There is a tussle between capex and opex
Ashok Dembla is President and Managing Director of KHD Humboldt Wedag India, a German multinational engineering conglomerate and a leading supplier of cement machinery and plants. Dembla has a long stint in the cement industry, with in-depth knowledge in cement manufacturing. In a conversation with Sumit Banerjee, Chairman, Editorial Advisory Board, ASAPP Info Global Services, Ex. Vice Chairman, Reliance Cement, and Ex. CEO and MD of ACC Ltd.
How do you look at the cement demand situation considering the lockdown period and economic disruption caused?
Considering the first quarter of 2020, the cement demand for housing and infra projects had started picking up. Unfortunately by March 20, there was a disruption and the demand for cement vanished within no time. The silos in the cement factories are full but there is zero demand. The plants have no place to store it. It will take some time to see uptake in demand. Infra projects that requires capital may take some more time as monsoon is approaching. Therefore in July and August there will be no construction activity.
What has been the situation after April 20, 2020 (partial lockdown was relaxed)? Were you able to start the work at your client's site where the construction activity has started. What about your own set up?
At the start of the year, we had a backlog of Rs 400 crore. Till March 20, the progress was normal but then all of a sudden everything came to a grinding halt. Talking about the ongoing jobs of existing order book, it will be delayed by three to four considering the force majeure. We have restarted those jobs wherein we had the permission to start. For the projects that are in the pipeline, the owners are differing the projects because of the cash flow problems. We see there is a tussle going on between capex and opex, and the owners have delayed the projects by another eight to nine months. However there are a few projects where the owners have money, they have decided to go ahead and will take advantage of pricing.
One of our sites"Sadguru Industries near Indore"started activity after April 20, 2020. Around 500 people are working there after following the required guidelines. We have contacted other clients like UltraTech and JSW where once they start the construction activity, they will receive our equipment and machinery.
In case of our unit at Faridabad, close to Delhi, we were permitted to start by April 20 but the actual operations stared only on April 25 with 50 per cent of manpower. There have been a lot many conditions imposed before the operations begun. Health and safety are the topmost priority on our list, followed by social distancing. Before start up, we had to sanitise everything. Provide mask and check the temperature of workmen when they enter factory.
In short, there are about 13 SPOs we have to follow. From this unit, we shall be supplying parts and spares to cement plants in India as well as abroad in countries like Nepal, Bangladesh, USA and Philippines. With some difficulties, we are able to start the production and are able to fulfil our obligations. As a result, the cost of production has gone up. The situation like this is likely to continue for another a year or so till we are able to get a vaccine for Coronavirus.
Taking into account all the procedural part to start operations, the cost of production must have gone up. Can you give a ballpark number how much the cost is going up?
It is difficult to give even an approximate number. The additional cost is incurred on health and safety. Working with lower number of manpower and improving on automation. But automation takes its own time to give full benefits. It is a learning stage for us also because we modifying the procedures. Rough estimate on cost increase can be around 5 per cent. The cost will increase at start but may get optimised over a period of time.
You mentioned about operating with lower number of hands, does it mean that you will be rotating your workforce so that everybody gets a chance to work?
The main issue will be salary because we are going to employ only 50 per cent of the workforce. The employer will have to take the burden of 50 per cent salary without taking any work from them. Similarly cement plants will have to operate with 50 per cent of manpower reliability studies so that the plants are approaching us to increase the automation so that they are able to get full output with less manpower. It involves carrying out reliability studies. One would like to continue for one full year operation without any difficulties.
In order to improve on automation in a cement dispatch section, there will be enquires for automated loaders, weighing and counting of bags, etc. for full scale operations. What is your take?
Some clients have approached us to have reliability studies before going for improvement in automation. One has to understand how much one can rely on automation. It involves capex but consequently it will hit the number of jobs.
This means plants that have automated line for dispatch will be at an advantage. Do you feel it will lead to more of bulk cement transportation in the industry?
I can see that happening if the situation continues like this for a year or so. To extend it further even in the kiln operation or mill operation, you will have to operate with reduced manpower. Therefore plants will go for reliability studies so as to ensure continuous operation. About the bagging of cement there is lot of scope for automation, even in bulk loading. Many plants have already done, the remaining will do it now. The bulk cement will primarily go to large construction projects and that percentage will increase. But bag cement that goes to individual house building and will continue to be dispatched in bags.
Speaking on the mindset of the decision makers of cement companies, are we price conscious or technology driven?
Indian situation is very unique. Everybody wants the best of the technology at the lowest price. Therefore we have to work on very thin margins. They also want minimum time to be spent on projects so that their money is not blocked for a long time. For setting up pyro processing, the time has come down from 18 months to 15 months, and for grinding facility, the time has come to 10 months from 12 months. This is putting a lot of pressure on machinery suppliers.
People are open for technologies e.g. the target set for alternate fuels is 25 per cent TSR by 2025. We are ready to supply the required technology. We are offering pyro rotor with no constraint on the size of feed. Our earlier pro rotor had some limitations on the size of feed. The first installation has been in Austria and then in South Korea. We are sure this is suitable for India also. The problem here is consistent availability of waste at the plants.
Let us know about KHD India's presence outside India in terms of engineering services.
We are allowed to serve the clients in Nepal, Bangladesh, Sri Lanka, China etc. We are also working for some far eastern countries, and Africa and Gulf countries. We have projects in China and we have been offering supervision services for commissioning wherein we have done some expansion work. We were to commission these plants from mid-January but because of Covid-19 situation, we had to resort to use digital medium for the job through our office based in China. From March-April 2020, we successfully commissioned all those eight plants. Today around 40 to 50 per cent of our business comes from outside India. The business from India supports us during difficult time.
Many of the companies who have setup in China are likely to shift outside China. How much share of it India is likely to get?
In the last 40 days, we are hearing news that companies are trying to shift out of China. Japan and US have already decided to shift. It is certainly not one day's job to shift when you have created facilities over a period of time. The kind of concessions and facilities that China provides at such a low cost is very difficult to resist. Some part of business will come to India depending on the support from the Government and from small and medium enterprises.
Everyone is trying to conserve the cash flow. Do you think that the problem is much bigger than what we see from outside?
This is absolutely right and it is a unique situation due to a lot of uncertainties. Cement companies have already reduced their opex budget for 2020. They are working on same level of production with use of automation, differing capex by another six to eight months. At the same time, companies are working on increasing the demand for cement. Looking at our cash collection for April 2020, we could collect only 10 per cent of cash that we were supposed to receive. Every client here or outside is trying to drag the payment schedule.
Do you need to add anything else?
We have started webinars for our clients on the latest technologies. This is to impart knowledge on our products and services. It is open to cement industry employees with prior communication to us.
Quote from Nuvoco for World Environment Day
Jayakumar Krishnaswamy, MD, Nuvoco Vistas, says, "Building a sustainable world is an integral part of Nuvoco's vision. This year's theme for WED "Celebrating Biodiversity", which emphasizes the need for nurturing plant and animal life in order to ensure natural sustainability of all life forms.
Conserving and replenishing natural resources is an important step towards this goal, and Nuvoco has been steadily making progress through various responsible practices. Our sustainability goal is to reduce waste generation, and overall water and energy consumption by 5 per cent over the previous year's baseline. Our product portfolio, too, reflects this development; for example, our "Concreto Green" product launched last year is a result of one such effort. It consumes 25 per cent less water but increases the strength of concrete up to 70 per cent; making it one of the best performing products in the areas where water scarcity is a perpetual issue. We are ensuring that we make a net positive contribution to nature by minimising our environmental footprint while maximising the value for all our stakeholders."