Ladies and gentlemen, good day, and welcome to UltraTech Cement Limited Q1 FY 2019 earnings conference call. We must remind you that the discussion on today's call may include certain forward-looking statements and must be therefore viewed in conjunction with the risk that the company faces. The company assumes no responsibility to publicly amend, modify, or revise any forward-looking statements on the basis of any subsequent development, information, or events, or otherwise. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Atul Daga, Executive Director and CFO of the company.
Thank you, and over to you, Mr. Daga.
Good morning, everyone, and welcome to our call for this April-June quarter results. I wish we were doing a repeat performance of last year, April-June quarter on current volumes. That would be the day. If wishes were horses, then we would surely be riding them. Let me get on to the first of the wish list, demand. Cement demand, I believe, is coming back, and this trend we noticed more than a year ago. Housing has been and will always remain the biggest demand driver for cement. In this cycle, infrastructure-led demand is taking cement consumption up, and with the improving infrastructure, a natural extension is improvement in the housing demand, which we believe should start off in the next 2 to 3 years. There's a moderate shift at present from individual housing to institutional housing.
I've mentioned in the past also about this being the biggest upcycle for cement. Historically, cement cycles have been 3 to 4 years, but we believe this being the longest upcycle, and that the industry is witnessing. Because this time around, the demand drivers are different. We expect the momentum in cement demand to continue with some big projects around the annual. The planned work on Jewar Airport, that is the Noida International Airport, coastal roads in Mumbai, Purvanchal Expressway on the Allahabad, Gorakhpur sector, Mumbai-Nagpur Expressway will commence before the end of this year. The long overdue Navi Mumbai International Airport also is expected to commence work now. Land leveling has been completed, and the contracts have already been awarded for the construction of the airport. Polavaram Dam in Andhra continues in full swing. All these are very large projects.
This time around, again, Government has introduced penalty clauses and delays beyond the deadlines given for completion of the project. Hence, there is a strong chance of systematic and time-bound execution. The recent MSP hike will further help improve the rural demand. Of course, this is bound to create inflationary pressures in the economy. Rural markets have been a very strong forte of UltraTech. Today, we have nearly 36%, 37% of our sales in rural markets. Sorry, I stand corrected. It is now up to 40%. Low-cost housing and affordable housing consistently are supporting cement demand growth with increased pace of execution. Since April 2018, I am told fresh construction work started for another 1 million houses in urban areas, the low-income houses. Construction has already been completed about 0.4 million houses in the last three months.
In rural areas, about half a million houses have been completed during the last quarter and sanctioned about 2 million new houses. Total sanctions till now is about 8.5 million houses. Government is fast reaching its target of at least sanctioning the 10 million houses per year that we had emphasized. Further to update, the first phase of DFC project is also likely to commission by the end of this year. For Western Freight Corridor, which is 432 kilometers out of the 1,500 kilometers, and Eastern Freight Corridor, 343 kilometers, is likely to commission. This is important, not for cement consumption, but to improve the logistics for cement, improvement in rail availability in the Eastern Corridor, which is absolutely dry as far as cement industry is concerned for rake availability.
Movement of cement become extremely difficult these days in the absence of availability of rakes, because rakes are diverted for Government requirements. The growth and improvement of infrastructure in the country will lead to a general improvement in housing demand. Additional capacity from new assets acquired has given us an opportunity to expand our footprint into newer markets and in the institutional channel. With pan-India presence, we enjoy a very high share of business for cement sales amongst all the leading infra companies who are catering to the low-income housing projects, catering to the infra projects, and urban housing as well. This quarter, our domestic volumes have grown 32%. The quarter saw strong demand across all regions. In our view, we could see double-digit growth for the sector in this quarter for sure.
For UltraTech, blended sales have gone up 3%, now at about 67%, and trade sales Being in the focus have now risen 2% to 68% over the previous quarter. Let me get onto the next of the horses of the wish list, which is prices. I would compliment our own team for achieving this growth without compromising on prices. The realizations on an average have gone up 1%-2% quarter-on-quarter. However, the exit prices have been far higher than the average prices for the quarter across all zones. As compared to previous quarter, central and western markets saw a good improvement followed by north and south, which were lower than Q4. The exit prices, as I mentioned earlier, were higher. East was muted or remained flat.
Full benefit of June price hikes should reflect in the current quarter, since the exit June prices were higher than the average. The next area which I would want to touch upon is our costs. Our costs have increased about 3% quarter-on-quarter. pet coke, coal, diesel have not shown any signs of slowing down in terms of cost. rupee depreciation is also impacting the import bill. Another dimension to watch now is the interest cost, which seems to be inching up. This could be a dampener on new capital spending, new expansions that seem to be mushrooming. The plight seem to be mushrooming as of now in the country. We are focusing on reducing the impact of increase in purchase price with efficiency improvement. During this quarter, the purchase price impact was about 13% and efficiency gain was about 2% in our direct manufacturing cost.
