‘Consolidation is good to enhance competitiveness, efficiency and margins’

JK Lakshmi Cement Ltd is one of India’s leading players in the cement industry boasting of 12 fully operational plants across Western & Northern regions. The company has wide network of 70 cement dumps and over 2200 dealers with products being available in seven states nationwide.
Vinita Singhania, MD – JK Lakshmi Cement told Sandeep Menezes that India’s demand growth for cement has been subdued, primarily due to a difficult macro environment and political paralysis.

Excerpts from the interview:

The cement market is growing less than expected because growth was expected at 8%, as seen over the last five years, but now growth is down to around 5%. Going forward, how do you foresee the scenario across the cement industry?

Cement is one of the core industries which plays a vital role in the growth and development of a nation. Since the product is essential in nature, the cement industry in India has been expanding significantly on the back of increasing infrastructure activities and demand from housing sector. The market size of the industry is expected to grow from 223.4 MTPA during FY12 to 550 MTPA by FY20. Cement companies in India are receiving full attention from Private Equity firms for funding their business plans. India’s cement sector is with an overall capacity of 350 MTPA. In the 11th Five Year Plan (2007-12), the industry added 120 MT of new capacities and is expected to reach close to 470 MT by 2017.

Market trends indicate the industry is likely to pick up, also with the elections the industry will indeed get a boost in terms of demand, which will then stabilize the market dynamics leading to the growth of the industry.

Do you feel the cement industry mistakenly expanded capacities, given that consumption has dropped?

India’s demand growth has been subdued, primarily due to a difficult macro environment and political paralysis, thus affecting the current price and volume development. Also prolonged monsoons have delayed the much awaited revival of the cement industry. Since the industry is indispensible in nature – the demand supply gap is likely to be met once the elections conclude and the demand recovers.

Capacities have been rightly planned looking at future changing economic conditions and India is still at an infrastructure development stage. Cement consumption is bound to go up though there might be short term and seasonal demand supply mismatch. Any greenfield project has a minimum gestation period of 4-5 years and thus capacity expansion have to be planned based on the growth projections of the country. The dynamics of the Indian economy would in future help to absorb the extra capacity expansion under way.

Although cement demand is subdued currently, the long term prospects are definitely bright. Tell us about the main future growth drivers for the cement industry?

The government of India increased its investment in infrastructure to US $1 trillion in the Twelfth Five Year Plan (2012-2017) as compared to US $514 billion spent on infrastructure development under the might Eleventh Five Year Plan (2007-2012). Further, infrastructure projects such as the dedicated freight corridors, upgraded and new airports and ports are expected to enhance the scale of economic activity, leading to a substantial increase in cement demand. Housing sector and road also provide significant opportunities. The cement demand is likely to be sensitive to the growth in these sectors and also the policy initiatives. Keeping in view the factors responsible for the increasing demand for cement up to the year 2027 have been given. The annual average growth in the demand, production and installed capacity of cement during the period could be within the range of 10-11.75 per cent. The production of growth could be sensitive to the GDP growth and the growth of sectors which are major users of cement. A step up in demand of these sectors could provide some stimulus to the cement sector as well.

Also, with various states going for polls this month and the general elections due next year, cement demand will improve considerably given the pre-election spending. Cement demand has already picked up in Madhya Pradesh, Chattisgarh and Delhi – all three states to go to polls soon. Cement demand is expected to grow from 3.6 per cent in FY14 to 7.1 per cent in FY15 and a recovery in rural housing demand, on the back of rising rural incomes.

The sharp rupee depreciation has made life difficult for cement companies that were dependent on imported coal. Following the global trend, Coal India also hiked prices in the domestic markets. Comment.

At a time when the southern market for cement has slowed, the rupee’s depreciation has opened a door for companies in the region. Industry representatives have said the currency fall in recent months has pushed price realization by around 15 per cent and many are looking at new markets. Coal India hiked domestic prices as rupee depreciation against the dollar offset the sharp decline in coal import costs. The capacity utilization of the industry has remained stagnant at about 70-75 per cent in the last several quarters. Operating margin in the cement sector, which shrunk by about 5-7 percentage points for many companies, is unlikely to see an improvement in spite of the recent spurt in prices. Soon, there will be close to 99 million tonnes of surplus capacity per annum until fiscal year 2016 and the industry will operate at around 75-76 per cent utilization levels. The depreciation of the rupee increases the risk of cost pressures, given that imported coal and fuel will become costlier.

