From a regional player that faced the ire of debtors in 2003 to a company that is aiming to be one of the leading cement players in India in the coming times, India Cements is planning a paradigm transformation. Can it go the distance? by Virat Bahri
Besides being dependent on the vagaries of one market, India Cements also faces the issue of high dependence on coal imports, where fluctuations in coal prices and exchange rates affect it in a big way. Naturally, as the company goes about with its capex plans, it would be more difficult to sustain margins if they don’t take steps to reduce costs related to coal as well as other inputs for its operations. The company is planning two 50MW plants and has also completed the formalities for a coal mine acquisition in Indonesia for the same, according to Srinivasan.
Then there is the lurking question of its continuing debt obligations, which are an outcome of the CDRM mechanism; and stood at Rs.1.02 billion as on September 2009. Furthermore it has $75 million worth of FCCBs due for redemption in 2012, which has been speculated as the major reason for the recent QIP issuance. Jinal Joshi, cement analyst, Jaypee Capital Services Limited, comments to B&E, “I’m bearish on the stock due to exposure towards FCCBs (which are likely to come for the redemption/conversion in FY’12) and higher depreciation and interest costs due to completion of capex in FY’11.” While the situation of debt is not as bad as it was in 2003, it is definitely a detriment to the company’s capex plans; whether they be for greenfield expansions or for acquisitions. In a sector where current installed capacity is 252 mtpa and 76 mtpa is expected to be added in the next two years, fast-paced capacity expansions are critical to gain a lead over the competition; and unless that happens, the CSK edge will have little meaning for India Cements. Adds Rakesh Singh, “The aim (of our expansions) is that we should be able to move at the same pace as the market if not faster.” He also tells us that the company cites service to be the key differentiator as they move from state to state. For instance, the company has mandated that its plant or branding unit should not be at a distance farther than 300 km. from its customers or dealers.
Also, the situation of surplus supply in the South Indian market is expected to persist, which will continue to hamper realisations. There was some improvement in prices in the month of March, but that is expected to be short lived. Archna Khemka, Analyst, Edelweiss Securities, elaborates, “Prices are up to INR 210-225/bag in Hyderabad. Interestingly, prices in other states like Tamil Nadu have also shot up to ~INR 260/bag levels. Interaction with market participants reflect that current hikes are opportunistic and discipline is unlikely to last in monsoon.” According to Joshi, the company’s realisations are expected to fall by another 5% in 2011 due to its huge presence in the South Indian market. The situation is expected to stabilise in 1-2 years, since part of the new capacities have been absorbed and infrastructure investment is happening at a rapid pace. But till then, the Southern market will continue to face realisation issues. Rupesh Kumar, Analyst, Angel Broking, agrees, “Short term concerns on expected oversupply in next few months that will lead to a drop in realizations & rising cost pressures on account of higher coal prices as well as higher freight costs due to the issue of wagon unavailability.” On an overall basis, the demand is going to grow quite well for India. Amber Dubey, Director, KPMG Advisory, tells, “Over the next few years, demand from housing sector is expected to slow down but will be compensated by demand from infrastructure projects (roads, bridges, etc.) and overall cement industry is expected to grow with a CAGR of 7-8% over the next 5 years.” Naturally, one can expect more acquisitions, expansions and attempts by more other regional players to go national.
So ultimately, India Cements has two major contrasting obligations – to ensure smooth debt repayment on one hand and to expand pan-India footprint at a rapid pace on the other. Even though analysts may advise caution, market trends clearly call for upping the ante, while keeping their debt at manageable levels. It’s time for new ideas and for a more aggressive, risk taking Gen-Next, which is why the induction of Srinivasan’s daughter Rupa Gurunath into the board is a positive step. Holding on to their dominant South Indian market position is not a choice anymore, a fact they have realised.
With inputs provided by N. Asokan from Chennai
For more articles, Click on IIPM Article.Besides being dependent on the vagaries of one market, India Cements also faces the issue of high dependence on coal imports, where fluctuations in coal prices and exchange rates affect it in a big way. Naturally, as the company goes about with its capex plans, it would be more difficult to sustain margins if they don’t take steps to reduce costs related to coal as well as other inputs for its operations. The company is planning two 50MW plants and has also completed the formalities for a coal mine acquisition in Indonesia for the same, according to Srinivasan.
Then there is the lurking question of its continuing debt obligations, which are an outcome of the CDRM mechanism; and stood at Rs.1.02 billion as on September 2009. Furthermore it has $75 million worth of FCCBs due for redemption in 2012, which has been speculated as the major reason for the recent QIP issuance. Jinal Joshi, cement analyst, Jaypee Capital Services Limited, comments to B&E, “I’m bearish on the stock due to exposure towards FCCBs (which are likely to come for the redemption/conversion in FY’12) and higher depreciation and interest costs due to completion of capex in FY’11.” While the situation of debt is not as bad as it was in 2003, it is definitely a detriment to the company’s capex plans; whether they be for greenfield expansions or for acquisitions. In a sector where current installed capacity is 252 mtpa and 76 mtpa is expected to be added in the next two years, fast-paced capacity expansions are critical to gain a lead over the competition; and unless that happens, the CSK edge will have little meaning for India Cements. Adds Rakesh Singh, “The aim (of our expansions) is that we should be able to move at the same pace as the market if not faster.” He also tells us that the company cites service to be the key differentiator as they move from state to state. For instance, the company has mandated that its plant or branding unit should not be at a distance farther than 300 km. from its customers or dealers.
Also, the situation of surplus supply in the South Indian market is expected to persist, which will continue to hamper realisations. There was some improvement in prices in the month of March, but that is expected to be short lived. Archna Khemka, Analyst, Edelweiss Securities, elaborates, “Prices are up to INR 210-225/bag in Hyderabad. Interestingly, prices in other states like Tamil Nadu have also shot up to ~INR 260/bag levels. Interaction with market participants reflect that current hikes are opportunistic and discipline is unlikely to last in monsoon.” According to Joshi, the company’s realisations are expected to fall by another 5% in 2011 due to its huge presence in the South Indian market. The situation is expected to stabilise in 1-2 years, since part of the new capacities have been absorbed and infrastructure investment is happening at a rapid pace. But till then, the Southern market will continue to face realisation issues. Rupesh Kumar, Analyst, Angel Broking, agrees, “Short term concerns on expected oversupply in next few months that will lead to a drop in realizations & rising cost pressures on account of higher coal prices as well as higher freight costs due to the issue of wagon unavailability.” On an overall basis, the demand is going to grow quite well for India. Amber Dubey, Director, KPMG Advisory, tells, “Over the next few years, demand from housing sector is expected to slow down but will be compensated by demand from infrastructure projects (roads, bridges, etc.) and overall cement industry is expected to grow with a CAGR of 7-8% over the next 5 years.” Naturally, one can expect more acquisitions, expansions and attempts by more other regional players to go national.
So ultimately, India Cements has two major contrasting obligations – to ensure smooth debt repayment on one hand and to expand pan-India footprint at a rapid pace on the other. Even though analysts may advise caution, market trends clearly call for upping the ante, while keeping their debt at manageable levels. It’s time for new ideas and for a more aggressive, risk taking Gen-Next, which is why the induction of Srinivasan’s daughter Rupa Gurunath into the board is a positive step. Holding on to their dominant South Indian market position is not a choice anymore, a fact they have realised.
With inputs provided by N. Asokan from Chennai
Virat Bahri
Source : IIPM Editorial, 2010.
An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).
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