Deepak Khetrapal, managing director and chief executive officer, Orient Cement talks to Ujjval Jauhari on the company's strategy, outlook for cement demand and realisations, monsoon impact and capex plans. Edited excerpts:
Despite overcapacity in the industry, how have you been managing good utilisation levels?
We are selling around 30% of our produce in Telangana, 55-60% in Maharashtra and remaining in Gujarat, Madhya Pradesh and Chhattisgarh. Our plants are located more towards the Maharashtra side and we have a grinding unit in Maharashtra. Thus, we are away from the overcapacity zones of southern India. As a result, we have managed better utilisation rates than our peers and given better product mix.
While Andhra Pradesh-focused companies managed capacity utilisation of around 60%, we have achieved 84% in FY14, which was even better than all-India rate of 73%.
What is your sales and marketing strategy?
We have focussed on independent house builders in rural and semi-urban markets and not on large projects. Also since we sell more to independent house builders, which sees a steady demand, we sell more of PPC (more than 70%), which is a higher margin business, too.
As regards our projects, we have a greenfield project coming up in Karnataka's Gulbarga district. Project implementation is on schedule and it will go on-stream by the first quarter of 2015. Commissioning the plant in 15-16 months of inception (started November 2013) at the cost of about Rs 1,700 crore will give us an opportunity to expand more.
How do you expect the demand situation panning out going ahead?
Expecting a pickup in demand due to the new government is too premature a thought. The decision making and new project clearances will push up demand, but it will take three - four quarters. In the June 2014 quarter, the overall cement demand has not grown by more than 3%. However, we hope that the demand will grow as new governments at the Centre and in Telangana and Seemandhara will push infrastructure development. While we had earlier seen demand de-growth of 7-8% in Andhra Pradesh, the trend is reversing now and we are seeing a decline of just 1%. Thus, slowdown rate has now bottomed out.
What has been the impact of monsoon?
Last year the monsoon was strong, which also boosted rural income. This year, weak monsoon has translated into strong demand for cement. However, August is seeing softer demand as rains have picked up. We prefer a stronger rural demand driven by better good rains in the later part of the year rather than demand in these monsoon months.
In the past we have seen when the monsoon has been a little soft in the initial months, it tends to go on longer, so we are hoping deficit will be covered and post monsoon demand will become stronger.
How has the realisation trend been?
The cement prices that picked up in June have stayed healthy till now. Today, the market price of a cement bag (50kg) in Telangana, which at one point of time had dipped to below Rs 200, is now somewhere between Rs 280-290. This has helped first quarter performance as well.
How do you plan to take on the challenge posed by rising fuel and power costs?
There is no wishing away these costs but we have been trying to handle costs on three fronts - coal, power and diesel - that also impacts freight. We have been working on efficiencies so our power and fuel costs per tonne didn't go up much despite coal and power costs moving up about 8-9%.
We try to mix fuels with pet coke when it is economical to bring it to our plants. So buying smart, both coal and power, helps and besides we are monitoring power usage on hourly basis. On freight, we are working on average distance of cement transportation by selling to areas nearer our plants. So it's all about efficiencies.
How do you plan to push up volumes and profitability?
Any EBIDTA (earnings before interest, depreciation, tax and amortisation) improvement has to be through market realisations and we don't see why prices in certain parts of our area of operation should remain lower than other parts.
The days of this disparity are over and the fact that many cement players burnt their fingers by selling at weak prices would not prevent them from selling at those levels now. Realisations will also be aided by slowing of demand de-growth. Thus the combination of these two factors should help realisation and we should continue seeing an improvement on a regular basis. We target an EBIDTA per tonne of Rs 700 (Rs 590 in Q1FY5 and Rs 425 in year ago quarter).
Volumes from current capacities, however, cannot be pushed up much more as we are already operating at high utilisation levels. However new capacities will bring a volume push.
So how much volumes boost do you expect from new capacities in the next year?
We expect 50% capacity utilisation during first year of operations and benefits will start flowing in by second quarter next year while some benefits will come in the first quarter too. In the current year, we should be able to do about 43-lakh tonne compared to 42-lakh tonne last year but the kicker will come in from the next fiscal once volumes will get a boost.
