Mumbai: After jettisoning the deal to buy 2 cement units from the distressed Jaypee group, CK Birla group company Orient Cement plans to invest Rs3,600 crore over the next 5 years to expand its existing cement-making capacity to 15 million tonnes per annum (mtpa) from the current 8mtpa.
In a phone interview with Mint, Deepak Khetrapal, MD and CEO, Orient Cement, said that the company has applied for environmental clearances to expand clinker and grinding capacities in Devapur (Telangana) and Chittapur (Karnataka). It also wants to set up additional grinding capacity in the eastern market, possibly in Odisha, Khetrapal added.
The total capacity expansion will be 7mtpa and investments will begin in FY20. “Our ambition to increase capacity to 15mtpa has not changed," Khetrapal told Mint. “But the original deadline of 2020 that we set is now impossible because we lost 2 years waiting for this (Jaypee) transaction to happen."
Last month, Orient Cement announced that it had terminated its agreement with Jaiprakash Associates to buy 2 of the latter’s cement units for Rs1,946 crore. Orient was to acquire Jaiprakash’s 74% stake in its joint venture with SAIL for Bhilai Jaypee Cement Ltd and a separate Nigrie Cement Grinding unit from Jaiprakash Power Ventures. Orient informed stock exchanges that it had called off the deal because it did not close within the stipulated 12-month timeframe. Jaiprakash Associates, for its part, said in regulatory filings that the deal did not go through because Orient stipulated new conditions that were not acceptable to its JV partner, Steel Authority of India (SAIL).
Orient has now replaced its failed acquisitions efforts with plans to organically expand capacity. “Investments in expansion will be funded with debt and internal reserves," Khetrapal said. “The investments will start from FY20 onwards and will be complete by FY23, provided environment clearances come through on time."
Meanwhile, in the March quarter, Orient Cement Ltd’s cement sales volumes declined 3% year-on-year at 1.68 million tonnes (mt), impacted by weak demand in south India and increasing competition in the company’s core operating markets of Maharashtra, Andhra Pradesh/Telangana and Karnataka.
Khetrapal expects cement demand to be robust in the April-June quarter buoyed by increased construction activity ahead of the onset of a full-fledged monsoon season.
However, despite that, cement prices remain on a weak footing.
“Prices have not been very robust, which is quite disappointing for the industry as a whole because this was the time where additional costs have come into the system with increase in energy cost all around - be it petcoke or diesel. We should have been able to pass on these additional prices, but I think even today players in the industry are perhaps more keen on pushing volumes rather than passing prices," he said.
Unimpressive demand growth coupled with intensifying competition in the sector, especially after pan-India focused UltraTech Cement Ltd’s acquisition of Jaiprakash Associate Ltd assets, brought cement prices under pressure due to capacity overhang.
Khetrapal is hopeful that cement prices will recover as this additional volume from the supply side is absorbed by the market.
“Cement prices have held steady since the fourth quarter of the last financial year and in this financial year so far, prices are lot more robust than the second half of the last financial year. They are not quite there, where they were in the first quarter last year, but they are higher than the previous quarter. That gives us some bit of impression that additional capacity that hit the market has more or less been absorbed and people are now looking at steady prices," added.
As far as the cement price trend in the key market of Maharashtra is concerned, Khetrapal said that prices in this state have remained very low for more than two years.
“Prices are better than the second half, but not as good as the first half of last year. Prices in Maharashtra region are definitely less by Rs12-15/bag compared to first quarter last year, but compared to previous quarter they are better."
In an attempt to further boost cost efficiency, the company is planning to set-up a Waste Heat Recovery System in the next 12-15 months.