Mind you, this improvement of 2% is a sustainable long-term permanent reduction in cost. I believe the purchase price impact price today it is high. In the long term, it is not sustainable, and there will be a tipping point when costs start coming down. With the current cost of pet coke at some of our locations, coal is becoming economical. Our total usage of coal, both in kiln and power plants put together, has increased to 16% in this quarter as compared to 11% in the same period last year. Amidst the adverse cost scenario, there is one good news for the sector. In the last few days, the government announced the new norms for axle load for trucks, increasing it by 20%-25%. This will surely benefit the logistics costs. There was some confusion that the axle load is allowed only for new trucks.
However, a clarification has been issued that the older trucks will be eligible for the improvement in axle loads. We will see how the benefit starts impacting the P&L in the future quarters. Another element wise, the focus is always on operating margins. We run a large treasury and the treasury income forms part of our overall EBITDA. This quarter, since the yield curve has gone up, it resulted into an M2M dip in our treasury income because of which the overall EBITDA would also look slightly down. Let me now share with you an update on our sustainability agenda. Five new projects are under commissioning for WHRS, which will take our WHRS capacity to 121 MW, meeting about 15% of our total power requirement. We expect them to be completed by-
By 20.
Somewhere in the financial year 2020. We have increased the consumption of alternate fuel to about 4% of our total fuel and are working on further increasing it. We are now certified as 2.18 times water positive by a global quality assurance and risk management company, DNV GL. I wouldn't know the full name, so don't ask me about it. Let me touch upon the acquired assets. It's almost a year has gone by. I think 12 months of operations now. We completed the acquisition on 29th of June 2017. Our focus has been on cost optimizations this quarter, and we should be able to achieve the optimal level of cost from all the acquired plants post-monsoons. A couple of plants are under shutdown right now, after which we believe that costs will be at par with our existing plants.
Excepting, of course, the structural costs, which are the MMDR royalty and logistics cost because some of the plants are landlocked or far in locations. Total variable cost difference today is around 160 per metric ton between the two sets of plants and the acquired plants and our existing plants. Out of which there is scope to achieve efficiency improvements to the extent of INR 50 per ton, which is remaining now, and 110 will be the structural difference. We are confident to complete our improvement plans by December 2018. These assets were operating at a very low level of capacity utilization when we acquired them at somewhere around 18%. We completed the acquisition at the start of monsoon months last year, also sand mining bans were hitting the country at that point in time.
This led to a forced suppression of demand. Our focus has been to increase our capacity utilization of the acquired assets without compromising on prices. We have successfully increased the capacity utilization across the network, and the plants are now stable at around 70%-75% capacity utilization. A lot has been said, and I've read about increasing supply. We expect the supply to moderate around 3% to 4% every year, whilst the demand growth will be around 8% to 10%. Faster pace of demand growth than supply would result in narrowing of demand-supply gap and gradual increase in capacity utilization. Historically, if you scan decades of history of cement industry in the country, every time when the cement demand has started booming, supply has also increased. This is nothing new.
This time around, what we are looking at as the gap between demand and supply, demand will certainly be far higher than the supply. The moderation in supply will be primarily be driven by continuing cost pressures for key input items such as coal, pet coke, and oil, as well as costly mines in the long run. Also, the rising interest rates will increase the overall financing cost for new capital outlay. On our own home front, we have already completed our three and a half million tonne of greenfield capacity at Dhar in southwest M.P. The Bara grinding unit of 4 million tonnes is under execution. Work has picked up pace, and we expect the plant to be commissioned by Q4 this financial year. CapEx spends during the quarter were about INR 330 crores, and balance to be spent for the year is roughly around INR 1,800 crores.
We had also announced the merger of cement business of Century Textiles with UltraTech. We expect the transaction to be completed by Q4 FY 2019, after all the regulatory formalities. CCI application has already been filed. It is under review, we expect CCI clearance by middle of August. Thereafter, the legal formalities of court-convened shareholder creditors meetings, filing with ROC, et cetera, and in between there are court holidays because of which the transaction will see a closure only by Q4 of FY 2019. White cement-based new Putty capacity expansion of 0.4 MTPA is also on track. This is expected to commission by FY 2020. Let me talk about our own cash flows, since it's a high-focus area right now. Net working capital has increased by about INR 568 crore, essentially with the buildup of raw materials and fuel inventory. This is typical for pre-monsoon period.
During this quarter, our net debt has reduced by about INR 208 crore and now stands at INR 11,799 crore on the Indian balance sheet. Net debt to EBITDA is around 1.75x, and the ROCE has marginally inched up to 10.4% on the basis of Q1 annualized. That is all that I have to say. In the end, I have heard a lot about anxieties about the cement sector, saying that demand is rising, prices are not rising, et cetera. I believe that the fruits of patience are always sweeter. There are no secrets to success, it is the result of preparation and hard work, which UltraTech is well known for. Thank you so much.
Thank you very much. Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star 1 on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star 2. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. First question is on the line of Gunjan Prithyani from JPMorgan. Please go ahead.
Hi, sir. Thanks for taking my question. Just one quick clarification. Firstly, you mentioned the difference between the cost of the JPA and the ex-JPA assets at about INR 160, right?
