Associated Cement Companies (ACC) has unveiled an ambitious plan to expand and optimise capacity. The move follows the recent acquisition of a strategic stake in ACC by Gujarat Ambuja Cements Limited, which is one of the most efficient producers of cement in Asia.
ACC is India's second largest cement company with a capacity of 11.6 m tonnes per annum. The company commands an 11.5% stake in the Indian cement market.
ACC has also announced that it is also looking at greenfield projects to augment its capacity levels. In accordance with this it has applied for mining rights and plans to set up plants with a capacity of 2 MMTPA in the states of Gujarat, Rajasthan and Himachal Pradesh.
Setting up a 2 MMTPA plant would cost Rs 8 bn and considering the ambitious expansion plans the total funds requirements would exceed Rs 30 bn. The company would in all probability have to resort to either external equity or debt to fund these plans. In case of debt, the interest burden would significantly reduce the bottomline of the company, especially in view of the mixed price recovery in the cement sector. Resorting to equity would lead to a dilution of earnings and this may not be well received by the existing shareholders of the company.
Another important factor is that the company's plants (greenfield) will go on stream only after approximately 24 months from the time the construction process commences. Although the prospects for the cement industry are considered to be very good, in view of the need for infrastructure and housing, there could be a further delay in the pick up of investment activity. This could leave the company with large unutilised capacities.
With Gujarat Ambuja on 'board', ACC should try to leverage on the formers' skills in trying to improve the efficiency and productivity levels at its plants. Infact, Gujarat Ambuja has historically been the domestic leader in plant productivity and efficiency levels. ACC could utilise Gujarat Ambuja's managerial experience and expertise to significantly step up production at existing plants. Meanwhile, ACC has another 2 MMTPA plant coming up in South India. Together, these measures could provide enough capacity to the company to generate growth in the coming years.
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