Cement companies optimistic in new year
After a diminished performance in 2014, the Indian cement industry is preparing for an upturn in this year. While the government is planning increased activities in construction and infrastructure, major cement companies are consolidating their presence in the industry to cash in the advantages in the new environment by way of acquisitions and investment in existing facilities.
UltraTech has aggressively scaled up its capacity to become India´s largest cement maker. Today, it ranks among the world´s top eight cement giants. The company had two major acquisitions within a span of 16 months. The most recent is the acquisition of two cement plants of Jaiprakash Associates (JAL) in Madhya Pradesh. With this, the company has added another 4.9 million tonne to its capacity at a cost of Rs 5,400 crore. Before this, the group had acquired the 4.8-million tonne unit of Jaiprakash Associates in Gujarat for Rs 3,800 crore in September 2013. The recent acquisition has taken UltraTech´s overall capacity to 65 million tonne - more than a sixth of the industry´s total capacity of 360 million tonne.
The market saw the wisdom in the acquisition: UltraTech traded 3.5 per cent higher the day after the deal was announced at above Rs 2,600 even as the broader market remained subdued. The brokerages have upped the target price for the stock to Rs 2,900- Rs 3,200.
The two deals augur well for UltraTech such as cost escalation, land acquisition and environment clearances for new projects have collectively impacted companies´ plans for expansion through the greenfield route.
The acquisition of Jaiprakash Associates´ Gujarat unit has helped UltraTech counter Ambuja Cements in the state, while the Madhya Pradesh acquisitions will help it grow in central India as well as in regions of eastern Uttar Pradesh, Bihar and Jharkhand. Historically, the region has commanded higher cement prices than the rest of the country because of fewer production units located there. Moreover, Prime Minister Narendra Modi´s focus on eastern India, which is rich in minerals and metal ores but poor in infrastructure, could cause cement consumption in the region to rise sharply. Overall, the cement sector, according to optimistic projections, could return to sustained 10-11 per cent growth in the coming years.
India Cements Vice Chairman N Srinivasan is cautiously optimistic of 2015 after witnessing a difficult year. Addressing the company´s shareholders, he said operating profit last year was low due to lower volumes, while realisations were lower by Rs 200 a tonne. The company also had a one-time cost due to loss on sale of ship, fuel surcharge and others.
India Cements cautiously optimistic
Srinivasan said there had been two items of non-recurring exceptional items of expenditure, including Right of Recompense paid to banks amounting to Rs 57.13 crore besides fuel surcharge adjustment towards electricity charges at Rs 69.43 crore.
The industry also faced cost pressure due to ´unprecedented´ increase in exchange rate, revision in railway freight, power tariff revision, monthly dosage of increase in the price of petroleum products and increase in wages due to new settlement. During the year, the company exited from the corporate debt restructuring (CDR) mechanism after paying the prescribed compensation.
According to him, capacity utilisation for the cement industry at the national level is 71-72 per cent, while it is 60 per cent in the south. The overall cement production capacity currently stood at around 360 million tonne (mt), including 145 mt in the south. The company is also hoping fresh investments would flow into Andhra Pradesh and Telangana, pushing demand for cement in the south. India Cements has a major chunk of its capacity in these two states.
Jaiprakash Associates optimistic
Shares of Jaiprakash Associates (JAL) zoomed nine per cent after Aditya Birla Group firm UltraTech announced the acquisition of its two plants in Madhya Pradesh for Rs 5,400 crore. Cheering the deal, shares of Jaiprakash Associates on 24 December 2014, immediately after the announcement, soared 8.96 per cent to settle at Rs 25.55 on the BSE. During the day, it gained 9.8 per cent to Rs 25.75.