Credit crunch slows cement companies’ expansion plans

Rising Raw Material Costs, Real Estate Slowdown Add To Worries

Mithun Roy & Kausik Datta MUMBAI

COSTLIER raw material and tight credit conditions have slowed down cement companies' ambitious Rs 50,000 crore expansion plan to add 80-90 million tonnes capacity in three years. Adverse economic factors and problems in land acquisition have made expansion almost impossible, industry officials told ET. Some of them said they will be happy if even half of the proposed expansion goes through.
    Holcim executive committee member Paul Hugentobler told ET that "not many companies who had announced expansion plans two years ago are on schedule." A Holcim team dispatched to photograph sites of some new projects reported last week that there is little progress on the ground. "The equity market is dead and the debt market is not in a good shape, making fund-raising a huge task," said Mr Hugentobler.
    Yet, according to Mr Hugentobler, this would not hurt Holcim much. "We have three strong balance-sheets to bank on," he said, referring to the financial strength of ACC, Ambuja Cements and parent Holcim, "which is not the case with many others." Expansion plans of ACC and Ambuja Cement may be a little delayed, he said, indicating that won't be a cause for major concern.
    This was corroborated by an analyst with a domestic brokerage. He said ACC's expansion plans at Bargarh, New Wadi and Chanda are slightly behind schedule. These will add 7.2 million tonnes of capacity, taking total capacity to 29.6 million tonnes.
    According to the Cement Manufacturers' Association, last year saw capacity addition of 27 million tonnes, taking the total to 170 million tonnes. The demand is estimated at around 200 million tonnes and is expected to grow at 8-10%. Some doubt the trend will continue. "2007-08 was a golden year due to large government spending. High commercial activity and the housing boom due to higher per capita income kept cement offtake growth in double digits," said an analyst.
    Daljeet S Kohli, head of research, Emkay Global Financial Services said that margins are facing rising pressure. "The sales growth rate fell sharply with a drastic cut in house construction as the real estate industry is under pressure."
    Cement makers blame the government. Said ACC managing director Sumit Banerjee: "The cement industry was targeted by the govern-ment, when the commodity is cheaper than any other commodity." An analyst said a large chunk of the cement industry's revenue goes to the exchequer as tax and loyalty payments. The government has taken several steps to check cement prices, the latest being an export ban (since relaxed) and a 12% ad valorem duty on cement above Rs 250 per 50 kg bag. Last year, cement import was made duty-free.
    The expansions at Grasim's Shambhupura and Tadpatri units will be over in H1FY09, while the Kotputli plant is expected to go on stream in Q3FY09. Upon completion, Grasim's cement capacity (including UltraTech) will rise to 48.7 million tonnes. Grasim commands 30% share in Maharashtra and Karnataka, which account for 42% of India's cement market. Analysts Jagdishwar Toppo and Nitesh Jain of Enam said in a note that the sector has underformed on concerns of large impending capacity additions, substantial erosion in industry profitability due to price correction, cost pressure and government intervention. Even brownfield expansions are delayed 6-9 months and greenfield projects are delayed by about one year as against an anticipated delay of 3-6 months.
    India Cements is planning to spend Rs 2,100 crore for capacity expansion, raising it to about 14 MTPA from 9.1 MTPA through debottle-necking, upgradation of facilities and setting up two grinding units. The units of 1 MTPA capacity each would come up at Chennai and Perli by the end of Q1 FY09.
    mithun.roy@timesgroup.com