India Cements looks to fortify base but future growth remains a question

Early this month, Chennai-based India Cements (ICL) divested its 100 per cent shareholding in Springway Mining Pvt Ltd (SMPL) for Rs 476 crore in a bid to reduce its debt burden. Including a loan component of Rs 127 crore, the total consideration comes to around Rs 603 crore. A Kolkata-registered company, SMPL owns limestone reserves, a key cement input, in Madhya Pradesh and is planning to come up with a cement unit there.

Many see this sale as the end of the road for ICL’s national ambitions, since the bulk of the company’s operations are primarily in Telangana, Tamil Nadu and Andhra Pradesh, with grinding units in Maharashtra and Rajasthan. SMPL would have helped expand its north India footprint. 

In a recent report Motilal Oswal Securities had said, “The future growth plans of the company look uncertain. India Cements has not added any capacity after the up-gradation of its Chilamkur unit in June 2010, which resulted in a significant market share loss for the company by 800bp+ over FY10-22.”.

Industry analysts indicate that though the company managed to reduce the debt from Rs 3,526 crore in 2020, it is still high enough to be a roadblock for its expansion and plant renewal. But those who have witnessed the bitter boardroom battles and controversies surrounding the company in its 76 years indicate that the current level of debt of around Rs 3,061 crore (as on March 2022) is manageable.

“The debt was close to Rs 4,000 crore a couple of years ago and India Cements managed to bring it down to Rs 3,000 crore and the current deal will bring it down further,” said a source aware of developments in the company. The current deal is considered to be advantageous as ICL acquired SMPL in October 2018 for a mere Rs 183 crore.

All the same, these developments take place just as the Adani group completed its acquisition of Ambuja Cements and ACC, making it, in one stroke, the largest cement producer in the industry after UltraTech, which is owned by the Aditya Birla group. “Debt is perceptive. The cement industry is a long-term industry and over a period of time, sometimes, debt appears high,” said N Srinivasan, vice chairman and managing director of India Cements.

He added that the company has 26,000 acres of land, and those parts that won’t be needed for the cement business would be sold. “Therefore, I don’t see any concerns arising out of debt or anything,” he added. Also with coal prices hitting new highs, this is not the ideal time for expansion. The major reasons for the debt was due to money taken for operational expenses and also expansions done till 2010.

As for its geographical footprint, the company believes that it is in an advantageous position focussing on the south because it has high reserves of around 2 billion tonnes of limestone, a key ingredient in cement manufacturing. The region also contributes to 35 per cent of the limestone capacity in the country, giving regional players an upper hand.

Still, ICL’s challenges come at a time when the cement industry in India is under pressure owing to a sharp rise in raw material prices leading to a lower capacity utilisation of around 64 per cent. Coal prices have seen a four-fold rise in the last two years. During the first quarter of FY23, the company posted a net profit of Rs 76 crore, against Rs 37 crore in the same period of FY22, mainly on account of a tax reversal. Its total income was seen at Rs 1,454 crore, up from Rs 1,025 crore during the first quarter of FY22.

“The industry suffered from steep increase in the cost of production due an almost doubling of the price of thermal coal and petcoke along with spiralling increase in petroleum products prices during the past one year,” Srinivasan said. Power and fuel cost also rose over 50 per cent till the end of the first quarter.

Experts and those close to the company operations say the current debt, taken for operational requirements and expansion over a period of time, is unlikely to cause any huge damage for the entity. From a capacity of around 1.3 million tonnes per annum (MTPA) in 1989, ICL has grown to 15.5 MTPA now.

“The Madhya Pradesh unit was part of the strategy to go national. However, it is almost clear that the focus now is on the company’s stronghold, the south,” an analyst said. South India accounts for 40 per cent (180 MT) of the total capacity in the country, out of which the capacity utilisation level is only around 60 per cent.

Several analysts indicate that the entry of Adani Group may turn out to be cause of concern for regional players in the cement sector. Adani’s presence in the logistics segment, power and fly ash are expected to give the company a competitive edge in the longer run as it may be able to pass on cost savings to customers. “This is unlikely to have any immediate impact on India Cements, given its strong presence in the southern market,” said a Mumbai-based analyst. 

The promoter group holds a 28.42 per cent stake in the company, while R K Damani and his family, founders of the retail behemoth D-Mart, hold 20.8 per cent. Though this is seen as a challenge, experts say that Srinivasan is in a comfortable position. “I am a strong player and considered strong,” Srinivasan said.

At least part of Srinivasan’s confidence stems from the fact that ICL, a major stakeholder in Indian Premier League cricket franchise Chennai Super Kings, has been down this road before. Founded by Srinivasan’s father T S Narayanaswami and Sankaralinga Iyer (a family friend) in February 1946, in collaboration with FLSmidth & Co of Denmark, it is credited for coming out with one of the first initial public offerings in independent India in 1947. The first major challenge before Srinivasan was the sudden death of his father in 1968. In 1979, he was removed from the post of joint managing director, after a rift between promoters.

In the 1980s, the company saw a takeover attempt by tobacco major ITC after buying equity holdings of LIC and UTI. However, Srinivasan, approached the High Court as an original promoter family member and foiled the attempt, though he managed to return as managing director only in 1989. But the new developments in the industry could be his biggest test yet.