UltraTech Cement plans next phase of greenfield expansion3 min read . Updated: 16 Jan 2015, 01:06 AM IST
Firm has plans to set up two greenfield grinding units in Bihar and West Bengal, according to an official
Following its takeover of two cement plants owned by the Jaypee group, UltraTech has plans to set up two greenfield grinding units in Bihar and West Bengal, according to O.P. Puranmalka, managing director of UltraTech. “We will also build a bulk terminal in Maharashtra and increase capacity at our existing plant in Rajasthan," he said.
While the capacity expansion will strengthen UltraTech’s top spot in the industry, the bulk terminal will help it to cut transport and logistics costs.
The company has an installed capacity of 62 million tonnes per annum (mtpa) of grey cement. It has 12 integrated plants, one clinker plant, 16 grinding units and six bulk terminals.
With the Jaypee acquisition last month, its cement capacity in India will increase to nearly 67 mtpa. The capacity will stand raised to 71 mtpa by 2016 once projects under implementation are completed.
On 23 December, UltraTech said it will buy two cement plants and related power assets owned by Jaiprakash Associates Ltd (JAL) in Madhya Pradesh for ₹ 5,400 crore. In September 2013, UltraTech had acquired Jaypee’s Gujarat unit for ₹ 3,800 crore.
Demand for cement has been sluggish in the last few years due to a slowdown in the economy and in the infrastructure sector.
However, cement demand is expected to revive on expectations of a pick up in growth and investment starting fiscal year 2015-16. India is expected to grow at 5.5% in fiscal 2015 after two years of sub-5% growth, the government said in its mid-year economic review 19 December.
Growth in 2015-16 is seen at about 6.5%, according to the Reserve Bank of India’s (RBI) projections. The government is also trying to kick-start stalled infrastructure projects, which could trigger demand for commodities such as cement.
UltraTech’s recent acquisition and expansion will bode well for the company’s volume and profit growth, say analysts.
For the fiscal third-quarter for instance, while the industry volume growth is expected to moderate to 4-5%, UltraTech would lead growth at 9% partly led by new capacities, said a 7 January report by Religare Research.
UltraTech’s plan to construct a bulk terminal in Maharashtra will also help the company control high costs, said analysts. A bulk terminal specialises in handling and storing non-containerized bulk cargo. Transport and logistics costs for the cement industry are as high as 20%, the highest among all major industries, according to property consutant Knight Frank.
“The bulk terminals will help the firm to use their captive modes of warehousing and transportation, rather then using third-party logistics providers which will aid them to cut costs," said an analyst with a domestic brokerage. He requested anonymity since he is not authorized to speak to the media.
But there may be some downside from the company’s expansion plans as well.
According to Nitin Bhasin and Achint Bhagat, analysts at Ambit Capital Pvt. Ltd, while the increased capacity will allow UltraTech capture any increase in demand, the return on capital may be compromised. “...the company has a targeted plan to increase capacities further either organically or inorganically, which could restrict its return on capital employed (ROCE) expansion even though it may enjoy superlative volume growth," they said in an October report.
Ambit expects the company’s ROCE to improve only marginally and remain at 10-12% in fiscal year 2015 and 2016—lower than the last five-year average of 15% and materially lower than the peak ROCE of 18-25% seen during fiscals 2007 and 2009. ROCE measures how efficiently profits are being extracted from capital investments.
Meanwhile, the firm’s debt levels are the highest since 2009. The recent acquisitions have pushed up the company’s standalone debt to ₹ 7,812 crore, as of 30 September 2014, the highest since March 2009. Debt levels have jumped 78% compared to a year ago.
But the management is not concerned. Puranmalka said the firm’s balance sheet is strongly poised at a comfortable net debt-to-equity ratio of less than 0.5 times and enjoys a “AAA" credit rating. “All of UltraTech’s expansion plans are in full swing and do not pose any threat to the company for financing."
According to Capitaline, the company’s debt-to-equity ratio, on a standalone basis, as of 30 September, was at 0.43 times.