Can Srinivasan turn India Cements around?

Srinivasan’s determination to keep invaders away was best captured by Narotam Sekhsaria, founder and former chairman of Gujarat Ambuja Cement Ltd, in his book The Ambuja Story. “I was relieved that I did not buy Coromandel Cement,” he wrote. “Mr Srinivasan guarded his Southern territory zealously and he would not have let me settle down.” In 1990, Ambuja Cement had lost the bid for Coromandel Cement, located in Chilamkur in Andhra Pradesh, to ICL, and with it, an opportunity to enter south India.

That Srinivasan is today selling assets to a rival reflects his compulsions. Hit by high costs, especially on coal, and low cement realization, ICL has been in the red for the last five quarters. In 2022-23, it incurred a loss of ₹587 crore before exceptional items. During the first quarter of this fiscal year, the loss stood at ₹75.30 crore. Having burned cash worth ₹231 crore in the last five quarters, it is facing an acute working capital shortage that has curtailed production as its market share suffers an erosion. This, despite good demand—cement consumption grew 11% in south India in Q1 of 2023-24. The company urgently needs to increase output to become profitable, generate enough cash to repay debt and fund badly needed modernization efforts. Its volume, at 9.7 million tonnes (mt), is at the same level as it was two years ago.

The company is monetizing its non-core assets to raise funds—the land sale to UltraTech was a part of this strategy. Returning ICL to profitability will depend a lot on softening coal prices and better realization from cement. If cement prices do not increase significantly, ICL may need to sell more than just its non-core assets. In short, Srinivasan has his task cut out to turn India Cements around.

Double whammy

ICL’s operating parameters are far from the best in the industry (see chart). It’s not hard to see why. Srinivasan had acquired much of the capacity inorganically and these were vintage plants, operating on different technology. The Yarraguntla plant in Andhra Pradesh, for instance, was set up in 1980; Raasi (present-day Telangana) dates back to 1984 and so does the Chilamkur facility. Old plants and deep mines have resulted in higher power and fuel costs. ICL’s earnings before interest, taxes, depreciation and amortization (Ebitda) was thus lower, at ₹940 per tonne in 2020-21—before coal prices shot up—than Ramco Cements’ ₹1,600 a tonne and UltraTech’s ₹1,480 per tonne.

Under normal circumstances, lower Ebitda would have, at worst, meant lower profitability and a poorer valuation than its peers. But 2022-23 was not a normal year. Even as the world was emerging from covid-induced supply disruptions, Russia attacked Ukraine. This sent coal prices soaring to unprecedented heights. “When the cost of coal, which is our main fuel, skyrockets from about $60 per tonne to $300 per tonne, there is little we can do,” Srinivasan told analysts recently. ICL could not react to the high cost of coal effectively due to its vintage plants, he explained in another call. Between FY22 and FY23, ICL’s variable cost per tonne (expenditure that changes with the volume of production) alone jumped by ₹820.

When costs increase sharply, companies typically pass the increase on to consumers. ICL could not do so as south India, where most of its capacities are, is a cement market where supply (180mt) far outstrips demand (110mt). What complicated things further was the fact that cement players in the region went after market share and pushed volumes. Consequently, ICL could pass on only a small proportion of the cost increase to its consumers. This pushed its Ebitda into the negative zone—it suffered an operating loss of ₹140 crore in FY23.

Slow on modernization

Not all the players in the south were hit this badly. A comparison with Ramco Cements is appropriate as both companies largely operate in the same region. Ramco’s variable cost increase was only ₹580 per tonne on account of its more efficient operations. This ensured its Ebitda was ₹797/tonne and that it managed to post a net profit of ₹344 crore in FY23 ( ₹893 crore in FY22).

The unenviable position that ICL finds itself in is because it did not move quickly to modernize its old plants, say analysts. They point to the fact that the operating parameters of ICL’s new plants—be it the Dalavoi facility in Tamil Nadu or its plant in Rajasthan—were on par with the industry.

Srinivasan did make investments to lower ICL’s power and fuel costs but they did not pay off. The company invested in Andhra Pradesh Gas Power Corporation Ltd (APGPCL) to get low-cost power as a captive customer. It yielded power at ₹2 lower than the grid price, but in FY23, APGPCL’s operations were stopped for want of gas. ICL had to write off investments worth ₹113.83 crore in APGPCL last year. Almost a decade ago, the company acquired a coal mine in Indonesia with an investment of ₹100 crore. The idea was to ensure a consistent low-cost supply of coal. However, the plan did not materialize as the Indonesian government mandated that all exports had to be made only at the market price.

