Headroom for cement cos to raise prices: Heidelberg Cement

Giving his view on the dynamics of the cement sector, Ashish Guha, CEO & MD, Heidelberg Cement explained that in order to put up a cement plant today, one will have to spend about USD 140 a tonne, which would take 3.5-4 years.

"There have been some deals in the market for a long time and none of these are coming from some stretched assets. None of them were particularly interesting. They had started up a few years back and then wanted to get out. So probably, we may see some more deals happening but it depends on the appetite of the people," said Guha.
"At about USD 140 per tonne, if you were to build up a plant and take 4 years to service that interest, if you take debt equity of 1:1 on an assumptive basis then you would look to sell cement bags at about Rs 350 plus for an average distance of 500 km. We are 20% lower than that today." Guha clarified.
Besides, Guha added that there is headroom for cement companies to raise prices further. Here is the edited transcript of the interview on CNBC-TV18. Q: There is an impending deal in the cement sector at this point in time. How exactly is the dynamics of the cement sector playing out? What sort of capacity utilization are you currently working at and how difficult is it possibly for companies to service debt?
A: Personally, I don’t want to comment about anyone else’s transaction because they know best why they are doing it or if they are doing it at all. So, I have no comments on that.
As far as capacity utilization goes, it varies from region to region. In central India, we are currently around 100%. In south India, we are about 85%, and in western India, we are about 85%. So that is our capacity utilization and that’s generally the trend in most places except the south where I am told the capacity utilization is around 60-65% for the other companies. But we are small in south and our capacity utilization actually doesn't imply any kind of increase in capacity utilization for the other companies. Q: If the deal happening at these prices, it works out to about USD 160 per tonne economic value. Is this an attractive price and can we, therefore, expect more deals? After all, it's quite a bit of return of value to the table. Do you think that you can see more deals?
A: You have to compare it. Let me clarify myself with all the caveats. I am not talking about any particular transaction which is being reported in some parts of the press. I am talking generally about cement industry and what is the replacement cost etc. To put up a cement plant today, you will have to spend about USD 140 a tonne and then that takes about 3.5-4 years to put up a plant.
If there are targets which are coming at less than that or around that, it would make sense for some. If there is some synergistic value and if they are not making losses, then you can add the cash flows for the next four years and probably can justify a higher price. So it depends from case to case. But for setting up a Greenfield plant, it will take you about USD 130-140 per tonne and about 3-4 years to set up a plant. Q: If someone is able to do a deal for a company with cash flows as USD 160/tonne, does it give you a sense that there could be more deals in the offing?
A: There have been some deals in the market for a long time and none of these are coming from some stretched assets. None of them were particularly interesting. They had started up a few years back and then wanted to get out. So probably, we may see some more deals happening but it depends on the appetite of the people.
At about USD 140 per tonne, if you were to build up a plant and take 4 years to service that interest, if you take debt equity of 1:1 on an assumptive basis then you would look to sell cement bags at about Rs 350 plus for average distance of 500 kms. We are 20% lower than that today.
_PAGEBREAK_ Q: Give us a sense in terms of your expansion plans currently. We do understand that there is some amount of operational efficiency which you are envisaging in the coming quarters. What are your capex plans? When could it come on stream and how much would you envisage in terms of demand off take?
A: We will see the first production coming out by end-September or early October. The first three-four months is stabilization period, so we will not see huge delta coming out of that for this year. Next year, we see majority of that production, the total expansion is 3 million tone so we expect about 2.2-2.5 million tonne to be sold in the market next year.
We sell in UP, MP, Bihar, Uttarakhand, Delhi and Haryana. So all these markets put together, we are looking at about a rough size of 50-60 million tonne for this market and 2 million tonne is nothing much. It's about 4%.
So we will be able to sell such volumes in the market. As far as our capex plan goes, the total project of expansion is about Rs 1,250 crore and we have another project going simultaneously, which is a conveyor belt covering the gap of mines. So all put together, it would stand at Rs 1,400 crore and our net debt, as reported in June balance sheet, was Rs 750 crore. Q: When does the conveyor belt get completed?
A: It's coming in simultaneously. We are trying to get it together. Q: Your second quarter was a very good improvement in margins on YoY terms. Should we expect further improvement in margins?
A: We saw a bit of delayed monsoon. First was our reaction to no monsoon, so a bit of a dip was expected; and then there was a deluge in Madhya Pradesh and parts of Uttar Pradesh. So sales were a little slow in these regions for the first few days of August. We hope that we should be able to do better in the next few months. Q: Even when the capacity utilization was 70% or 75%, cement companies have managed price increases probably because railway rakes are not available so there is a problem of reaching cement. Is there more headroom basically for better realizations come September, if not now?
A: I am not talking about better realization because ultimately you look at net sales realization. So here, even at about Rs 350 a bag, the net realization would be lower than Rs 3500 and your average cost of borrowing at 12%. You won't be able to get that kind of a return. Q: Given the economics, demand pressures and the infrastructure constraints, is there headroom for cement companies to raise prices further?
A: Let me give you a comparison with the real estate industry. There are more sellers in the real estate industry than buyers. But have the priced picked up in the last five years? Yes, and it has picked up heavily. Cement, which was selling at Rs 250 earlier, going up to Rs 280-300, of course, there is headroom.