors.
Private equity fund, True North, said in November that it would acquire a 75 per cent stake in Shree Digvijay Cement from Brazil-based Votorantim Cimentos, one of the largest global cement producers in terms of annual installed capacity. True North has made an open offer to acquire a 25.1 per cent stake held by public shareholders for Rs 23.33 apiece, aggregating to Rs 83 crore. Shree Digvijay Cement manufactures oil well cement and sulphate resisting portland cement at its plant in Jamnagar, with overall production capacity of 1.20 MTPA.
Recently there were reports that some foreign private equity firms are evincing interest in picking up 15-20 per cent stake in Wonder Cement. Part of Ashok Patni-led RK Group, Wonder Cement has an installed capacity of 6.75 MTPA.
Capacity & demand
Cement production during H1FY19 stood at 162.4MT, 14.4 per cent higher than 142 MT cement production in H1FY18. Total installed capacity stood at approximately 465 MTPA at
the end of September 2018, after adding an estimated 120 MTPA in last five years. However, Nainan of CARE says that pace of capacity addition during the next 2-3 years may have remained low (10-12 MT p.a.), as the current trend is more towards consolidation.
A back of the paper calculation suggests, total installed capacity could/should ideally be between 540-550 MT by 2025. The present capacity utilization is around 70 per cent an improvement of about 4 per cent over the last 12 months. 'We expect it to remain in the same range during FY19,' adds Nainan.
After years of sluggish growth, India Cements is expecting the pick-up in demand to continue on the back of the increasing consumption from infrastructure projects, roads, irrigation projects and private sector housing, besides the government's push for affordable housing projects.
'The October to December quarter may be the last difficult quarter we see. We are expecting that from January onwards, we will start seeing better growth,' said N Srinivasan, Vice Chairman and Managing Director of India Cements, while announcing the July-September results, even as he exuded hope that the growth is expected to continue for the next three to four years.
However, Nainan expects moderate expansion over the next few years, and predicts that a 75-77 per cent capacity utilisation looks achievable by 2025.
Housing is the largest segment of demand, but the infrastructure sector is the growth driver, and the government is also investing on roads and putting a huge sum of Rs 1.46 trillion on railway expansion, says Maheswari.
The cement industry has witnessed some extreme churning over the last four years, though the intensity was bolstered by IBC by bringing debt-ridden companies under the NCLT hammer. UltraTech has developed such a lead over others in installed capacity that it is not an exaggeration to say that it will take years them to catch up. What will be the impact of M&As and investments on the composition of the industry in the years to come, is the question that has cropped up. Nainan of CARE Ratings says, 'For the industry, volume is the key for long-term sustainability. We can expect 8-10 dominant large cement producers pan-India, with 3-4 dominant producers in each region going forward.'
However, the industry's falling profits remain a concern, given that the industry's operational profitability falling by 275-325 bps to 12-14 per cent from 15-17 per cent in FY18. On the other hand, the key input prices rose about 10-20 per cent, biting into the profits. But the cement majors, who have been on an acquisition spree, are focusing to push volumes compared to hiking prices. However, as Srinivasan of India Cements said, the industry is hoping for the best times ahead.
Expansion plans on the anvil
Shree Cement is planning to set up two greenfield projects in eastern India with an expected outlay of Rs 9000 million, to be operational by 2019-20. These projects include a 3 million tonnes per annum (MTPA) grinding unit in Cuttack and a 2.5 MTPA unit in Jharkhand.
India Cements is planning to set up a new manufacturing facility in Madhya Pradesh with a total investment of around Rs 10 billion, taking its capacity from 15.5 MT to 17 MT. With this expansion in view, the company recently acquired Springway Mining Pvt Ltd at a total cost of Rs 1.82 billion.
South India based Orient Cement is planning to nearly double its capacity to 15 MT with an outlay of Rs 3,600 crore in 5 years. It includes adding clinker and grinding unit at its Devapur facility in Telangana, and grinding units in Kalaburgi and Bengaluru in Karnataka.
Penna Cement is planning brownfield expansions in the South and East and a greenfield project in the North, in all taking its capacity to 16 MT in three years, with an outlay of Rs 3,500 crore. The company has already filed a draft prospectus with the regulator for raising Rs 15,500 million through an IPO.
JK Cements is planning to add 8 MT to its existing capacity to take its total capacity to 18 MT in four years.
VICAT Cement is planning to invest Rs 1,700 crore by 2021 to increase its capacity to 13 MT from 7.75 MT. It includes setting up of a second line of 2.75 MTPA capacity in existing Kalburgi cement plant, and a grinding unit of 1.7 MTPA capacity at Vizag in Andhra Pradesh.
Wonder Cement is planning to expand its capacity from 6.75 MTPA to 8.75 MTPA by setting up a grinding unit in Maharashtra with a capacity of 2 MTPA.
- B.S. Srinivasalu Reddy