MUMBAI: As the tide remains favourable for cement manufacturers, rising demand and realisations are prompting companies to expand capacities and diversify into new geographies. Star Cement, having a strong presence in the northeast, is expanding into eastern India with ongoing capacity expansion at Siliguri, West Bengal.
Eastern India has been a key focus area for most cement manufacturers, given the expected demand surge. Limestone availability in the region, the key raw material for cement manufacturing, makes it an attractive destination. Hence, utilising its strong cash flows from the northeast, expanding in the neighbourhood in eastern India is the logical next step for Star Cement. The company’s Siliguri plant will commence production soon.
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The company is already present in the region through leased grinding units of 0.6 MT capacity. The new grinding unit at Siliguri will replace supply from the leased units and will be able to boost further volume growth. Analysts expect the expanded capacities to see 60-65% utilisation in FY22.
Even if the new unit generates EBITDA/tonne of ₹500, the return on capital employed (ROCE) will be at 12.5-13% say analysts at Nirmal Bang Institutional Equities. The management expects profitability from the eastern unit at ₹800-1,000/tonne, which analysts, however, believe is some time away.
Meanwhile, the company already is the market leader in the northeast, with a 25% market share with its ‘Star’ brand. It unlikely to face much competition due to significantly high entry barriers when compared to other regions. Analysts thereby expect regional players to continue performing well. The region has a balanced demand-supply scenario, with total capacity of 11 mtpa compared to demand of about 9mtpa. Star Cement, though, is planning a 2 MT clinker plant in Meghalaya, and is awaiting environmental clearances.
With no significant capex otherwise being planned, increased supplies from outside the region will not affect pricing much, feel analysts. The company had seen cement sales volume grow 8% year-on-year during the September quarter. While the impact of lockdowns on June quarter sales may mean FY21 sales growth will be tepid, nevertheless a strong rebound is expected in FY22. “We expect sales volume to decline 11% in FY21 and grow 19% in FY22,” said analysts at Anand Rathi Research in their note.
Strong growth momentum in its key market of northeast and expected triggers to be provided by expansions in eastern India makes Star Cement the pick of analysts. Improved cement prices in the east, availability of coal from Meghalaya for regional players and rising operating efficiency are some of the key positives, feel analysts.
Nevertheless, for the benefits to accrue, a timely ramp-up of new grinding unit without any delays is crucial.
