Royalty or no royalty, Holcim parentage is already a financial burden on ACC and Ambuja Cement, forcing them to grow slowly than their desi peers such as Ultratech, Shree Cement and Madras Cement. Holcim group companies have one the highest dividend pay-out ratios in the industry, leaving less cash in their hands to invest in new projects. In the past five years on average, ACC and Ambuja Cement have distributed a quarter of their cash profits as equity dividends. The corresponding figure for Ultratech and Shree Cement is around 5% each, and 9% in the case of Madras Cement. This gives them greater financial power to fund new projects and outgrow their peers.
Analysts are not surprised given the capital intensive nature of the cement business. “The equation is straightforward. If a company distributes a greater portion of its profits as dividends, so much less is available to fund growth. The other option is to fill the gap through borrowing but this may disturb balance sheet ratios,” says a cement analyst with a brokerage firm in Mumbai on the condition of anonymity.
In the past seven years since Holcim took over management control of ACC and Ambuja Cement, the two companies cumulatively distributed around Rs 5,750 crore as dividend, nearly half of which accrued to Holcim. During the same period, Ultratech investors, including promoters, got just Rs 654.4 crore. The amount increases to Rs 1,685 crore if we include Grasim’s dividend pay-out prior to demerger of its cement division in 2009. Shree Cement, on the other hand, distributed only Rs 265 crore, less than 5% of its cumulative cash profit during the period.
This trade-off is clearly visible in the capex trends of respective companies. ACC and Ambuja Cement have, on average, spent 55-60% of their cash profit on capex. In comparison, Ultratech (including Grasim before 2009) and Shree Cement ploughed back nearly three-fourths of their cash profits while Madras Cement has been even more aggressive, with its capex to cash profit ratio being 150%.
There is now a danger of Holcim losing pole position in India given the aggressive growth plans of its desi peers. “Ultratech and Shree Cement have aggressive capex growth plans and they create capacity ahead of the demand. We expect them to grow faster than the market going forward,” says Dhananjay Sinha, head of institutional equity at Emkay Global Financial Services.
Ultratech is investing nearly Rs 12,000 crore to raise its capacity by 20% to 62 million tonnes by mid-2014. Shree Cement plans to raise its capacity by a third to nearly 18 million tonnes over the next three years. Holcim still leads the Indian market with an installed capacity of 57 million tonnes split between ACC and Ambuja Cement.
ACC denies the charge of growing slowly and says it will maintain its current market share. “We have just approved a 4 million-tonne expansion and plan to retain our current market share of around 11% even in future,” says the company’s spokesperson. The email sent to Ambuja Cement spokesperson remains unanswered.
Some analysts agree. “Ultratech and Shree cement are likely to grow faster and grab some extra market share but it this may not be at the cost of ACC and Ambuja Cement,” says a cement analyst with a brokerage firm in Mumbai.