Also the shortage of coal has led to the use of alternate fuels like pet coke and fly ash.

In the near future do you expect consolidation in India’s cement industry?

Consolidation in the industry is a good step for the long term as it will enhance competitiveness, efficiency and margins, since it may also give them much of the untapped market and pricing power due to their size factor. However in the short term, it would not be a welcome concept considering the already low market performance which will also sequence the quantum of margins for the producers at present. As a matter of fact, Indian Ratings agency also expects consolidation in the medium-to-long-term with large M&A activities.

Indian cement industry is the second largest in the world but there remains number of environmental issues such as control of air pollutants, reduction of greenhouse gases and control of fugitive dust. Comment.

Keeping in line with the technological world, the Indian cement industry has transited itself into a more advanced one. The Indian cement industry, comprising of many large and small cement plants (183 large and 365 small cement plants), has been ranked second globally. Many cement majors, have signed a co-operation pact to support low-carbon investments in India. The pact was signed in Geneva along with member companies of the World Business Council for Sustainable Development’s Cement Sustainability Initiative and International Finance Corporation. The roadmap, which is the first to focus on one specific industrial sector in the country, will pose as a possible transition path for the Indian cement industry to reduce its direct emissions by 18 per cent by the year 2050.

JK Lakshmi Cement is also equipped with latest technology, encouraging green initiatives in the interest of the environment. JK Lakshmi Cement was the first to be awarded the ISO Certificate, introducing coloured cement bags, using alternate fuels like pet coal and fly ash which are more eco-friendly alternatives.

JK Lakshmi Cement witnessed second quarter (July-September) net profit plunging 80%, impacted by the steep fall in cement prices coupled with increase in freight costs. Comment.

JK Lakshmi Cement increased its production and sales by 7 per cent despite depressed market in the company’s marketing areas of North and West. Its turnover for the quarter stood at Rs. 500.86 crore against Rs. 551.59 crore in the corresponding quarter of the previous year and Rs. 511.11 crore in the previous quarter indicating growth paradigm.

However, the fall in cement demand, especially from the infrastructure and the realty sector is a cause of concern. Despite reduction in its cost by improvement in all-round efficiencies company’s PBIDT fell drastically. Muted growth in demand and cost escalations has squeezed the earnings of cement companies in the last quarter of FY13 despite it being a seasonally strong quarter. The core reason for its downturn is the depressed economic growth, which has led to a disparity in the demand and supply dynamics. The cement industry is facing overcapacity, which has become way too high for the industry to handle. Also the GDP deceleration has caught house builders who are feeling the pain of inflation and poor visibility of income growth which is holding them back, adding to the trough in the cement industry.

JK Lakshmi Cement’s capacity will be more than doubled to 11.3 million tonne by end of FY15 from present capacity of 5.7 million tonne. Is this expansion part of a well-planned growth strategy?

JK Lakshmi Cement Ltd has a state-of-the-art plant at Jaykaypuram, district Sirohi, Rajasthan. With the capacity expansion and further commissioning of split location grinding units at Motibhoyan, Kalol (Gujarat) & Bajitpur, Jhajjar (Haryana) – JK Lakshmi Cement currently hones a capacity of 5.3 million tonnes of cement per annum.

Its wide network of 70 cement dumps and over 2200 dealers spread across the states of Rajasthan, Gujarat, Delhi, Haryana, U.P., Punjab, J&K, MP, Mumbai & Pune and the vast pool of highly trained & dedicated marketing and technical service team helps the company to service its customers at their doorstep.

Currently, the company has 12 fully operational plants in Western & Northern regions of the country and is further expanding in this area. Currently JKLC products are available in 7 states over 122 districts across India.

JK Lakshmi Cement currently hones a capacity of 5.3 million tonnes which would increase to 12 million tonnes in next 2 years with an investment of Rs. 2500 crores as the Durg greenfield plant and Jhajjar grinding unit would be commissioned.

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