The Hindu Business Line : Greenfield mania hits cement industry

With the cost of building new cement plants seeming to be a lot lower than that of buying existing capacities, greenfield announcements are piling up thick and fast.

This has given rise to a situation where a complete newcomer like Nagpur-based Murli Agro makes capacity expansion plans that match that of an established player such as Grasim.

Murli Agro has announced a two-million-tonne plant in Chandrapur, Maharashtra and has plans for 10 mt over the next few years, according to Mr N.L. Maloo, Managing Director.

Grasim, which had earlier announced capacity expansion of eight million tonne, including greenfield of four million tonnes, has now added another 3.5 mt to its plans with a recent MoU signed with the Orissa Government for a new plant.

Both the companies say that their greenfield plants will cost around $80 per tonne, including captive power plants.

At current market capitalisation levels, the large cement majors with capacities of 12-19 mt show capacity valuation of Rs 9,000-12,000 a tonne (and some well higher); this is over $200 a tonne.

Even the medium-sized companies with capacities of 2-6 mt are showing valuation levels of Rs 5,000-6,000 or over $100 per tonne.

"Even if the new factory takes two years to come up, and even with interest costs and a power plant, a new plant is still more attractive than acquiring one," said Mr Sanjeev Bafna, Deputy CFO of Grasim Industries.

"It can be a little frustrating arranging for mines (limestone), but otherwise it makes sense to go greenfield."

Everyone, from the four largest cement players in the country to very small ones, has greenfield plans in place.

Fitch Ratings said that an estimated 70-75 mt of additional capacity would go onstream between now and 2008-09, the maximum being in the latter year.

"While operating rates and consequently prices would remain firm in the short term, they are expected to soften in 2008-09 and 2009-10," said Mr Rakesh Valecha, Director, Fitch, India.

Many others could be setting up plants in the hope of selling off later.

Holcim's acquisition of Gujarat Ambuja at over $200 a tonne (a recent 3.6 per cent was bought at $260 a tonne) and Heidelberg's of Mysore Cements at $117 a tonne has got everyone still hopeful, said a senior official with the AV Birla Group.

"How long the party will last is the question. There will be very few acquisitions, the buyer will increasingly not see value," said Mr Anil Singhvi, Managing Director of GACL.

"All the capex planned and the price levels cannot sustain; there will be a reality check in 2008-09."

A senior official with the AV Birla Group said that acquisitions will be limited to the odd foreign player who may not have the patience to wait three years for a new plant to come up.

Even though a fresh line of consolidation should be in order, considering the fragmentation of the industry, it may not happen for another 1-1.5 years, at current valuations, said Mr Valecha. After that period valuations may drop off, he added.

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