Yes.
The difference is all cost, or this INR 110 of MMDR is included in this?
Yeah, INR 160 includes INR 110 of MMDR and extra logistics.
Okay. The incremental cost saving or cost reduction would be about INR 50.
INR 50, yes.
-over the next two quarters?
Yes.
Okay. Just to get clarity on this roadmap to PBT breakeven. Now, we are already at about cash breakeven in this quarter, right?
Yes, please.
From here, of course, the cost reduction of 50 will come through in next two quarters.
Yes.
I think from a perspective of reaching PBT breakeven, there will be more needed in terms of EBITDA per ton increment.
Absolutely.
Is this banking on the debt paydown or the roadmap is contingent on pricing improvement? Just want to get clarity there.
It's a mix of both, Gunjan. There is a continuous focus on debt repayment. Last year, we had reduced INR 1,600 crore. This year, first quarter, INR 200 crore already down. However, today when we are at about 77% capacity utilization, this capacity utilization will go up. One of the plants is under a long shutdown for environmental improvements. ESP is being converted to baghouse. That's category requirement. Once all the plants are fully up, the capacity utilization will also go up. With this increasing demand, the buoyancy in demand, I believe the prices are bound to rise further, helping us improve EBITDA. Second thing also which will help UltraTech improve its EBITDA for the acquired assets is fast change in the ratio of trade, non-trade sales and blended sales improvement.
That should also yield some realization improvement.
Yes, absolutely. There will be a mix of that. It's not just realization by itself.
Okay. Would you be okay to comment on what will be the EBITDA per ton difference? Because, of course, we can work out the calculations given certain cash breakeven. Any sense you can give us what will be the.
Difficult to say that, Gunjan.
Okay. Secondly, on these results, the fiscal incentives seem to be higher. Any specific reason why there is more accrual in this quarter, and how should we look at the remainder of the year?
One is, it's directly linked to volumes and prices in the markets where the plants have fiscal incentives. This will go up further when there's one plant where incentives are due. I believe that should get cleared next quarter. Should be, yes. We would expect clearance on another set of incentives.
Already provided for.
Sorry, it's already provided for. Sorry. This is all due to volume and realization mix as of now.
This should stay as a run rate for the rest of the year. This has risen pretty sharply versus what we were reporting until even Q4 of last year.
We'll wait and watch. It's a mix. Suppose the volumes go up in western markets on an average, then the incentive mix will not be visible as much.
Sure. Just one last question, I'll join back the queue. On the lead distance, you mentioned there's been improvement sequentially. Anything you can comment on versus last year? Because last year 1Q, we didn't have JPA with us. What is the lead distance now?
Gunjan, it's not sequentially, it's year on year.
Okay. What is the lead distance now?
About 240. How much?
427.
What am I saying? 427 or 429 km.
Okay, got it. I'll join back the queue.
It was 450, one year ago. Now it's about 427.
Okay, got it. I'll join back the queue. Thank you so much.
Thanks.
Thank you. The next question is from the line of Indrajit Agarwal from Goldman Sachs. Please go ahead.
Thank you for the opportunity, sir. Sir, two questions. First, on pet coke prices, can you give us some idea as to what was the average rate for the quarter?
$110
[inaudible]
INR 114 was the average for this quarter, and current trading is happening at around INR 119.
All right. That is helpful, sir. Second thing on any update on your aspirations in the northeastern market, anything that you can share at this point?
No. When I have an update, I'll come back officially.
Sure. Thank you. That's all from my side.
Thanks, [inaudible].
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Hi, sir. Morning.
Morning.
One again on other expenses. Compared to December quarter versus March quarter, we always seen that the other expense declined. If I even compare to December quarter, given the volume increase that we've seen versus December, our other expenses were absolutely lower than the December quarter.
This is all linked to maintenance costs which would surface. There's no fixed pattern on maintenance costs.
You commented that in December quarter, there was INR 30 crore JPA related shutdown costs. Even if I adjust for that, despite a 10% increase in volume versus December quarter, absolute other expenses were lower than that.
Ashish, you have anything to say?
Other than maintenance, there is some slight difference in advertisement costs. It really depends.
My colleague here tells me there will be some element of advertisement costs in this quarter or maybe even last quarter.
That would.
Nothing unusual here.
That gap will be only INR 10 crore-INR 15 crore, right? That's it, right?
Yeah.
There's nothing unusual?
There's nothing unusual. I don't remember anything unusual. Yeah.
Second thing you mentioned, the exit prices are higher. Just one question that, if it takes those prices to sustain at the higher cost of pet coke and freight, your contribution, excluding the fixed cost, you will still be maintaining the contribution today, what you had in the June quarter?
Let me give you an analogy on this. The average prices went up about 1%-2%, and variable costs have gone up about 13%.
Understood.
EBITDA per ton has improved quarter-on-quarter.
Quarter-on-quarter cost.
