Kalyanpur Cements Ltd Management Discussions

1. Industry Structure and developments

Indian cement industry expanded rapidly after it was delicensed in 1991. It expanded in a major way between 2007 and 2012, when , encouraged by sustained economic growth coupled with the boom in the infrastructure and real estate from 2005 onwards, Cement companies added fresh capacities. Around half of the existing capacity of 360 million tonnes , were added during this period.

The potential for development in the infrastructure and housing sectors encouraged many transnational companies like HOLCIM .Hiedelberg , Lafarge , Italicementi, and CRH to take up stakes in Indian Companies , which in many cases was increased to acquire controlling stakes. Some of the major acquisitions in recent years have been Raymonds and Tata Cements by Lafarge , ACC and Gujarat Ambuja by HOLCIM and My Home Industries by CRH.

However, increase in interest rates by the Govt, to tame inflationary pressures coupled with cutback in Govt. spending on infrastructure from 2010 led to steep drop in Cement demand . The industry was left with huge oversupplies and unutilized capacity .Furthermore, the spending of USD one trillion on infrastructure proposed in the 12th five year plan period from 2012 till 2017 was yet to get underway, though the cement industry is well on way to achieve the installed capacity target of 480 mil. Tonnes by 2017 set in the 5- year plan.

The margin of the cement industry has been severely eroded by loss of pricing power on one hand and continued increase in cost of power, fuel and transportation following Govt. decision to cut back on subsidies . There were 14 hikes in price of diesel alone since January2013. The Cement Industry has since been facing mounting problems , which has given impetus to the process of consolidation in the industry to achieve better economies of scale , market access and improved pricing power . Jaypee Cements , under huge debts , have divested their majority stake in their 2.1 mill, tonne plant at Bokaro in favour of Dalmia Cements as well as their stake n i their 2 plants of 2.8 mil. Tonnes each in favour of Ultratech. Binani Cements ,with a total capacity of 6 mil. Tonnes from 2 plants in Rajasthan have suspended operations at their two plants in Rajasthan .HOLCIM and Lafarge , the two largest cement producers in the world have announced merger plans , after which their combined capacity in India will go upto 68 mill, tonnes . Similar such acquisitions are also under negotiations .

2.0 Opportunities and Threats

2.1 Opportunities

The Govt. since 2010 has kept interest rate high to curb inflationary pressures in the economy , which has largely been unsuccessful. While this has led to steep fall in demand , inflation has continued to remain high. In view of the present state of the economy and moribund demand , the Govt . may soon cut interest rates and reduce Excise duty , which may once again revive demand. Further , it is also being anticipated that the stalled infrastructure projects may soon be restarted , which will start an infrastructure boom and reduce oversupplies. Moreover, cement industry in India has entered a phase of consolidation with larger players acquiring the smaller ones to gain market share , which will improve the pricing power of the Industry.

2.2 Threats

The Cement sector has been reeling under crisis for last 3 years due to massive oversupplies, inadequate demand and continued cost! increases. None of the above factors are likely to change in the near term. Capacity additions continue unabated in the hope of reaping benefit in the long term, when demand revives. The cost of coal .power and transport are also expected to maintain an upward trend, as the Govt may persist with its policy of doing away with subsidies. Further, despite failing to control inflation in the last 3 years by persisting with tight monetary policy, the Govt may still not delink inflation from bank rates, which will continue to curb demand in the economy.

3.0 Segmentwise / productwise performance

The Company is a single product manufacturer and there is no other product segment. Since 90 % of its product s i marketed in Bihar, it has virtually only one geographical segment.

4.0 Outlook

Indias housing and infrastructure deficits point to huge potential for development and the cement sector will benefit immensely as and when momentum picks up. Infrastructure as a percentage of GDP has been steadily increasing over the last two 5-year plans increasing from 5 % in the 10th Plan to 7.2 % in the 11th Plan. In the 12th 5-year Plan, the Govt. plans to increase this to 9.1 % of GDP .equal to an investment of Rs.51,464 billion and additional demand of 145 mill, tonnes between 2013-17. The fact that cement majors have buik up capacities in advance is an indicator of their expectation that demand will sooner or later pick up. The focus of the Government on strengthening of infrastructure and promotion of low cost affordable housing is expected to drive the demand for cement. According to CARE Research, which is a division of CARE Ratings, in the event of Low Cost Housing going forward, this could mean cement demand of 270-290 mill, tonnes in the next 3-4years .

5.0 Risks and concerns

Cement sector is in grip of negative factors and Companies are continuously losing pricing power and costs continue to rise. Power, fuel and freight costs make up around 60-65 % of the total cost . CARE Research, anticipates that power and fuel costs will further increase by 10 % in 2014 . Diesel prices were up 15% this fiscal and it is estimated that freight costs / tonne will again go up 15 % in 2014. .Further, capacity is way ahead of consumption . Between 2009 and 2013, capacity increased at CAGR of around 10 %. However, fresh capacity continue to be added to secure future demand with addition of around 66 mill tonnes expected during the period 2014-16. This will further erode margins of the Industry. Infrastructure Projects have been delayed by spiralling costs, land acquisition and environmental issues. With land acquisition and environmental laws getting more stringent, infrastructure projects may get further delayed and impede investments .

6.0 Internal Control Systems and their adequacy

The Company has adequate internal control systems which are reviewed by the Management and the Internal Auditors through quarterly audit of various areas of Companys operations to ensure that the systems are being properly complied with and transparency is maintained. The Observations of the Auditors alongwith Companys replies are placed before the Audit Committee of the Directors on regular basis for reviewing their adequacy.

7.0 Financial performance with respect to operational performance

As a result of lower plant availability due to increased frequency of unplanned stoppages , capacity utilization levels in both Clinker and Cement declined during the year . As total arrivals were far in excess of demand , It was difficult to maintain price levels , as manufacturers pushed sales by cutting prices to beat competition . I n view of the market condition and continued increase in input costs , it was increasingly difficult to cover the cost at existing levels of realization and input supplies were maintained with great difficulty by further increasing liability levels . Major high cost spares and consumables were arranged on deferred payment terms.

8.0 Material developments in Human resources / Industrial Relations front , including number of people employed •

I n order to achieve full utilisation of equipment and inculcate proper operation and maintenance practices, the Companys personnel are exposed to latest ideas and concepts through various in-house as well as external training programmes . Interactions amongst plant personnel on a daily basis also help improve sensitivity about the plant and better identification of plant problems and their resolutions and also in identifying areas of cost reduction. The Industrial Relations remained cordial during the year under report. The Company employed 1087 persons during the year.