Also, Srinivasan believed in selling cement at the right price. Over the years, he has scoffed at the idea of selling cement made from limestone, a finite resource, at low prices. This drove him to price his brands higher in a surplus market like south India, where players periodically chase volumes by dropping prices. Any attempts to bring in discipline always carry the risk of India Cements being accused of cartelization. In 2016, for instance, the Competition Commission of India accused the company (and many other southern players) of cartelization and imposed a penalty of ₹187.48 crore on them. The case is now in the Supreme Court.

Pause in expansion

After an acquisition blitzkrieg in the 1990s and early 2000s, ICL took a pause from major inorganic expansion in the south. It ventured into north India and set up a plant in Rajasthan in 2011 with plans to enter Madhya Pradesh.

Since 2011, its capacity has remained at 15.5mt (12.96mt in the south). Other players, in the meantime, continued to expand in the south. UltraTech’s capacity rose from 12.60mt in FY10 to 23.80mt by FY22. Ramco grew from 11.49mt to 18.09mt and Chettinad Cements from 9mt to 16.37mt during this period.

All this has resulted in India Cements losing market share. According to Motilal Oswal Financial Services, the company has lost market share to the tune of over 800 basis points between FY10 and FY23. But company officials attribute the fall in market share to ICL’s strategy of focusing on high-margin markets.

Interestingly, despite its ongoing struggles, ICL’s stock price has remained high. It closed at ₹229 on the National Stock Exchange on 11 October. Rumours about possible mergers and acquisitions activity, market players say, have kept the stock price high. Others say that the worst is behind the company and things can only get better as it has been liquidating assets as promised. News of a cement price hike is the latest trigger.

Turnaround strategy

Srinivasan has drawn up a two-step strategy to turn ICL around. The first step is to return to the black.The company has engaged the services of global management consultant Boston Consulting Group to find ways to reduce its operating costs. The consultant has recommended steps to cut costs by ₹200 per tonne without any significant investment. This includes using low or no-cost alternate fuels to fire the kiln.

ICL, meanwhile, is continuing to monetize its non-core assets. Last October, the company sold its subsidiary Springway Mining Pvt. Ltd in Madhya Pradesh (land it had acquired to mine limestone) to JSW Cement Ltd for ₹477 crore. This improved its cash flow and helped the company increase capacity utilization significantly in the fourth quarter of FY23. Talks are on to further monetize land worth ₹800-1,000 crore across the southern region.

Higher capacity utilization, lower cost and an improvement in the price of cement should bring ICL back into the black. Analysts are already reporting a price hike of ₹70 to ₹80 per bag of cement by various players in the southern market. If the price hike holds and the company is able to monetize its non-core assets as planned, it could return to profitability soon.

But the bigger challenge will be in making ICL as efficient as its peers. This will involve significant investments in modernizing its old plants. The company has reached out to cement machinery manufacturers such as FLSmidth and Thyssenkrupp for the same and they are believed to have suggested a budget of ₹1,200 crore for the job. That bill may be too big for Srinivasan.

ICL’s debt is already high. Net debt at the end of the first quarter of FY24 stood at ₹2,947 crore. The debt to be repaid this year is ₹400 crore, of which ₹100 crore has been paid. The balance needs to be paid from the sale of land as the business continues to lose cash. Even after the Springway sale, the company’s net debt reduced by only ₹160 crore and much of the sale consideration of ₹477 crore went towards working capital, says ICICI Securities, a brokerage.

The first priority from the sale of non-core assets will be to meet working capital needs, then repay debt and finally fund capex, including upgradation. Unless ICL turns profitable quickly, it may not have enough funds for modernization without the sale of a core asset.

Clearly, Srinivasan has a difficult path ahead of him. But industry observers say he just may have the adeptness needed to navigate that path. They have always perceived Srinivasan to be a troubleshooter—be it in a crisis, or in the negotiations for the periodical wage agreement with the cement industry workers union. Perceptions aside, however, he will certainly need a deft hand to transform ICL from its current state into a profitable and efficient cement producer.

“Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!” Click here!

Updated: 11 Oct 2023, 10:11 PM IST