Sorry. I can correct it, Anubhav. Quarter-on-quarter, the costs have gone up about 3%-4%, and prices have gone up 1%. Prices have risen only in the month of June. If we are able to sustain these prices in the entire quarter, then obviously, we should be able to do a good EBITDA. However, April, June, July, September quarter is a maintenance period. Maximum amount of maintenance work is undertaken during the monsoon period. As you mentioned on contribution, yes, contribution levels will be maintained.
You will be able.
Yeah. I don't foresee a challenge over there.
Okay. Sir, the last question on the freight benefit you mentioned on the truck load bearing capacity being increased. Any initial assessment, let's say?
We are doing it at the moment, Anubhav. Earlier, when the first circular was out, it was not really focused because it was about new trucks. Now, the subsequent amendment talks about old trucks also, there are various categorizations, 20 tonner, 38 tonner, and 35 tonner, that's already published. We are analyzing the fleet and how fast we can get the benefit of that.
Just a rough idea in the sense that the benefit can be low single-digit in terms of reduction in freight cost or can it be higher than mid-single-digit?
I'll keep my fingers crossed. I'll take a target of low single-digits only, but if higher is available, good for us. I don't have any computation, hence I'm not able to comment on it right now.
Okay, sure. Thank you, sir. This helps me.
All right.
Thank you. The next question is on the line of Raashi Chopra from Citigroup. Please go ahead.
My questions have been answered. Thank you.
Thank you. The next question is on the line of Murtuza Arsiwalla from Kotak Securities. Please go ahead.
Hi, sir. Just wanted to check. The Dhar capacity has been ramped up fairly aggressively compared to what you've traditionally known, a more slower ramp-up. Is it a reflection of the underlying demand growth or UltraTech continues to sort of sell ahead of peers and gain market share like we saw with the Jaiprakash acquisition where you've grown much faster than the industry? Is the ramp-up still reflective of?
Why can't you compliment us for doing something good?
Sir, I'm just trying to get a clarification whether it's a good work that you're doing versus peers or industry volumes have also improved.
Sir, I think Dhar is a shining example of UltraTech's capability, the technical team's capability. First and foremost, the execution of the project from the groundbreaking to commissioning of the first line in a record 354 days, cost being controlled, and the ramp-up. Of course, ramp-up, we wanted to do a ramp-up earlier also, and the demand has also supported.
All right. Thank you so much, sir.
All right.
Thank you. The next question is from the line of Amit Morarka from Deutsche Bank. Please go ahead.
Yeah. Hi. Good morning.
Morning.
Just first two data questions. What was your white cement Putty volume and revenue in Q1 RMC as well?
3 lakh tons of white cement. Putty is included, yeah. Sorry.
4.5. RMC will be 400.
White cement revenues is about INR 400 crore. RMC volumes is about-
509.
Revenue is INR 507 crore.
Okay, great. Just then a question related to the annual report actually from me. Just noticed the production mentioned was 57.23 here, but the sales and domestic sales have been 59.3. There's a 2 million ton additional sale versus cement production. This is I'm talking about. I guess this is what the tolling arrangements have increased.
Yeah, there are lots of tolling arrangements which we keep trying, short-term versus long-term. If there are opportunities available, we do that.
Okay. It's not that the clinker sales has increased, right?
No. Nobody will sell that much of clinker.
Right. Okay. Just some clarification on the regulatory issues. I believe there is a Supreme Court hearing wherein the oil ministry has kind of supported the pet coke import ban. I think the environment ministry has to respond. What is your sense on that as far-
No. As far as I understand, the Supreme Court judge asked, or has asked the petroleum ministry to file their report. Since they have delayed, a ₹25,000 fine has been imposed on the ministry. However, the ministry have maintained, and I've seen this order also, I'm sure you have also seen the order and heard the Supreme Court ruling or the Supreme Court arguments that both cement and steel are allowed to use pet coke. The import ban is not being discussed as of now. It's more about what the Supreme Court judge was talking about, the pollution and the related issues with pet coke. Import ban is not there on the anvil.
Okay.
We are pretty confident. It beats all logic. When India is deficit in pet coke, then why would you ban imports?
Right. The other worry also I think is that the Reliance pet coke gasifier is almost complete now. The domestic availability of pet coke could also probably reduce.
Yeah, that's true.
Right. Any update on the Rajasthan sand mining issue? I believe there's a court hearing pending on that as well.
Rajasthan, I believe, is the only state where there are still some issues left to be sorted out. By and large, it is not impacting the construction activity because sand import from neighboring states is happening at the moment in the State of Rajasthan.
Okay. Lastly, can I just get the fuel mix and OPC, PPC, PSC mix as of now?
I had mentioned it. OPC is about blended at 67%. What else did you ask?
Pet coke.
Pet coke is about 75%.
Oh, 75% of the kiln.
For kiln.
Okay. Balance 25% would be what, broadly, coal then? 4% is AF.
Coal is about 20%, and alternate fuel is about 4%.
4%, yeah. Okay, great. Thanks. That's all from my side, yeah.
Thank you. The next question is on the line of Suraj Yadav from CLSA. Please go ahead.
