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Seven years ago when the demand for cement began to fall in south India, Andhra Pradesh continued to remain a bastion of growth. The state's cement consumption was growing at 20 per cent annually and had reached 20 million tonnes at its peak. The state's (then) chief minister Rajasekhara Reddy's thrust on infrastructure projects had led to huge investments in cement capacity in anticipation of an increase in demand.
But Reddy's death in 2009 and the ensuing agitation for a separate Telangana sent those calculations haywire. Most of the projects commissioned during Reddy's regime came to a halt after his death, and the demand for cement began to skid. Andhra Pradesh's cement requirement has now fallen to 15 million tonnes annually, while the manufacturing capacity has gone to 90 million tonnes per annum from 25 million tonnes.
While Andhra Pradesh may be the epicentre of the bust, elsewhere in south India too construction activity has slowed, leading to a huge mismatch between demand and supply. According to industry analysts, the region is going through its worst cyclical dip in 35 years. South India has 170 million tonnes of the country's total installed capacity of 350 million tonnes, but less than 60 per cent of the capacity is being utilised at the moment.
The increase in input costs and railway freight, along with the drop in demand, has compounded the problem for cement companies in the region. "While diesel prices have been coming down, freight rates have been increasing 12-15 per cent year on year," says India Cements Vice-chairman N Srinivasan.
"There was practically nil growth in cement production during the first quarter of the year in India. With the huge capacity overhang in the south, the utilisation levels continue to be below 60 per cent compared to 70 per cent on an all India basis," he adds.
Amid the slowdown, reducing the cost of production has been the only option for the companies to keep pressure off margins. The other option - exporting excess cement to others parts of the country-has become uneconomical because of high freight costs. The cost of cement increases by around Rs 3,000 per tonne if it has to be sent to Kolkata from Tamil Nadu, say experts.
Ramco Cements, for instance, has drastically reduced its power cost by setting up captive plants in all its five units, and selling the excess to the grid. The savings are reflected in the company's first quarter results. Its net profit rose to Rs 97.4 crore for the quarter ended June 30 compared to Rs 36.2 crore in the same period last year.
On an average, grid power costs Rs 6 per unit, while captive power costs around Rs 2-3 per unit.
AV Dharmakrishnan, CEO, Ramco Cements, says the company's cost of production is among the lowest in the region. "The efforts we made to improve operational efficiency, coupled with the drop in commodity prices, are giving good results."
India Cements is focusing on integrating its non-core businesses such as coal, power and shipping for better synergy. The company has invested around Rs 1,150 crore on integration, including Rs 900 crore in building captive power (currently it has around 200 MW) and around Rs 150 crore on acquiring coal blocks. Srinivasan has said captive coal mines will result in saving of around $5-10 per tonne of coal. From the power plants, the company expects around Rs 70 crore of savings in input costs.
India Cements is also planning to partially or even fully exit some of its non-core businesses. "We are working on whether to merge, hive-off or sell and how to make all these businesses profitable, so that they can grow independently," says Srinivasan. According to an ICICI Direct report, India Cements has investments worth Rs 2,300 crore in non-cement assets that fetch low return on equity.
However, despite slowing demand, cement prices increased by Rs 600 to Rs 3,930 a tonne in the quarter ended June 30 following announcement of some big projects by Andhra Pradesh and Tamil Nadu. Andhra Pradesh, for instance, has called for tenders exclusively from local manufacturers to supply two million tonnes of cement for building a new capital. The decision will benefit companies like India Cements, Ramco Cements, Dalmia Cements and My Home Cements, among others. Tamil Nadu too has announced several eco-friendly housing and highway projects. It also hopes to attract investments worth Rs 1 lakh crore during the forthcoming Global Investors Summit.
