UltraTech uses slowdown to aim at the top

25 April, 2013 | Business Standard

Aditya Birla Group cement major using its financial heft to expand at a fast clip in a tough environment

April 25, 2013
Business Standard

No one likes an economic slowdown — it means stagnant revenue, poor profitability and a falling share price. Some business leaders, however, sense an opportunity in a challenging environment, of racing ahead of the competition and, so, being the first mover when the economic tide turns.

This is what UltraTech Cement is scripting. Having spent the better part of the boom years in consolidating its operations and building its balance sheet, the company is now using its financial firepower to outgrow the competition and become India''s largest cement maker by the end of this financial year. In the past six months, it has commissioned projects worth Rs 4,500 crore; additional projects worth Rs 7,500 crore are in various stages of implementation. The target is to raise yearly production capacity to 58 million tonnes (mt) by June and to 62.5 mt by FY15.

This will make the Aditya Birla Group the country''s largest cement producer, ahead of the Holcim group. The latter has been market leader since it acquired ACC and Ambuja Cement in quick succession, in 2005. The two Holcim companies have a combined capacity of 57 mt, against UltraTech''s 51 mt. ACC and Ambuja are, however, going slow on capacity expansion and are focusing on expanding the use of current capacity. This has opened an opportunity for UltraTech.

"We aspire to be a market leader in India and follow a calibrated growth strategy to achieve this," says K C Birla, chief financial officer, UltraTech. The company is expanding a region at a time, to minimise the disruption to the demand-supply balance in the industry. "Our first expansion in Chhattisgarh, that serves eastern India, is on stream. Next, we will commission our Karnataka projects that will take care of South India and Maharashtra. Now, we will take the expansion in Rajasthan that supplies to the northwest," he said.

Slowing demand is not a concern, he says. "India is a long-term growth story, with cement consumption expected to grow at a compounded annual rate of eight per cent over the long term. It takes a minimum of three years to put up a plant, built to run for the next 30-40 years," he adds.

In a way, UltraTech is creating supply ahead of the demand, hoping to grab some market share from the competitors once economic growth picks up. Historically, cement consumption grows at 1.2 times the growth in the country''s gross domestic product (GDP). That is, every one per cent rise in GDP raises cement demand by 1.2 per cent. Analysts say there is an element of risk in this growth push but UltraTech is well placed to take it, given its strong balance sheet and copious cash flow. "At the worst, the company will run its new plants at less than optimum capacity but if economic growth picks up in the next two years, it will have first-mover advantage and make a killing, besides raising market share" say cement analysts at a leading brokerage house here, on condition of anonymity.

In FY13, UltraTech''s cash flow from operations was around Rs 3,700 crore. It has cash and equivalents worth Rs 4,800 crore and is debt-free on a net basis. The company hopes to maintain its rate of internal accrual in the current year as well, giving Birla sufficient head to grow at above the industry rate, without straining the company''s balance sheet. "With a debt to equity ratio of 1:1, we can easily take up new projects worth Rs 7,000 crore every year," he says.

Social feeds

Aditya Birla Group

Official LinkedIn account of Aditya Birla Group.

A US $44.3 billion corporation, the Aditya Birla Group is in the League of Fortune 500...

MUMBAI.10,001+ employees