Hello. Good morning, Atul sir.
Yes, Suraj.
This is Vivek. My first question is again on freight. One, while you said about the calculation that you will have to do, but just conceptually, this will only benefit your output or there can be some benefit on the input side also. As in when you fetch raw materials or when you fetch chips and fly ash or coal.
Yeah. Both sides.
Both sides. Sir, I thought input will be more volume dependent and therefore, there is a limited potential to increase the tonnage over there.
No. There are open trucks also which are used for exports. Earlier, before this relaxation, the government had put penalties on the buyer if the trucks were loading extra. A local miner would tend to load extra, but the buyer was handicapped. There was a lot of restriction on inbound logistics as well. This will get eliminated to the extent of whatever is the allowance.
Okay, the benefit will be on both the sides, input as well as on the output.
Yes.
Okay. Second is on the cement pricing, where the exit prices are compared to where the, let's say, spot costs are. Is it still pushing up margins, or you are just maintaining what the levels were?
Pushing up margins. As I mentioned, if you were to exclude the July-September quarter, because July-September quarter will be heavier on costs. Everything else remaining the same, October-December, if you were to observe, it will push up margins.
Okay. Obviously, I don't have the detailed numbers for, let's say, different revenue line items. If I just purely remove operating income and look at grey cement realization, it doesn't look like on a sequential basis there is hardly any increase. Is that correct or no?
Sequentially, about 1%-2%.
No, sir. If I remove operating other income, which has fiscal incentives and a lumpy one, actually, there is no increase in sequential realization. Is that not correct?
Sorry.
I'm saying if I remove the fiscal incentives or let's say, operating other income.
Fiscal incentive is not part of my billing.
Okay.
If I look at my average billing, my average billing is higher.
Okay. For the quarter you're saying?
For the quarter, about 2%. QoQ is what I'm talking, but of course, not YOY.
Sure. You are saying underlying grey cement realization are higher on a sequential basis.
More important, I'm sure you guys can do your math. The price hikes were taken during June and multiple points in time in June. You don't have full month effect of June, and this is, as I'm repeatedly saying, the exit prices are higher.
By how much?
Good question.
Could you quantify on a serious note?
Obviously, I will not want to tell you. That's why I don't want to quantify.
Okay. Lastly, your outlook says with the cement industry now in its upcycle, demand is expected to be healthy. Your demand is looking like to be more of an outcome because cement is in an upcycle. What do you mean by that exactly? When your volumes are rising, let's say 33%, there is hardly any change in EBITDA. Upcycles are not characterized by that. How would you respond to that?
I wish I were Shakespeare to capture words properly. The point that I'm trying to make is, cement as an industry will see very high volume growth. Long story short. Second one, again, from our perspective, I don't know about other players in the country. From our perspective, our focus was to ramp up the capacities of the acquired assets, which we have been successful. Wherever we found opportunities to increase prices, we have taken price hikes.
Okay. Upcycle, obviously, should also mean better margins, right? Is that how one should look at it?
Yes.
This quarter, you say it's a start of an upcycle, but numbers are not showing that, is what I'm trying to say.
I know. What is happening is this time around, the costs are also ramping up very fast. Whether it is pet coke, I don't have to repeat that point, but all these elements which contribute about 65% of our costs are going up continuously. The low on pet coke, if you will recall, was January-March 2016, about $41-$45. Today, it is hovering around $119. Okay. Coal is at $101-$102, anywhere around $105 actually. Diesel prices. Crude is stable at $75. Rupee is depreciating. This is causing a far higher impact on costs. Small hikes in prices are enough to take care of these costs, which has been again visible in this quarter.
If you see that the marginal hike in prices, let's say 1%-2% in this quarter, and the total cost increase of about 3%-4% over the previous quarter, has helped improve the EBITDA per ton marginally over the previous quarter. Our forecast is, and if you look at any, what is Argus?
Pet coke.
There's an agency called Argus who publishes data on coal and pet coke. If you look 2 years long, the prices are being forecast in a downward trajectory. All right. Costs will come down. It cannot go unabated the way the costs are going up on pet coke and coal. There are global phenomena. There's an Aramco IPO, if you were to ask me. That also links to crude prices.
There are several other phenomena which we can discuss offline.
Sure
which are keeping the prices at these levels.
Okay. My point is, wherever the costs are in an upcycle means that you should be able to pass on all the impact and should still grow the margins, right?
Absolutely. It will happen.
Okay. On that positive note, wish you all the very best, sir.
Thank you so much.
Thank you.
The next question is on the line of Navin Sahadeo from Edelweiss. Please go ahead. Hello.
Hi, Navin.
Hi, sir.
Can you speak loudly, please?
Is it better now?
Yeah, this is better.
Perfect. My question was now from a market share perspective, having acquired JP Assets, Century's also on its way, and hopefully even Binani. From an overall market share perspective, from here on, how do we see expansions? In the sense that, do we look at maintaining market share, expansions for UltraTech to maintain market share? Or there is scope, and, of course, the company aspires to increase it further.
