Shree Cement readies Rs 6,000 cr for expansion

To ramp up capacity by another 10 million tonnes in the coming three years

When most cement players have stuck to the acquisition route for expansion, Shree Cement, the fourth largest in the sector, is looking to ramp up capacity by another 10 million tonnes (mt) in the coming three years.

Shree Cement has lined up a capital expenditure of Rs 6,000 crore to construct three new clinker plants. Clinkers are lumps usually formed during the manufacture of cements, and are usually ground to a fine dust to be used as a binder.

The first in the line - a plant in the Baloda Bazar-Bhatapara district in Chhattisgarh, with a minimum capacity of three mt - will be announced in four months. The company has recently won a bid for limestone reserves at the Karhi-Chandi area in the state, through an e-auction in February.

This block has an estimated reserve of 166 mt, with 80 mt cement-grade limestone.

Commissioning of these new plants will take Shree Cement's total clinker plant count to six, while six to seven grinding units will remain operational throughout this phase.

With this, in three years, the cement maker's total capacity will increase to 33.6 mt from the current 23.6 mt.

"We will be bidding in at least 12 more limestone auctions and hope to win three to four of these. This will help us set up plants to increase our capacity," the company's Managing Director, H M Bangur told Business Standard.

In Karnataka, in preparation of the expansion, the company has already purchased 1,500 acres over five years.

These expansion plans will be funded from the company's internal accruals.

However, with tapered demand in the cement industry, its net standalone profit margin shrunk from 17.96 per cent in 2013 to 13.37 per cent in 2014. It further dipped to 6.61 per cent in 2015.

Its net profit also took a hit, falling from Rs 1,003.97 crore in 2013 to Rs 787.24 crore in 2014, and then to Rs 426.33 crore in 2015.

During the July-December period this year, the company registered a net standalone profit of Rs 231.59 crore, while the profit margin fell to 6.52 per cent.

Unlike most of the other players in the sector, Shree Cement has always opted for the organic route to expand its business and portfolio.

Its managing director reasoned that India still needs capacity expansion which is possible only through the green-field route while brown-field projects may enhance existing capacities.

According to Bangur, while the cement industry has a 370-mt capacity at present with 300 mt cement demanded annually, over the coming 10 years, the demand would scale up to 600 mt, which will call for 700-mt capacity.

"Takeovers are popular in the western world where there is enough capacity but in India we have to build it first," he said.

Besides, the company, which is keen to maintain its own "contained work culture" doesn't like acquisitions.

"When one takes over a unit or a plant, one has to compromise. We want to remain immune from compromises," Bangur, a chemical engineer from IIT-Bombay, said.

Other companies such as Ultratech, Birla Corporation, and JSW Cement have been in the race for acquisitions, relying on takeovers and mergers, besides focusing on green-field projects.

One of Shree Cement's competitors said acquisitions are the easiest route when it comes to expanding a company's capacity as it involves less hurdles.

"The cost of land acquisition has rocketed now. Besides, there are other operational issues associated with green-field projects. Compared to that an acquisition is an easier option," the competitor said.

Besides, organic expansion always carries with it the risk of overstressing a company's cash reserves or leading it into a vicious debt trap, especially in a low-demand market.

"In the past we have seen what happened to the Jaypee Group and Reliance Cement," Rahul Shah of Motilal Oswal said.