Reliance Cement aspires to share space with Holcim, UltraTech

Reliance Group-owned Reliance Cement sprang a mild surprise when it announced it was using a contract manufacturer with capacity of about 0.5 million tonnes (mt) in Durgapur to herald its entry into the West Bengal cement market. The surprise is a conglomerate spanning telecommunications, power, infrastructure, etc, and aspiring to become a 50-mt cement producer using a mini plant, with an option to buy it. A company official, however, says at an appropriate time, the capacity of the Durgapur unit, fed with limestone from Reliance Cement quarries in Madhya Pradesh, will be raised to one mt.

Following the global merger of Holcim of Switzerland and French Lafarge, we are likely to see Holcim subsidiaries ACC and Ambuja, and Lafarge India combining about 80 mt of capacity under a single roof. Kumar Mangalam Birla has about 57 mt of capacity available with UltraTech and an additional 12.8 mt with Century, which he is inheriting from his grandfather, Basant Kumar Birla. The meteoric capacity rise of two of the country's cement leaders is largely through takeovers. Now, UltraTech is in the last lap of acquiring the Gujarat unit of Jaypee Cement at an enterprise value of Rs 3,800 crore.

By contrast, Reliance Cement's arrangement looks less than modest. The company had to make a start to turn a contender for a share of the 14-mt cement market in West Bengal, now largely a privy of ACC, Lafarge and Ambuja. Though overwhelming portions of the 352-mt Indian cement sector are with 'large' units, the cement space is still dotted with 'mini' plants that are finding it increasingly difficult to sell their products, perceived to be short on quality and packaging, due to the competition with branded cement.

STRIVING FOR A SHARE OF THE PIE

• Following the merger of Holcim and Lafarge, we are likely to see ACC, Ambuja and LaFarge India combine about 80 mt of capacity under a single roof
• Reliance Cement is seeking to turn a contender for a share of the 14-mt cement market in West Bengal, now largely a privy of ACC, Lafarge and Ambuja
• Reliance Cement is to build a 2.1-mt grinding unit at Purulia in West Bengal, for which it has acquired 100 acres
• In the 3 years to 2013, India's cement consumption grew at an average annual rate of four per cent, in step with the economic slowdown

ACC was already a trusted brand. But the credit for giving a new twist to branding should go to Narotam Sekhsaria, former promoter of Ambuja Cements. Brand-building is an expensive and time-consuming proposition, beyond the contemplation of 'mini' plants. No wonder capacity use of the 'mini' sector is much below 50 per cent, and continuing to fall. The survival of these companies will depend on making cement for the biggies, on a contract basis. Such an arrangement is likely to help reduce distribution costs, which have emerged as a major cost element for the sector. The fact that Reliance Cement is stepping into the Durgapur unit marks the unfolding of a national strategy of similar drills across the country. The company is to build a 2.1-mt grinding unit at Purulia in West Bengal, for which it has acquired 100 acres. But the Purulia plant is commissioned, say, in two years, Reliance wants its brand to be established in the state.

Justifying its entry into West Bengal, a company official says he "expects the cement market here to grow at an annual rate of eight per cent through the next few years." Generally, housing accounts for 67 per cent of cement use, followed by 13 per cent for infrastructure, 11 per cent for commercial construction and nine per cent for industrial construction. Unfortunately, except for some briskness in residential construction, the three-year-old Mamata Banerjee government is yet to find traction in industry and infrastructure development. More, in the three years to 2013, India's cement consumption grew at an average annual rate of four per cent, in step with the economic slowdown. This stands in contrast to the golden period of 2008-09, when cement use grew at a compounded annual rate of eight per cent. Industry officials are hoping the Modi government will break policy logjam and flag many stalled infrastructure projects. This will translate into higher capacity use, demand rise and better prices for cement. Currently, the sector is using less than 75 per cent of its capacity. Hopefully, rural demand for cement will remain intact even if the monsoon is below-average.

Whatever the current problems, long-term prospects for the cement sector are considered encouraging. Indian per capita cement consumption is only 200 kg, compared with the global average of 500 kg. Huge infrastructure and housing deficit remains to be addressed, for which large new cement capacity has to be created. A Planning Commission working group on cement has fixed a production target of 407 mt for 2016-17, the terminal year of the 12th Plan. The way the country muddled through the second term of the United Progressive Alliance (UPA) government, however, made all such projections go haywire. At the same time, encouraged by the good work during the first term of the UPA government, the cement sector made investments to build 90 mt of new capacity.

Economic progress decides the demand for cement. But this varies from state to state, depending on the levels of infrastructure development and new industries. Reliance Cement has set foot in West Bengal as part of its grand strategy to become a 50 mt producer, rubbing shoulders with the likes of Holcim and UltraTech. Raising capacity from about six mt to 50 mt is a challenging proposition. Acquiring limestone deposits and being allocated coal blocks are highly time-consuming. Therefore, should Reliance not go for some big-ticket acquisitions to reach the targeted capacity? Burdened with high debt, a number of cement mills in the capacity range of one mt to five mt remain takeover targets.o