Cement is among the most vital ingredients required for the growth of an economy. A growth in demand for cement reflects an uptick in the activities in the business, financial, real estate and infrastructure sectors of the economy. In the last decade, cement demand has grown consistently at a multiple of over 1-1.2 times of GDP growth underpinned by the rising demand for housing and infrastructure. To meet this demand, cement companies invested briskly in expanding capacities leading to increased fund need. However, innovative methods of financing is still evolving in this brick and mortar industry. The cement industry requires financing for its working capital and capital expenditure requirement. Working capital cycle starts right from the time of material procurement, production and sale of finished goods till the realisation of sales proceeds. The primary requirement is in building up raw materials, additives, fuels, stores & spares, clinker and finished goods inventory. Debtors are generally in non-trade segment of business. The sector incurs capital expenditure for its regular capex requirement, expansion of existing capacities and setting up of new capacities.The development of industry post decontrol was dependant on fiscal incentives, financing from international institutions (IBRD, etc) and local developmental financial institutions. With the passage, just as the industry has evolved, the development financial institutions too have become banks.During the early stages, capacity addition was dependent on promoters and leveraging capabilities. The debt equity ratio of sector used to be 2 to 2.5 times of debt to equity. The sector profitability was weak so promoter/companies used to survive on fiscal incentives provided by the government. The construction activities were weak and companies were not having the financial motivation to expand. Thus, despite being one of the oldest industry, no company could acquire/add sizeable capacities to reckon with.With the opening up of the economy in 2001, together with a flourish in information technology, communication and entertainment (ICE) sectors, the demand for cement saw a sustainable growth of over 8 per cent. The profitability improved which was ploughed back in further capacity addition.
Working Capital Financing
Working capital needs are met through traditional banking channels. Companies opt for working capital arrangements through (i) consortium banking arrangement or (ii) multiple banking arrangement. The common modes of financing working capital are cash credit, WCDL, export packing credit, etc. However, the following two products also help companies in managing working capital.Apart from use of cash credit, WCDL & packing credit, companies also use buyers credit and supplier’s credit facilities provided by various banks. Under the buyers credit facility, banks pay to the company’s import vendors and company pays to the bank on a pre-determined date with interest. Similarly companies also use supplier’s credit facility.
Channel financing: To reduce debtors in their books, companies use channel financing for its large dealers. Bankers do their own due diligence and provide credit facilities to dealers which are exclusively used for payment or clearing dues of the company. The onus on the company is the continuity of dealership. If there is disruption, companies are required to inform the banks.
Financing of Capital Expenditure
Long term financing usually takes the form of (i) equity (ii) debt and (iii) hybrid (mix of debt & equity).
Equity: It is a permanent form of money which is mobilised by the promoters and through public participation. In case of an established company promoters can invite private equity funds. Besides companies issue ADRs/GDRs in foreign capital markets.
Debt: Companies raise debt through banks and other FIs. Depending on the financial strength, companies evaluates the various debt raising options. Debt raising can be done in (i) foreign currency and (ii) rupee, and can be further segregated into secured and unsecured borrowings depending on whether any collateral has been provided to the lender.
Common Modes of Long Term Financing
For raising long term funds the industry uses various instruments in the domestic as well as the foreign capital markets depending on the interest cost, accessibility to various markets and risk appetite, etc.Debentures: Over the years industry has reduced the use of debentures as a mode of financing due to high interest as well as compliance cost. Proportion of debentures has reduced drastically from 34 per cent in FY06 to 14 per cent in FY10.
FC/Rupee Term Loan: Foreign currency loans in the form of ECBs appeals the industry due to its low cost and rupee term loan due to its relatively low cost and flexible end use. Requirement has increased as is evident from the increase in its proportion of 48 per cent in FY 06 to 57 per cent in FY10.
Sales Tax Deferment Loan: Appeal of incentives provided by various government has attracted the industry. Interest free sales tax deferment loan also improves the overall weighted average cost of theborrowings.Foreign Currency Convertible Bonds (FCCB): Some players also access international markets by issuing FCCB. It has an option to convert the bonds into equity at a pre-determined price on a specific date. Many players tie up with IFC for financing their capex needs. Companies also access ECA financing from the Exim Banks of the countries from where they are importing major equipments, ie, Hermes and Coface.
MNC’s generally borrow in local markets for local expansion and for acquisition financing they opt for offshore financing based on cost benefit analysis.
Challenges faced by the industry
- With rise in capital cost and longer time for implementation, judicious mix of internal accrual, equity and debt became critical.
- Locally long term maturity debt papers can be placed only with life insurance companies or some banks.
- Cost of borrowing in foreign currency (ECBs) is still competitive with full hedging as compared to domestic borrowings. But keeping the currency risk and interest rate risk unhedged may result/put companies into deep trouble.
- With over capacity in the sector, the equity route for mobilising money is also not cheap. Equally PE money is costlier funds require exit route at a higher price.
- Hence companies should have systematic approach of risk management relating to leveraging and debt servicing.
Sustainable solutions by Ambuja Cement, ACC
Ambuja Cement and ACC the cement and building material companies of the diversified Adani Group announced solutions to an array of customer concerns while keeping environment sustainability at its core. Examples of this are the concrete mix proportioning solution; designed to optimise the proportions of aggregates, sand and water in concrete mixes considering their unique properties. This helps the company optimise the resources thereby minimising wastage. The company also developed an in-house modular curing solution, also known as zero-water curing. This technique helps concrete slab curing without excessive use of water. This has helped save about 39 million litres of water across multiple sites.
Fornnax adds 430HP secondary shredder to it’s R-series line-up
Fornnax technologies showcased the R4000-HD tyre shredder at the IFAT expo 2023, where the company got a platform to interact with industry professionals from domestic as well as overseas markets and demonstrate the technological prowess of their machine. The R4000-HD is a powerful machine designed to make secondary shredding and steel separation more efficient and profitable.
The machine saves electricity and man-power and due to its design features it is built to make maintenance procedures easier and also lower the wear and tear to the equipment, thus lowering operating cost. It can process various materials from types, cables, e-waste and aluminium scrap. It is built to last 20-25years. With all its features and sturdy built, it is one of the most powerful secondary shredding machines in the industry.
Udaipur Cement Works Limited doubles its clinker capacity
A subsidiary of the well known JK Lakshmi Cement Ltd., Udaipur Cement Works Ltd. (UCWL) recently announced the expansion of its clinker facility taking its current capacity from 1.5MTPA to 3 MTPA at Udaipur. The company, by the end of financial year 2023-24, plans to exceed twice the current capacity from 2.2 MTPA to 4.7 MTPA. The capacity expansion has been funded through a mix of equity and debt; the company recently successfully completed its rights issue of INR 450 crores.
They have two brands under their portfolio ‘Platinum Heavy Duty Cement’ and ‘Platinum Supremo Cement’.
Also known for their commitment to renewable energy and environment sustainability, they have the first and only of it’s kind floating solar power plant of 1MWp at it’s mines, fulfilling 50% of their electricity needs.