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.