Today our capacity is 88.5 plus 4 million tons of Bara, which will take it to 92.5, plus roughly
Okay
14, I'm rounding it off, 106.5. That divided by about 460 million tons gives us about 23% capacity share.
Right.
UltraTech believes in profitable growth. There is no end to profitable growth. We will want to increase our market share and profitability alike.
Fair. In the sense that because a lot has been talked about expansion, as you've mentioned in your initial comments.
Yeah.
Try to understand that our expansion, including that of Pali, that can be followed with expansions which are targeted at growth higher than the industry to further increase market share, or?
Yes.
Okay. Fair. My question was again on the JP Assets. Are these assets having waste heat recovery plants?
Yes.
Sorry?
No, not yet. We will take them up now. Currently, we have five plants under execution. As I've mentioned, we will take up the waste heat recovery plants in the acquired assets also in due course.
The 62 which is planned, new waste heat recovery of 62 megawatt which is planned, that is at JPA?
No, existing plants. It is at Kotputli which is in Rajasthan, Dhar itself. There is Hirmi.
Hirmi.
Hirmi, which is in Chhattisgarh, Gujarat plant, and one plant in Andhra.
There is scope to be saying put it for JP Associates acquired assets also, right?
Definitely.
With the payback-
Older the plant, more the opportunity for WHRS.
My question then, sir, is that if the payback period, typically, as we understand for waste heat recovery projects is being very high, what is it stopping us to have these waste heat plants at JP Associates in-
Very simple. I have two arms and two legs. Management where? Management is required. We will take it up. Whether I put it up over there or put it up in our existing plants, there is bound to be efficiency gain and improvement. Return on investments will be there.
No, sir. I was only saying since the cost difference is that INR 50, which you said can be bridged.
Yeah.
There is some element of structurality of INR 110 odd. I am saying waste heat recovery could get us another INR 20, 30 there, I think.
We will take it up. Since these projects were already planned and conceived, the work has already commenced on them. The team is, I believe, working on the plant. Assessment is happening right now. My colleague from the JP acquired assets tells me. The assessment is happening, and it will be put up to the board for approval.
Okay. Okay, one last thing. Pali, what is the timeline? Have we ordered equipment for this unit? Pali expansion, I'm saying.
Not yet ordered. We will start the commissioning in June 2020. That's what the target is.
Okay. Thank you. That's it from my side.
All right.
Thank you. The next question is from the line of Sanjay Patel from Reliance Mutual Fund. Please go ahead.
Hello? He's not there.
As there's no response from the line, we move to the next question. That is from the line of Rajesh Lachhani from HSBC. Please go ahead.
Yeah. Hi, sir. Thanks for the opportunity. Two questions. Can you just give me what is the demand growth in each of the regions, and what was our utilizations in these regions?
Our utilization North would be somewhere around 80%, Central about 70%, East 95%, West about somewhere around 75%, South somewhere around 60%.
Okay. Sir, demand growth in these regions would be?
Demand growth, how do I estimate that?
Yeah.
It's very difficult for me to comment on demand growth on an individual region, Rajesh.
Okay, sir. Not a problem.
Yeah.
Thank you. The next question is from the line of Kamlesh Jain from Prabhudas Lilladher . Please go ahead.
Yeah. Thanks for the opportunity, sir. With regard to this Pali expansion or the greenfield plant, somehow the feeling which we are getting that it has been postponed. Earlier we were talking March 2020. Now even the equipments have been not supplied. What's the actual thought process on the plant in terms of adding capacity in the southern Rajasthan? Is it a thought that we would first want to complete this Binani, and then we will give a thought to that?
No, there's nothing like that. North market is so buoyant that we have to do our Pali project. We are running almost fully sold out. Binani, if it were to happen, it will help us meet the growing demand of Rajasthan and the northern markets. Both. I think we are committed to March or June 2020 deadline. That should not be a problem.
Sir, just one question on this incentives part. Let's say some of the incentives would be getting expired, like say for the HP plant. What should be the steady rate or per ton rate we should look into? Because in this quarter it has been as high as around INR 105 per ton.
Very difficult to compute that. As I was mentioning on the call earlier, it all depends upon the mix of sales volume from region to region and realizations that are happening in that. High prices and low volumes will still lead to lower incentives.
Sir, your break up among the incentives as well, it would be more contributed by your western region, like say, the Maharashtra plants or it's equally distributed among the regions?
It will be more or less equated because incentives are now on SGST for sales within that state. The rate of incentive is the same. Somewhere you might have one-off additional incentives like electricity duty, somewhere exemption is available and so on and so forth. The biggest standard incentive is an exemption on SGST for sales within the state. That ratio remains the same. It's only directly linked to the volumes there.
Mm-hmm. Sir, lastly, what's the guidance on the CapEx part in this year and next year?
This year we've already completed about INR 300 odd crores of CapEx in Q1, INR 1,800 crores more to go. Next year I would have about INR 2,000 crores as of now.
Okay. Great, sir. Thanks a lot, sir.
Thank you.
