MUMBAI: THE COUNTRY’S most conservative business group has finally admitted to a slowdown in the economy. Aditya Birla group chairman Kumar Mangalam Birla on Friday painted a bleak outlook for the cement sector when he said that high costs and inflation have affected construction and could pull down growth in the local cement industry, considered to be the world’s second largest market after China.
“The economy in general, including the cement sector, is gravely affected by the escalation in fuel prices which have resulted in double digit inflation, rising interest rates and slower economic growth,” Mr Birla told shareholders of group company UltraTech.
Cement, like steel, is a key input for various industries including construction, housing and infrastructure. A slowdown in this sector could affect most user industries.
Mr Birla also scaled down the growth outlook for the Indian cement sector. The industry has been expanding by about 10% every year, a rate that has attracted large foreign cement majors to set up base in India. This growth could now come down to about 8% if the current recessionary trends persisted, said Mr Birla, pointing at the high fuel and power rates for the main reasons for the escalation in costs. Coal accounts for about 37% of UltraTech’s total costs, with the company importing about 1 million tonnes every year.
Inflation in India reached record levels of 11.91% on Thursday mainly on the back of steep crude prices. The 13-year high inflation levels prompted the Reserve Bank of India to raise interest rates that has dampened borrowing plans of many companies across the sector.
UltraTech, which was acquired by the Aditya Birla group in 2001 from Larsen & Toubro, reflected such concerns when CFO K C Birla said the fiscal first quarter net profit grew by just 2% as a sharp rise in fuel and power wasn’t passed on, due to an assurance by cement players to the government on their decision to hold prices till July. “The sharp increase in coal prices for example, has impacted an additional Rs 10 for every 50 kilogram cement bag,” said Mr K C Birla.
Cement prices in the country vary according to zones, with the industrialised western zone accounting a for a large share of the nation’s cement usage. Cement here is priced at about Rs 235 per bag.
UltraTech’s net profit in the April-June period rose slightly to Rs 265 crore, compared to Rs 259 crore in the same quarter last year. Sales in the same period rose 10% to Rs 1,496 crore. Prices of imported coal have surged to about $179 per tonne from $79 at the beginning of the year. The rise has prompted UltraTech to mull acquiring coal mines abroad. “We are looking at some mines in South Africa and at the group level, are exploring options in Indonesia,” said Mr Birla.
Indian cement companies are keen on owning coal mines as government policy restricts priority allocation of coal blocks to the cement sector. UltraTech is scheduled to spend Rs 2,400 crore over the next three years to raise capacity, build captive power plants and improve efficiency to lessen the impact of the slowdown.
The company is also increasing the number of plants making readymade concrete (RMC) due to a rise in the main user sector, the institutional user.
UltraTech to provide building solutions in smaller towns
ULTRATECH Cement has hit upon an innovative way to increase cement usage by providing building solutions to retail consumers in smaller towns as part of its plan to counter a general slowdown in the economy. The companys plan is to tap the segment where customers are more keen to build their own homes rather than buying a pre-built flat. The company is focusing on the Tier-II and smaller towns where the flat culture isnt popular and individuals still build their homes through local contractors and labourers, a company executive said. "The business is in nascent stage but the company has plans to grow the business in the coming years," said CFO K C Birla.
