The Hindu Business Line : Madras Cements not to raise funds thru equity

CEMENT manufacturers in the South had a bad start this financial year as consumption dropped in the April-June quarter. In this situation, Madras Cements stood out because its net profit increased, largely on account of a tight control over costs. Mr A.V. Dharmakrishnan, Senior Vice-President (Finance), spoke to Business Line about the company's efforts to check costs and the situation faced by the industry today. Excerpts:

What were the reasons for the fall in cement consumption in South India in the first quarter of the current financial year?

In the first quarter, all-India growth was only 3 per cent, compared with last year's 5 per cent. In this background, in Andhra Pradesh, there was a decline of 14 per cent, in Tamil Nadu a decline of 13 per cent, in Karnataka a decline of 6 per cent, and in Kerala a decline of 7 per cent.

I don't have statistics on which sector consumes what quantity of cement. What people say is infrastructure development has come down. Government spending is not as much as before in all states. In Tamil Nadu, there was water shortage. Karnataka had positive growth of over 15 per cent in the past three-four years. Strangely, this time it is negative. Whatever spending took place might have happened in the last four years, with maybe a little lull in the current year. In Andhra Pradesh with a change in government, investment may have slowed down. That is my feeling.

Generally in the South, doesn't the biggest demand come from the government?

Not necessarily. It's mostly from the housing sector.

What is the cement demand from housing likely to be?

Even today, if you talk to different banks and institutions, they are positive and say their disbursal has gone up 20-30 per cent. It means that, to that extent, housing activity is there, even though I don't exactly know what percentage of cement the housing sector consumes.

With cheap funds available, I don't see any reason why it should come down. Apart from that, negative factors are that steel and sand prices have gone up. Only cement prices have not gone up; it is lower than what it was 5-6 years ago.

Is there any sign of infrastructure demand picking up in the second half of the year?

The government is talking about a lot of infrastructure projects. (But) we don't have any statistics.

What is Madras Cements' outlook for demand in the remaining part of the year?

In line with the industry, there was a 10 per cent decline in demand in the first quarter . But in July we saw a little positive growth. I hope the trend will continue. By year-end, I expect at least 3-4 per cent growth.

Will you consider acquisitions?

Our policy is clear, we will have organic growth. Growth in installed capacity would come only through organic growth, maybe by de-bottlenecking, and in future maybe by expanding at existing sites.

Coming to your 2003-04 financials, could you tell us something about the reduction in debt, especially on foreign term loans?

As far as the foreign term loan is concerned, we had a very cautious approach. Whenever we availed ourselves of foreign currency loan of more than one year, immediately we covered (hedging for exchange rate fluctuation). Even after covering, the average interest cost for most of the loan is 4-5 per cent.

In the last year, we were able to reduce our interest-bearing loans by almost Rs 140 crore. The interest-bearing loans as on March 31, 2003, were Rs 568 crore. We reduced it to Rs 421 crore as on March 31, 2004.

Because of the forex loans, by what extent did the overall interest cost come down?

Real saving will be 2 per cent.

Is there likelihood that there will be more debt repayment this year?

This year we have a capital expenditure programme of a little over Rs 90 crore. We are implementing a 36-MW thermal plant in Alathiyur (in Tamil Nadu where the company has a plant) from internal accruals. After this, I am confident debt will come down by Rs 60 crore-Rs 80 crore.

In the first quarter, the interest commitment was Rs 7.81 crore (Rs 15.98 crore). I am confident that over the next three quarters, we will be able to reduce the interest payment.

What is the debt-equity ratio you are aiming for?

If you see the interest-bearing loan and take deferred tax liability as equity, not as debt, the debt-equity ratio will be less than 1:1. The industry average is over 1. We are clear that we will not raise equity. We will grow through internal accruals and debt.

Madras Cements raised only Rs 3 crore from shareholders, and has a capacity of 6 million tonnes. Has cost control been critical to the company's profitability?

Madras Cements always believed every cost will be controlled. In the last four years, we closely monitored each item of cost, and to facilitate that, information is available through our Enterprise Resource Planning. This enabled us to maintain efficiency in all areas throughout the year.

Is about 60-65 per cent of the power cost accounted by internal generation?

In Madras Cement, almost 95 per cent is internal and we have a small saving (on generators running on furnace/diesel oil) compared with grid power. But the difference is not big now. It is around 20 paise; it used to be almost Re 1 earlier.

Could you tell us something about your deal with AP Gas Power Corporation?

In AP Gas, we are holding some shares. We invested Rs 22 crore. This investment entitles us to receive power to the extent of 6 MW at around Rs 2 per unit compared with grid power cost of Rs 3.50-Rs 4. Even after one or two hikes, it is cheaper than grid power. This power is available only for the plant in Jayanthipuram (in Andhra Pradesh).

Corporate guarantees to group companies came to Rs 109 crore in 2003-04. Has it increased?

For the first time we gave (corporate guarantees) last year. With corporate guarantees, the group companies are able to get much cheaper rates if Madras Cements is guaranteeing the interest difference of almost 4-5 per cent. We thought why don't we support our group companies. It is not to say that they are not able to borrow.

Has it made any difference to Madras Cements' interest rate?

No.