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Binani Cement: Spreading its wings - Views on News from Equitymaster
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Binani Cement: Spreading its wings
Jun 10, 2009

We recently had a research meeting with the management of Binani Cement to get a first hand understanding of the various developments taking place within the company and the cement sector. Here are the key takeaways from the same. A brief about the company: Binani Cement, the flagship company of the Binani group, promoted by Braj Binani was established in March 1997. The facility located at Sirohi in the state of Rajasthan with an initial capacity of 1.65 MTPA of OPC (Ordinary Portland Cement) commenced commercial production from November 1997. The company is one of the leading cement producers in Rajasthan with an annual capacity of 6 MT of cement along with a 25 MW coal/lignite based captive power plant. The company has also set up subsidiaries in Dubai and China. The company's cement is marketed under the brand name of 'Binani'. Over the years, the company has established significant brand presence, especially in Rajasthan and Gujarat. Its cement product portfolio consists of OPC and PPC (Portland Pozzolana Cement).

Industry scenario: The domestic cement industry is expected to add around 60 to 90 m tonnes of capacity over the next two to three years to the existing capacity of 200 MTPA. The capacity build up is expected to result in an excess supply scenario, which in turn would exert pressure on realisations. However, from a long term perspective, the management of Binani Cement feels that market would be able to absorb the incremental supply. The strong belief is based on the recent initiatives (stimulus packages and fiscal incentives) taken by the policy makers and government to support economic growth. Although the management is optimistic about the sector’s growth prospects, it is of the view that supply side pressures in the medium term cannot be denied.

Ambitious expansion plans: The company’s decision to move out of India and spread across geographies was targeted to support growth. The slowdown in the domestic growth is expected to be compensated by the international ventures. In a move to diversify revenues across boundaries and tap growth potential available in markets outside India, the company has planned to scale up its capacity across boundaries to 15 MTPA over the next three years.

  • Domestic front: The company plans to scale up its domestic capacity by setting up a 2.5 MTPA greenfield plant in the state of Gujarat by FY12 at an investment outlay of Rs 7 to 8 bn. The company would pay Rs 170 m to the Gujarat Government as Royalty and Cess on limestone.

  • Outside India: Currently, the company has set up a 1.2 MT plant in Dubai and a 0.5 MT plant in China. The Dubai plant capacity would be scaled up to 2 MTPA in FY10 incurring a capital expenditure of US$ 20 m. The company has outlined capex of US$ 100 m in China to add 2.5 MT of capacity by the end of 2011. The company is also planning to set up a 1 m tonne grinding and packaging unit in Mauritius by 2011 at an estimated investment outlay of US$ 30 m.

Funding: For all these projects the company has tied up bank finances and has already started deploying funds to kick start operations as per schedule. The capacity expansion in Dubai was fully financed by the company. The other two international ventures would be funded by a mix of debt (local financial institutions) and equity in the proportion of 1:1. The average incremental cost of debt for the company is 11.5%. The company’s current debt equity ratio stands 1.3. The company has leveraged its balance sheet for expansion plans. Till the capacities become operational and start generating revenues, debt servicing obligations are likely to exert pressure on its already depressed margins (net margins in FY09 have declined to 7.3% from 18% in FY08).

Business overview:

Diversifying revenues: The company primarily caters to Rajasthan, Delhi, Punjab and Haryana in the North and Gujarat in the West. The company has started spreading its wings across boundaries and is also planning to cover more regions domestically. It has planned to foray in West Bengal in a move to cater to demand of the eastern region. The company is diversifying its revenue mix by operating with clearing and forwarding agents, market organizers and dealers.

Cost control initiatives:

  • The company has pioneered the concept of cash and carry in the construction industry. It was able to do so, on account of competitive prices offered, while not compromising on quality and better service in terms of setting up dealer distributor network and order deliveries. This move not only ensures cash flows but also enables to keep a check on inventory on books.

  • The company’s dispatch ratio in terms of rail to road mix stands at 50. Owing to freight issues and increase in transportation costs with the increase in fuel prices, the company is shifting focus towards railways as a mode of transport. The company’s initiative to increase dependence on rail transport is to ensure smooth transportation of products and at the same time keep check on costs. The company has outlined plans to dispatch nearly 75% of its produce by rail in the future.

  • To further lower cost of operation and be self sufficient in power requirements, the company has planned to scale up capacity of its captive power plants from 25 MW to 69.6 MW by the end of FY10. The company’s expansion plans are progressing as per schedule. The company is in the process of installing the second phase of 2x22.3 MW of power plant. The coal linkages for the cement industry are very poor. As the company is scaling up its business, the requirement of this key raw material is expected to increase. To ensure supply of key raw materials at reasonable prices for the smooth functioning of its operations, the company has signed a six month contract for coal supply from Indonesia.

What to expect?
The company is spreading across boundaries to de-risk revenues. However, the financial crisis had impacted growth of economies across the globe. Almost 40% of capacities in China are under refurbishment. Till these capacities become fully operational Binani Cement would stand to gain, only if the expansion plans progress as per schedule. The company’s capital expenditure plans are likely to enable the company sustain market share and keep a check on rising cost of operation. While these are positives, upcoming capacities amidst economic slowdown will pressurise realisations and hence profitability. Not to forget that the company has leveraged its balance sheet to scale up its operations. Thus, higher interest and depreciation costs will also exert pressure on margins. At the current price of Rs 60, the stock is trading at a fair valuation of over Rs 3,500 on the enterprise value per tonne (EV/tonne) basis as per FY09 consolidated numbers.

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