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Business News/ Companies / Cement firms plan to grow capacity to meet potential spurt in demand
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Cement firms plan to grow capacity to meet potential spurt in demand

Cement makers bet big on government's plans for dedicated freight corridors and 100 'smart cities'

North India will see around 23mt of capacity addition from fiscal 2014 to 2017, according to a 28 May report by Barclays Research. Photo: MintPremium
North India will see around 23mt of capacity addition from fiscal 2014 to 2017, according to a 28 May report by Barclays Research. Photo: Mint

With the new government announcing plans for dedicated freight corridors and 100 “smart cities", cement makers are anticipating robust demand and have planned huge capacity expansion in north India.

These companies include Jaypee Cement, JK Cement Ltd, Mangalam Cement Ltd, Birla Corporation Ltd, Ambuja Cements Ltd, Shree Cement Ltd, UltraTech Cement Ltd and India Cements Ltd.

However, any further expansion in the region will have to be done by way of consolidation, experts say, as limestone reserves are limited in the north and cost of transporting limestone from the south are high.

In a way, the consolidation has already begun with firms scouting for cement assets.

“As far as our expansion plans go," Madhavkrishna Singhania, special executive at JK Cements, said, “the same will be on stream by September 2014. There are some opportunities that we are currently exploring for new mining leases and are open to acquiring existing plants as well, provided we come across the right opportunity and valuation."

Singhania said the firm is bullish about demand growth for cement in north India on the back of the smart cities and dedicated freight corridors announced by the government.

Ambuja has announced a capacity addition of approximately 4.50 million tonnes (mt). Its greenfield projects will be set up in Rajasthan, Madhya Pradesh and Uttar Pradesh. The total expansion cost is estimated at 3,500 crore, the company said in its annual report.

UltraTech, too, is buying assets, starting with its acquisition of Jaypee’s Gujarat cement plant.

North India will see around 23mt of capacity addition from fiscal 2014 to 2017, according to a 28 May report by Barclays Research.

“The north is dominated by five firms that combined had a 63.1% market share in 2013-14. We expect a further consolidation to take place due to high entry barriers and the addition of 58.6% of the regional capacity by the top five companies between fiscal 2014 and 2017," analyst Chirag Shah wrote in the Barclays report.

The report said greenfield capacity additions in the north by newer players will significantly decrease.

Meanwhile, limited reserves of limestone in the north and high freight costs will also push manufacturers to look for existing assets in order to increase capacity.

Limestone is a key raw material in manufacturing cement. Any new cement facility will need steady supply of the raw material. The north has only 16% of India’s total limestone resources compared with 50% concentrated in the south, according to the Barclays report.

According to the India Logistics and Warehousing report by property consultant Knight Frank, logistics costs for the cement industry range from 18-20% of revenue—the highest among all industries.

“Consolidation is the only way for the industry to move forward; it cannot work in a fragmented manner and we will see many smaller players (become) a part of the big ones in the future," said Rajesh Kumar Ravi, an analyst covering the sector at Karvy Stock Broking Ltd.

The north has enough reserves of low-grade limestone but the supply of the high-grade limestone is limited, Ravi said.

According to V.M. Mohan, joint president of corporate finance at India Cements, since there are only a few states with limestone reserves, if a firm wants to expand in the north, it is not easy to get limestone. “So it is possible for firms to acquire smaller assets in the region."

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Published: 20 Jul 2014, 11:46 PM IST
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