Madras Cements Limited is planning to expand its cement manufacturing capacity by 900,000 tonnes per annum. The company also plans to set up a captive gas based power plant (14-16 MW). The total capital expenditure involved is Rs 2 bn.
Madras Cements Limited, the flagship company of the Ramco Group, is a south based cement company. It has an installed cement capacity of 2.8 m tonnes per annum and a 33 MW wind power farm.
The expansion plans have been announced on the back of the strong recovery in the demand and price of cement. Other cement majors, too, have been firming up their expansion plans in an attempt to capitalise on the uptrend in the sector.
The company’s decision to simultaneously set up a captive power plant is reflective of its view to be self sufficient in its power needs. This ensures optimum utilisation of the plants, as power interruptions are minimised. Moreover, captive power being cheaper than the state grid power, the company is able to reduce its cost of production, which results in better margins.
Another advantage that the company has is the location of all its plants, existing and planned, in the southern markets. These markets, generally, offer better price realisations per tonne of cement sold. The south based cement companies are thus able to earn better margins as compared to their peers.
However, there is a fear that with large capacities being planned by most of the domestic majors, there could be a glut in the future. This would again lead to a situation in which prices have to adjust downwards in order to equate supply with demand. This would adversely affect the bottomline of the company.
Analysts have rated the stock as a 'BUY' on account of the recovery in the cement sector, which is expected to give a boost to the company's earnings. Moreover, measures taken by the company to control costs has also supported this rating.
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