Shree Cement goes abroad after land acquisition woes hit projects at home

Shree Cement decided to venture abroad in the UAE after acquiring the Union Cement Company (UCC) for an enterprise value of $305.24 million because the company was facing the slow pace of land acquisition in the country, which delays the projected completion date of putting up cement plants.   

Shree Cement Managing Director H M Bangur reasoned that the company had a near Rs 40 billion cash balance, which was stockpiling, and was faced with two options -- either invest in some venture that would assure growth and higher returns for the shareholders or pay off the balance as dividends.

"In India, we could not invest so much money as land purchase would require five years. Further, after the 3 million tonnes per annum (mtpa) project in Karnataka, we didn't have anything big in sight in India. The cash balance with the company would have started piling up unless we had come up with a plan to use it profitably," he told Business Standard, adding that a 22-25 per cent operating margin was expected from UCC in the next three-five years.

Although Bangur described the acquisition as "one of its kind", he said he was open to more such global ventures in the long-run based on the success of UCC's acquisition and if the return on capital in global ventures would ensure returns comparable to his investments in India.

Three years back, Shree Cement had targeted a 40 mtpa capacity by 2020 and the UAE foray is part of that plan.

In case of the Rs 20-billion Karnataka project in the Gulbarga district, which marks the cement company's maiden south Indian foray, the process of land acquisition had started seven years ago and the plant is expected to be completed in the forthcoming October-December quarter.

Asked if land acquisition delays continued to be a business deterrent despite the improvement in the ease of doing business in the country, Bangur said, "It remains the issue throughout India... Be it West Bengal, Karnataka or Bihar, where plants have taken a lot more time than what was anticipated. Greenfield projects take a lot of time and you need to have a high level of patience besides planning at least five years in advance."

Its Rs 5-billion project in West Bengal's Purulia district, which is projected to strengthen the company's eastern market share, is yet to see the light of the day. 

In this two-mtpa project, Shree Cement has already acquired 95 per cent of the requisite 100 acres of land but is facing problems in acquiring the remaining five per cent for quite some time. Until the residual land parcel is acquired, the plant cannot be put up.

"In West Bengal, the biggest problem was the pace of purchase was low because the average land parcel size is 500 square feet and, in some cases, it is as low as 100 square feet. Typically, for every acre, there are 70-80 registries on account of the fragmented nature of the land," Bangur added.

However, the company has initiated the process of acquiring land in different parts of India for future projects and some are underway in Jharkhand and Odisha.

Besides these two domestic projects, the company is expanding its capacity in Rajasthan by two mtpa and in Bihar by 1.6 mtpa. Further, it has recently augmented capacity in Chattisgarh by another 2.6 mtpa. 

The completion of UCC's acquisition will increase Shree Cement's capacity from the current 29.3 mtpa to 33.3 mtpa. The other domestic projects expected to be completed in 2018 will augment capacity by at least 5.6 mtpa. 

In tune with the company's philosophy of greenfield expansion, Bangur had initially opted for putting up a fresh project in the UAE but changed his heart after feeling that the valuation of UCC, which was up for sale, was right, and that it would be having a much lower gestation period as compared to a greenfield project.

Although analysts remain sceptical about Shree Cement's foray into the UAE, arguing that a low return on equity is expected, the company acquired UCC for $76 a tonne, which is lower than $84 a tonne that UltraTech Cement incurred in 2010 while acquiring the 3.2 mtpa Dubai-based ETA Star Cement for $269 million. It is also lower than the $95 a tonne Shree Cement is spending on the Karnataka unit.