Realisation improves as national cement prices rise by Rs 90 since 2005-06.
The domestic cement industry, which is ramping up capacity fast, has shed its dependence on borrowings. Strong cash flows coupled with higher operating profit margins are helping cement makers fund their brownfield expansion entirely through internal accruals.
In 2007, the industry’s capacity was 165 million tonnes (MT), which has gone up to over 235 MT (second to China’s in terms of production capacity). The industry plans to take the total capacity to 300 MT by 2012.
This involves investment of Rs 34,400 for greenfield plants, Rs 6,400 crore for brownfield expansion and Rs 10,000 crore for captive power generation.
According to industry estimates, out of the total capex, around Rs 35,000 crore — 67 per cent of the total project cost — has been sourced from internal accruals and the rest through borrowings.
“Raising funds through internal accruals has played a major role in the growth of the domestic cement industry due to the good money the sector could make in the last few years,” said Amrit Lal Kapur, managing director of Ambuja Cements, a part of Swiss major Holcim.
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The realisations improved significantly as the national average of cement prices zoomed from Rs 160 per 50 kg bag in 2005-06 to Rs 250 per bag. Higher demand led to higher sales and capacity utilisation remained above 90 per cent for most part of the year.
Higher operating margins and strong operational cash flows due to favourable demand had made cement makers sit on huge cash pile, said an analyst with a domestic brokerage firm. She further added that many of the planned capacities had already gone onstream, generating more profits.
Chairman and Managing Director of north Indian major Shree Cement Hari Mohan Bangur said, “Cement sector’s borrowings have reduced substantially. Strong cash flows in recent years have strengthened cement makers’ balance sheets.” As on March 31, 2009, Shree had a cash balance of Rs 508.78 crore.
There was a time, Kapur added, when banks and other financial institutions stopped funding cement projects. “With strong cash flows, the sector preferred to re-deploy the money in expansion. For instance, today, our all projects are virtually being funded by internal accruals. Borrowings are nil,” said Kapur. Ambuja Cements’ (the company follows calendar year) cash balance on December 31, 2008, stood at 852.13 crore. Similarly, ACC has Rs 991.48 crore cash.
Vinod Juneja, managing director of Binani Cement said the cost of borrowings from banks was higher. “There is no point in borrowing from banks if cement makers have good cash flows,” he said.
This year, so far, the industry has added over 15 MT of new capacity and is expected to add another 20 MT by March, 2010. The industry has grown by over 10 per cent in the current financial year as demand has been up.