With delays in land acquisition, Shree Cement ventures abroad
With slow pace of land acquisition in India delaying its projects for new plants, Shree Cement has decided to venture abroad in the UAE after acquiring Union Cement Company (UCC) for an enterprise value of $305.24 million.
H M Bangur, managing director of Shree Cement, said the company had about ~40 billion cash balance and it faced with two options— either invest in some venture that would assure growth and higher returns for shareholders or payoff the balance as dividends.
“In India, we could not invest so much money as land purchase will require nearly five years. And, after the 3-million tonne per annum (mtpa) project in Karnataka, we didn’t have anything big in sight in India. The cash balance with the company would have started piling up unless we came up with a plan to use it profitably,” Bangur told Business Standard. A 22-25 per cent operating margin is expected from UCC in the next five years, he said.
Bangur termed the acquisition as “one-of-its-kind” and said he was open to more such global ventures in the long-run, based on the success of UCC’s acquisition and if return on capital in global ventures ensured returns comparable to the company’s
investments in India.
Three years ago, Shree Cement had targeted 40-mtpa capacity by 2020 and the UAE foray was part of that plan.
For the ~20-billion project in Gulbarga district of Karnataka, which marked the cement company’s maiden south Indian foray, the process of land acquisition had started seven years ago. The plant is expected to be completed
in the forthcoming October-December quarter.
Asked if land acquisition delays continued to be a deterrent despite ease of doing business improving in the country, Bangur said, “It remains an issue throughout India, be it West Bengal, Karnataka or Bihar, where plants have taken a lot more time than expected. Greenfield projects take a lot of time and you need to have a lot of patience besides planning at least five years in advance.”
A ~5-billion project in Purulia district of West Bengal — projected to strengthen the company’s eastern market share — is yet to see the light of day. For this two-mtpa project, Shree Cement has already acquired 95 per cent of the requisite 100 acres. But acquisition of the remaining five per cent land has been lingering.
“In West Bengal, the biggest problem was the pace of purchase because the average land parcel size is 500 sq feet and in some cases, it is as low as 100 sq feet. For every acre, there are 7080 registries on account of the fragmented nature of the land,” Bangur noted.
The company, on the other hand, has initiated the process of acquiring land in different parts of India for future projects and some are already underway in Jharkhand and Odisha.
Besides these two projects in India, the company has been expanding its capacity in Rajasthan by two mtpa and in Bihar by 1.6 mtpa. It has recently augmented capacity in Chhattisgarh by another 2.6 mtpa. The completion of UCC’s acquisition would increase Shree Cement’s capacity from the current 29.3 mtpa to 33.3 mtpa. Its some domestic projects expected to be completed in 2018 would augment capacity by at least 5.6 mtpa.
In line with the firm’s philosophy of greenfield expansion, Bangur had initially opted for putting up a fresh project in the UAE, but changed his mind after he felt that the valuation of UCC, which was up sale, was “right”, and it would have a much lower gestation period compared to a greenfield project.
Analysts have been remain skeptical about Shree Cement’s foray into the UAE, expecting a low return on royalty. But, the company acquired UCC for $76 a tonne, which was lower than $84 a tonne that UltraTech Cement had incurred in 2010 while acquiring the 3.2-mtpa Dubai-based ETA Star Cement for $269 million. It was also lower than $95 a tonne Shree Cement has been spending on the Karnataka unit.