Hyderabad/Mumbai :With demand and prices soaring, cement manufacturers that had opted to be classified mini-plants in return for tax sops,are willingly giving up that status.
There’s an additional benefit too, according to an executive at a US-based private equity firm who did not wish to be identified: a higher valuation. “Mini cement plants typically trade at a discount of more than 50% to the majors. As a result, the operating leverage that comes with an increase in capacity is very attractive.”
The government encouraged companies to set up mini cement plants (those with sales not exceeding 300,000 tonnes a year, or a capacity exceeding 297,000 tonnes in a single location) in the 1980s. The objective was to tap smaller reserves of limestone, a key input, and to supply cement to surrounding areas. Although 365 mini plants were set up, only 150 survive.
“Close to 100 were revived during the past year to take advantage of the fortunes of the domestic cement industry,” said Ramesh Chand, the president of the All India Mini Cement Manufacturers Association.
Mini cement plants pay an excise duty of Rs255 a tonne on the first 99,000 tonnes they produce as compared to the Rs 408, other cement companies do. An expansion of capacity will mean the loss of the mini status and a higher excise duty, but companies believe that is a small price to pay in the current circumstances. With a capacity of 156 million tonnes, the Indian cement industry is now the second largest in the world, after the Chinese cement industry. It is currently growing at 10% to 11%, and most manufacturers are convinced that it will continue to grow for the next five years.
“We will lose the mini cement plant status and that could have an adverse impact of Rs1.2 crore to Rs1.5 crore,” said K. Ravi, the managing director of NCL Industries which has embarked on a Rs213 crore expansion plan to increase its capacity by 800,000 tonnes. “But the benefits from the expansion will outweigh this.”
Sagar Cements, which runs another mini plant, is adding 2.1 million tonnes to its capacity and is trying to raise Rs50 crore from investors.
“Private equity firms look for sunrise sectors and there is a lot of money chasing good mini plants ,” said Amrish Baliga, a vice-president at ICICI Securities. He added that the gap between demand and supply meant that the business would grow for the next two to three years. “A single deal (to acquire a stake in a mini cement plant) can have five to seven players chasing it,”he said.