Thank you. The next question is on the line of Anshuman Atri from Premji Invest. Please go ahead.
Yes. Thank you for the opportunity.
Sir, can you speak up the phone, please?
Yes. I am saying thank you for the opportunity and good performance in a challenging time. My question is.
Thank you.
Yeah. My question is regarding the recent ministry talks on bringing the royalty payment under GST. Will this change the economics of the acquired plant and bring it at par with the existing one?
Why not? It will, no?
It's additional royalty.
No, no. Sorry, acquired plant, there is one more level of royalty which will continue. If this happens, then I think the margins and everything will stop coming to the offer and go and play golf. That's all. If it happens, it'll be wonderful for the industry.
Okay. Secondly is on the coal. For example, for the past one and a half years we have not seen any auction and all the captive producers would like to have, for example, UltraTech requires so much of coal. What do you think is, why are these coal auctions not happening?
I recently read a notification announcing the next set of coal auctions. We are examining if there's any mine of interest to us. We had one coal mine in auction in 2015 which we are working on commissioning, which should start production now somewhere in 2020 or 2021.
Okay, sir. Preference would be a linkage or a captive coal for UltraTech?
Sorry?
The preference for UltraTech, will it be a linkage or a captive coal mine?
Preference is linkage coal.
Okay. Got it, sir. Thank you.
Thank you.
Thank you. The next question is on the line of Anupam Goswami from Stewart & Mackertich . Please go ahead.
Hi. Good morning, sir. Just want to know one question, that what is your cost usage on pet coke and what is your cost usage on coal?
I'm sorry, what is the cost?
Cost per ton if you use on pet coke and what is your cost per ton on coal?
Just one second. On NCV basis, pet coke cost is about INR 1.30.
Coal is about INR 1.40, INR 1.45.
For one ton, right?
One kilo. One in NCV ton.
One Okay. Sir, if you are an actual investor in the beginning, if you could give the prices trend in the other regions of India, like how much it has risen or it has gone down from the previous year?
Just one second. Yeah. If I were to look at quarter-on-quarter-
the prices have better percentage movement. Central is about 4%-5%. West is again 4%-5%. East is flat. North is about percentage up and South is, I would call it a flat only.
Okay. Sir, on an overall basis in the longer term, where do you see a sustainable margin at? Because it has sharply fallen. Can we see anything improvement in the next two year maybe?
Yeah. Today we are at, let's say, 20% margin. Instead of talking about at the top or ton, I will switch gears to percentage. Today we are at 20%.
Yes, sir.
I think this is the lowest levels of margins. We should see-
Right
improvement in margins in the coming years.
Okay. That's all, sir. Thank you very much.
Thank you.
Thank you. The next question is on the line of Bhavin Chheda from Edelweiss Holdings. Please go ahead.
Yeah. Good morning, sir.
Morning.
Yeah. Sir, you indicated of good demand and actually we are seeing it across the region, but you also mentioned a good demand-supply equation. When we are reading reports or when we are hearing from companies, everyone is looking for expansion and even the ordering activity is picking up. What is your sense of supply side? Demand looks strong, but supply side, we are seeing reports of 25 million-27 million addition for next three years.
Yeah.
Versus less than 20 million tons for last three years. Can you throw some light here about your understanding of ordering activity?
Sir, it's slightly higher than that. Maybe close to 40 million tons over a period of three years. Which is around 10% growth in supply. The demand is expected to grow at about 8%-10%. I would be bullish on a double-digit mark, even if 8%-10%, average 9% growth, which is 27% growth in demand over the next three years. Current demand is roughly around 275 million or 290 million tons. 290 million tons, that is potentially set to grow by about 27%, which is roughly 78 million tons. The new capacity, this is announcements and board approvals and orders placed, anywhere between 40 million-45 million tons is the supply which will get commissioned during the next three years. To that extent, supply-demand gap will be shrinking.
You are indicating you expect 40 odd million tons over the next three years?
Yes.
Whereas the consensus is building upwards of 20 million per year. That's a number of 60 million.
No, that's totally wrong.
Okay. I think we have to do some more work on that.
Yes.
I think if your number is correct, then I agree with your assessment. Thanks a lot, sir.
Thank you.
Thank you. The next question is on the line of Madhav Mehta from Fidelity. Please go ahead.
Sir, just one question on the demand side. You're saying 8%-10%, and probably if you're bullish, it could be higher.
Yes.
In the history, if I look for the last so many years, now we are at a higher base, also of 300 million tons versus 300 in the last upcycle that we saw. What makes you bullish on getting that 10% number? On a 300 million tons base, and with urban housing, private CapEx not looking that great, how do we see that demand coming through? 10% seems very sharp.
Very sharp
It comes, what are the drivers? Infra is not a very big part of overall India demand, right?
Very good point, Madhav. My colleague just told me yesterday that FY 2012 or FY 2010.
Okay.
