Shree Cement sees the worst to be behind in the September quarter’s performance, and expects a more robust structure in terms of margins and price hikes. Former managing director Hari Mohan Bangur, who has now been elevated to the position of chairman, termed September quarter as a one-off period, and said that he expects better performance going forward, as demand resumes and cost pressures ease off. Notably, the company posted a multi-quarter low EBITDA/tonne for the September quarter at Rs 701/ tonne, almost halving year-on-year (YoY) and falling Rs 390/tonne sequentially.
Setting an aggressive target, Bangur said, “For Samvat 2079, the company expects to achieve what in the English calendar 2079 will be achieved by many.”
In a post-earnings interaction with Moneycontrol, the chairman spoke about the company’s financials, strategy, and inorganic plans, among many other aspects.
Q: What’s the company’s strategy after the change of directors?
A: The entire company is growing at a very fast rate. The aim is to grow from 45-46 million tonnes now to 80 million tonnes in five years. For that, a very experienced person who has worked in multi-locations and various types of big companies was needed to head the company. Shree has already grown to 45 MTPA (million tonnes per annum) capacity. Because of the complexity when you have so many operations, we chose the ex CEO of ACC and Ambuja Cements as our new MD designate. We want to grow 10 million tonnes from acquisitions over the next five years.
Q: Shree Cement typically has focused on organic expansions. So, how does that change now?
A: Right now we will be reviewing our strengths, and whether we will be expanding outside, which we would likely need to. It is a timeless game, which that has to be played for 50 years, 100 years. It is a long-term game, looking at new horizons and regions where Shree isn’t available.
The assets need to be available at the right price and right place. Because many times the price is right, everything is right, but you are already there. So, it doesn't make sense. So, we are looking at new horizons, newer regions where our capacities aren’t available presently.
Q: Of the total 40 MTPA expansion, how much growth would come from the inorganic route?
A: About 25 percent would come from the inorganic route. Around 75 percent will be organic. Because it is a long-term game of five to seven years, new opportunities will keep coming. Old opportunities will go away. So, roughly 10 million tonnes will be acquired while the company would add another 30 million tonnes.
Q: Tell us about the price hikes.
A: We expect something better, but after the festive season is over by 15th November, we expect markets to restart full consumption. So, when consumption is a little higher, prices will also increase. At present, our cost has increased substantially, though volume increase compared to last year same quarter is quite good. Prices are also better. But, you see, the coal of cost has more than doubled for the same kilocalorie heat. So, if the coal cost has doubled, we have not been able to pass on the corresponding amount of price range in the market. It may take one or two quarters, almost the time is over. Anytime we expect some price increase.
Q: By when would that be? And what would be the quantum of price hikes?
A: Here, the problem is that we are not in a monopoly situation where we can decide the price, but it is the full market. So, we expect that price should increase by Rs 15 a bag or so. By with will it increase? Whether it will be in one go or two, we just don't know. Because as demand increases, as government expenditure increases, then only the price will increase.
Q: What about your margin performance (Ebitda/tonne) for Q2 and outlook for Q3 and Q4?
A: Q4 will be better than Q3. And in Q3, I expect Rs 900 to Rs 1,000/ tonne depending on the market price. This quarter it is Rs 700. So, a little increase in margins is expected. It is around the corner.
Q: Cost pressure guidance for Q3 and Q2?
A: Quarter 3 and Quarter 4 – escalation will not be there. We expect prices of coal to come down internationally. So quarter 3, as the coal prices have gone down a little from quarter 2, $250 to $200, all numbers are rough estimates, but $50 have come down. So in quarter 3, the cost will come down. In quarter 4, even if the prices are same, the high-cost materials in the stock at the beginning of quarter 3 will be finished and in quarter 4 – our cost should come down further. So quarter 3 and quarter 4 costing should be lower than the present quarter.
Q: Adani is aggressively scaling up and bidding for smaller assets. How do you view this consolidation phase of the industry?
A: In the last 20 years, we have been talking about consolidation continuously. Few companies are taken over by other companies, bigger companies. But at the same time, new names which were not in the cement (sector) again comes up. So, overall the level of consolidation is the same as it was 20 years back. It will remain the same. New companies will come and gobble up some old companies. So, overall consolidation will not make a difference. If Mr. Adani wants to double the capacity, it is very natural. India is growing at a very fast pace. India will need double the amount of cement over the next decade. So, overall in 8 to 9 to 10 years, capacity has to be up at least 80 percent.
Q: You think the industry can hike prices?
A: Price rise has to come because of natural forces. How long can you reduce the price rise if the cost increases? Now, this time we were almost the first to announce results. In a day or two, other companies will announce their results. So, I feel that pressure will be there on the performance, price, and profitability of almost the whole sector. Price can be held for one quarter or two quarters, but ultimately, prices have to increase. It is a matter of when, but there is no doubt about the direction.
Q: What are the pockets of growth for the industry? And what is the outlook on real estate and infrastructure demand?
A: I am personally very bullish about the middle-class getting their own house. So, housing demand will be increasing disproportionately. Similarly, the government is having a very bullish view, they want to make India a developed country. So much is being done in roads and railways, ports, and airports. So, cement consumption is needed, and it will come in a very big way.
Q: Which are the regions of growth?
A: The north will be good, where we have big capacity. I feel even eastern India, where the prices at present are very low, the percentage-wise increase in there will be much better. Because a minimum threshold of price is needed. So, these are the two areas. In the South, good demand is coming.
Q: What are your plans for Samvat 2079?
A: We plan to post better volumes and better margins. For Shree Cement, the worst quarter is over and now the margins will increase. September was a one-off quarter. You will find a more robust and more updated Shree Cement at 2079 Samvat. We would like to achieve what in the English calendar 2079 will be achieved by many.
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