Royalty or no royalty, the Holcim parentage is already a financial burden on ACC and Ambuja Cement, forcing them to grow slower than domestic peers such as UltraTech, Shree Cement and Madras Cements.
Holcim group companies have one of the highest dividend payout ratios in the industry, leaving less cash to invest in new projects. In the past five years, on average, ACC and Ambuja have distributed a quarter of their cash profits as equity dividends. The corresponding figure for UltraTech and Shree are around five per cent and it’s nine per cent in the case of Madras Cements. This provides the latter more financial power to fund new projects and, thus, outgrow peers.
Analysts are not surprised, given the business’ capital-intensive nature. “The equation is straightforward. If a company distributes a greater portion of its profits as dividends, so much less is available to fund growth. The option is to fill the gap through borrowing but this might disturb the balancesheet ratio,” says a cement analyst with a brokerage firm here, who was not authorised to speak to the media.
| WITHIN THE GROUP How the earnings pie was divided? | |||
| Company | Rs crore | ||
| Capex | Dividend | Cash profit | |
| Ultratech Cement* | 16,519.6 | 654.4 | 13,564.6 |
| Ambuja Cement | 6,497.2 | 2,771.5 | 11,085.4 |
| ACC | 5,639.5 | 2,711.2 | 10,340.6 |
| Shree Cement | 4,202.1 | 264.8 | 5,757.7 |
| Madras Cement | 4,609.0 | 281.1 | 3,076.3 |
| *Including merger of Grasim cement assets with Ultratech in 2010. Source: Capitaline | |||
In seven-odd years since Holcim took over management control of ACC and Ambuja Cement in 2004, the two companies have cumulatively distributed around Rs 5,750 crore as equity dividend, nearly half of which accrued to Holcim. During the same period, UltraTech investors got just Rs 654 crore as dividends, including the promoters. The amount increases to Rs 1,685 crore if we include Grasim’s dividend payout prior to demerger of its cement division in 2009. Shree Cement distributed only Rs 265 crore as dividends, less than five per cent of its cumulative cash profit during the period.
This trade-off is clearly visible in the capital expenditure trends. ACC and Ambuja have spent 55-60 per cent of their cash profit on capex. In comparison, UltraTech (including Grasim before 2009) and Shree spent nearly three-fourth of their cash profit on capex. Madras Cements has been even more aggressive, with its capex to cash profit ratio being 150 per cent.
There is now a danger of Holcim losing the pole position in India, given the aggressive growth plans of desi peers. “UltraTech and Shree Cement have aggressive capex growth plans and they create capacity ahead of the demand. We expect them to grow faster than the market,” says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.
UltraTech is investing nearly Rs 12,000 crore to raise its capacity by 20 per cent, to 62 million tonnes, by the middle of 2014. Shree Cement plans to raise capacity by a third to nearly 18 mt in the next three years. Holcim still leads the Indian market, with installed capacity of 57 mt, split between ACC and Ambuja Cement. ACC denies the charge of growing slowly and says it will maintain current market share. “We have just approved a four mt expansion and plan to retain our current market share of around 11 per cent even in the future,” says the company’s spokesperson. The email sent to Ambuja’s spokesperson was unanswered. Some analysts agree. “UltraTech and Shree Cement are likely to grow faster and grab some extra market share but it this might not be at the cost of ACC and Ambuja,” says a cement analyst with a brokerage firm here.