In the history of cement in India, FY 2010 was the highest demand growth in volume terms, about 12.1%. That's anecdotal. Why 10? Of course, I don't remember what was the base in FY 2010 and absolute growth number. You're absolutely right that today is the highest base of 290 million tonnes. Let's say 300 million tonnes also rounded off, and 10%, 30 million tonnes of demand. Where is this demand going to come from? All these infra projects that we're talking about, some of them I enumerated on the call as well. I'll build on examples. The bullet train project, it will consume additional 1-1.5 million tonnes of cement every year. There is a rehab project for the BDD Chawl in Mumbai. It's a INR 12,000 crore project. That's a massive cement guzzler. The highways.
Cement roads were not being done in the earlier build cycles. Cement roads are happening now. The metro project, where we are one of the biggest suppliers in Mumbai, the sales are going up currently somewhere around 15,000, 20,000 tonnes, will go up post monsoons to about 30,000 tonnes a month. 30,000 tonnes does not equate to a 30 million tonnes, I understand that. The point that I'm trying to make is all these projects, and these projects are on a time-bound execution plan. Government is levying heavy penalties on contractors for any delays. The Worli Sea Link project, which took seven years, eight years, I don't know how many years and how many extensions, those kind of delays will not be permitted now. This time around, the heavy-duty consumption of cement is what is going to drive demand.
The Purvanchal Expressway, which is one of the longest ones from Allahabad to Gorakhpur, one of the longest expressways that is being done. The Bharatmala project, encompassing all these concrete road projects, 84,000 kilometers of roads. The low-income housing project, which is now picking up pace. I again repeat that the affordable housing program has not yet kicked off in its super speed. I am in touch with some developers, the organized real estate is gathering steam now because of RERA. People have forgotten that RERA just came in May 2017, and only eight or ten states have adopted RERA till now. Once the entire country is on RERA, the organized real estate will start booming. We are seeing uptick in urban real estate already. Cities like Mumbai, Gurgaon, Pune, they are seeing the construction activity and demand for organized real estate coming back.
It's a matter of time when the tier 2 and tier 3 towns start picking up pace. I'll give you another example Gujarat as a state was not growing in demand for cement till about six months or nine months ago. The moment DFC has entered Gujarat, there is so much ancillary activity which has started picking up that we are seeing huge volumes of cement in Gujarat. State by state, there are different demand drivers which are generating volumes. Rural markets, we keep forgetting about the rural markets in the country. Rural markets are the largest markets in the country. First and foremost, there was this crop loan waivers. The MSP hike which has come in. Monsoon has been good consecutively for the three years in a running. The demand from rural markets has started picking up big time.
All this is leading to the 8%-10% growth. Last three quarters, we have seen 13%, 14% growth in cement industry. It is happening.
Just one quick follow-up to that. In terms of pricing being better, you mentioned that we'll also try to increase our retail institutional mix. Many of these will be institutional projects, right? Insta plus the low-income housing. Do you think that could not help margins a bit? Would you agree with that?
We have seen price hikes in our institutional clients, for our institutional clients also. Because there is only this much of cement that is available. While we talk about 72% capacity utilization, or 72% overall?
73.
73% overall capacity utilization in the country, there's a lot of dead capacity also in the country. There is bound to be price improvements from institutional customers also, which we are already seeing ourselves. More important than the price is the margin, because there's a lot of cost which is eliminated in institutional supply, so margins are fairly robust.
Right. Okay. Right. Thank you so much, sir.
Thank you. Ladies and gentlemen, due to time constraints, we'll take our last question. That is from the line of Ashish Jain from Morgan Stanley. Please go ahead.
Hi, sir. My question actually pertains to the last point you made. Today, what is the kind of EBITDA per ton differential you see in your institutional versus non-institutional business?
Difficult to go down to the EBITDA level. If our average EBITDA per ton is 929, give or take INR 20, INR 30 here or there, that's what I would estimate.
Okay. Fine. Sir, secondly, the spike in incentive income that we have seen this quarter, is it from a specific plant? If yes, can you just highlight which plant is it?
The new plant which started generating incentives was Dalla, part of the acquired assets. More important is the mix of sales and prices, which have helped improve the other incomes or incentives.
Okay. Sir, just as a side point, there has been a newspaper article, this pertains to Binani, that as per the terms of the bid that you have given, you are incurring INR 1.5 crores of interest costs on a per day basis. Is it possible for you to comment on that?
The matter is sub judice. It's in court, so I don't want to delve on that at the moment.
Okay. Thank you, sir. Thanks so much.
Thank you.
Thank you. Ladies and gentlemen, that was our last question. I now hand the conference over to Mr. Atul Daga for closing comments. Thank you, and over to you, sir.
Thank you, everybody, for participating in this call. Due to July-September quarter, let me warn you up front, don't have high expectations in terms of margins because it's a wet period. Volumes, I still hope the way the construction activity is going, volumes will sustain and prices will sustain. However, with higher maintenance costs during the quarter, you could see some kind of a depression in margins. Otherwise, this seems to be a beginning of a good year and a good period for cement. Thank you so much.
Thank you very much. Ladies and gentlemen, on behalf of UltraTech Cement, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Yeah.