FREE

Management Speak: Holtec Consulting (Unlisted) - Expects utilisation to improve

We met Holtec Consulting Pvt Ltd (Holtec) management. Holtec is a consulting firm that provides solutions to cement companies globally on capacity addition, business development, logistics, power sourcing, etc.

Effective capacity of ~425mtpa as at FY18 end

As per Holtec, while the rated capacity in India for cement is estimated at ~475mtpa, the effective capacity for domestic consumption is lower at ~425mtpa as 1) many plants do not have adequate clinker availability for rated capacity (300-320mtpa clinker capacity), 2) plants typically cannot operate beyond 90-95% utilisation due to seasonal variations and annual shutdowns and 3) annual production of ~6-7mtpa of cement is typically exported each year.

Capacity additions to witness 5% CAGR over FY19-21E

Holtec estimates ~79mtpa of capacity additions over FY19-21E, with 17mtpa to be added in FY19E and balance over FY20-21E. A large part of the capacity additions are likely in India’s Eastern and Southern markets, while the Northern and Central regions could see muted capacity additions over the next two years (Exhibit 1). Moreover, as 60% of the capacity additions are grinding capacities, effective capacity addition is likely to be much lower, which eventually translates into 5% CAGR in cement capacity additions over the next 3 years.

Capex and timelines continue to be a constraint

According to Holtec, the cost of producing 100% ordinary portland cement (OPC)  in a completely integrated plant, which would include waste heat recovery system (WHRS), captive thermal power plant, railway siding and employee colonies would be ~Rs9,000/t or US$128/t. However, a mix of OPC:PPC:PSC would increase output and reduce the capital cost on per ton basis to ~Rs6500-7000/t or US$95-100/t. Nearly 10% of the total capex would be directed towards land acquisition, 25% towards civil works, 50% towards plant and machinery and balance on pre-operative costs, interest during construction (IDC), etc.

While a brownfield expansion would take about 2 years (based on approvals, land, etc) to be completed, a fully-integrated greenfield unit would require ~3 years post approvals and land acquisition to be operational.  

Limited limestone reserves to drive prices higher, as seen in recent auctions

Holtec estimates 22bn tonnes of exploitable limestone reserves in India and expects these reserves to get exhausted by 2040-45. Accordingly, limited limestone reserves would result in high bids for limestone mines, as is evident from recent auctions by several cement players (Exhibit 3).

8.5% CAGR in demand over FY18-21E

As per Holtec, cement demand should post 8.5% CAGR over the next 5 years, on a base of ~314mtpa in FY18, with 10% yoy growth in FY19E. Demand growth in FY19E will be witnessed across regions, with a particularly strong rebound in the South, Central and Western regions.

Strong execution in government infra & housing projects and growing individual home building (IHB) segment could lead the demand, partially offset by weak real estate market in the metro cities. The company estimates robust demand growth contribution from rural areas versus urban areas.

Following projects are likely to boost cement demand for cement over the next 5 years:

• Rs500bn (US$7.3bn) earmarked for 100 smart cities over 5 years (FY16-FY20E)
• Estimated 44m units in urban India and 65m units in rural India required until 2022 (current shortage + ’Housing for all by 2022’)
• Bharatmala Pariyojana, in which 34,800km of highways are planned to be constructed at an estimated cost of Rs5.35trn.
• Rapid development of metro and rail network to improve transportation.

Utilisation levels to rise sharply over the next 5 years

As per Holtec estimates, India has ~75% average utilization of cement capacities. The company expects utilization to cross 80% in FY20E and reach close to 85% in FY21E, as demand picks up to grow at 8.5% over the next 5 years (314mtpa in FY18).

Within regions, North and Central are likely to witness a sharp increase in utilisation, considering sustained demand and limited capacity additions. Similarly, East and West too will see sharp improvement in utilisation. However, inter-regional movement of cement could result in lower utilisation in states like Maharashtra, Orissa, etc,. While South India could see improved utilisation, sustained capacity additions will keep the utilisation in check.

Limited large-scale capacities available for M&A

Holtec sees the scope for consolidation of 20-25mtpa of cement capacity in India. However, most of this capacity is expected to be fragmented at 1-2mtpa across regions.  As a result, there could be several small M&A deals and any significant consolidation looks unlikely, going forward.

Others

• Players need to make EBITDA/t of ~Rs1000/t for debt servicing to generate a meaningful RoE. At the current cement prices, it is unlikely that the operations yield such EBITDA/t, hence making a strong case for price hikes in the near future. Accordingly, Holtec believes cement prices have bottomed out across most regions and are likely to trend up, going forward.

·      In India, WHRS trend is picking up considering the high cost of fuels. However, the use of alternate fuel in India is likely to remain limited  compared to international markets, as there is no organized way to collect or process waste, rice husk, etc.