Cement industry is looking towards new Govt for direction: Deepak Khetrapal, Orient Cement

In an interview with ET Now, Deepak Khetrapal, MD & CEO, Orient Cement Ltd, shares his business outlook. Excerpts:

ET Now: Is pricing under pressure for the next two or three quarters?

Deepak Khetrapal: You need to compare our prices with that of companies which are working in our area of operations. We are active in Andhra Pradesh and Maharashtra; and the companies operating in these two states were facing a price pressure in Q4 of FY14. Though the prices in the month of May were expected to rise, we did see a bit of pressure on the prices last week, where a dip of about Rs 5 to 7 a bag or Rs 200 a tonne had happened.

Going forward, say, in the next two or three quarters, it would be surprising if prices continue to remain under pressure. Like most industries, the cement industry is also looking forward to some clear directions and decisions from the new government. There is no denying the fact that a lot of investment needs to be made in the infrastructure sector, and infrastructural revival cannot happen without cement. The pressure on prices has been a result of low demand in the last two financial years, where the total industry capacity was more than 350 million tonnes and the demand was around 250 million tonnes. With the demand pick up and new capacity not being added at the same pace, we expect the demand-supply mismatch will start getting narrowed and there would be an improvement in prices.

ET Now: It is said that companies exposed to Andhra Pradesh are in a sweet spot since there has been virtually no development for the last five years and things could only improve over the next five. Your comments?

Deepak Khetrapal: Absolutely. With the bifurcation of the state, a lot of new projects and construction activity will be underway since a whole new capital will have to be built within Andhra Pradesh. From that perspective, things do look up for everyone working out of Andhra Pradesh.

Even the country-wide scenario, within let us say three months from now, we should start seeing some positive movements in the market place about most of the companies which are dealing with the infrastructure sector. We at Orient Cement and many colleagues of mine in the industry are quite bullish for the next few quarters, both in terms of quantum increases and prices.

ET Now: There has been a fair amount of institutional interest in your company. What is your outlook on growth?

Deepak Khetrapal: From my current operations, Orient Cement already operates at one of the industry’s leading capacity utilisations. Last year, we closed 84% capacity utilisation, where the national capacity utilisation had been reported at about 73% and where Andhra-based companies have struggled around 60%.

In terms of growth, from our existing plants, we cannot look for too much growth coming from here. Therefore, while last year we finished with 4.2 million tonnes of sales, this year we might go to 4.3 or thereabout. We are talking about 2-3% growth from the current operations, but more important is the fact that we are as of now busy constructing a greenfield project at Chittapur in district Gulbarga in Karnataka, which is likely to go on-stream. We will be proposing to commission it in the first quarter of FY16. Therefore, in roughly a year’s time, from our current capacity of five million, we would have added another three millions of capacity.

Given our current plants in Andhra Pradesh, Maharashtra and with this one coming up in the north-eastern part of Karnataka, we actually are coming up with a very nice strategic footprint in the market where we can move across states, depending on which state is doing better. The growth story is possibly 3% volume growth from the current operations, but more importantly, getting set to address the markets early next year to hopefully be able to tap into the demand that the new government will be able to create through the right policy measures.

ET Now: What about realisations?

Deepak Khetrapal: We do believe that realisations should be up by close to 10%. This is because the industry in the last two years has absorbed inflation close to 17-18%, with prices having gone down by about 10-12%. Since we have not been able to pass on the costs to the customers and have been selling at lower prices, a 10% price correction at the moment is something that I would be certainly looking at. A 10% increase in realisation is about Rs 300 to Rs 350 a tonne, which should happen very soon.

ET Now: If demand is looking good for the next 12 months, why is it that your capacity utilisation will remain at 85-86%, why cannot it go up further?

Deepak Khetrapal: There are a few things to remember when you are talking of the cement industry. First and foremost, whether we like it or not, for a few months during the year, cement goes down in terms of capacity utilisation. When the monsoons hit, construction activity slupms and labour goes back to their villages for crops, for festivals etc. So, there are a few months in which even a company like ours would be able to see about 70% of capacity. Then of course, there are peak months when you can sell up to 100% of the capacity.

ET Now: I was talking to Shree Cements two days ago and they mentioned that they are running at average capacity utilisations of 101%. I am sure the same rules apply to them as well?

Deepak Khetrapal: An Andhra-based company like Orient Cement actually sold 96% of capacity in Q4 of FY14.