Beneficial interest AvH: 19.9%
AvH Contact: John-Eric Bertrand
In 2016, India had the fastest growing economy in the world, stimulated by economic reforms, low commodity prices and stable inflation. Nevertheless, growth in the construction industry remained low as a result of delays in large infrastructure works and the challenges presented by the demonetization of the Indian banknotes which had a serious impact on demand at the end of the year.
Sagar Cements reported only a limited turnover increase in 2016, from 7,524 million INR in 2015 to 7,690 million INR in 2016. As the persistent over-capacity and low market demand were reflected in lower prices, the strong increase in volumes could not be translated into a similar turnover increase. The increase in sales volumes was made possible by a continuous increase in the capacity utilization of BMM. The acquisition in 2015 of BMM Cements, based in the south of Andhra Pradesh, with a capacity of 1 million tonnes and its own 25 MW thermal power plant, resulted in the expansion of Sagar’s production capacity to 3.75 million tonnes in 2015 and a significant optimization of the company’s transport costs. The BMM plant is situated on the southern edge of the historical markets of Sagar’s Matampally plant. Sagar increasingly supplied the southern markets of Karnataka and Tamil Nadu, which are characterized by a more favourable dynamic of demand and supply, from BMM. The BMM plant made a significant operational contribution to the group’s result in 2016.
At the same time, Sagar continued to diversify beyond its core markets Andhra Pradesh and Telangana by increasing sales on the eastern markets. In order to limit the logistical costs of supplying those markets and to optimize the capacity utilization of the furnace of the Matampally plant, Sagar Cements acquired a grinding unit with an annual capacity of 0.18 million tonnes of cement. This acquisition will enable Sagar to supply the east coast states of Andhra Pradesh and Odisha with slag cement (PSC) made from clinker from the Matampally plant. The company is currently expanding the capacity of the grinding unit to 0.3 million tonnes and intends to increase it to 1.5 million tonnes per year.
Sagar Cements increased its capital by 31 million euros in two phases at the end of 2016 and the beginning of 2017 to finance this expansion and to invest in its own 15 MW thermal power plant and a 6 MW heat recovery system in the cement plant in Matampally. This will further reduce its dependence on the national grid and optimize the cost of power generation. At year-end 2016, AvH subscribed to the first share issue on a 50/50 basis with the Reddy family, the developers of Sagar Cements. The second phase of the capital increase was reserved for qualified institutionals and was successfully closed in February 2017. As a result, AvH’s stake decreased slightly to 17.6%.
The states of Andhra Pradesh and Telangana are currently engaged in major infrastructure projects such as seaports, airports and industrial corridors. Further public spending on infrastructure and a long-expected recovery of rural demand are also expected to stimulate the demand for cement. Since no extra capacity is expected to be brought into operation in southern India until 2018, the utilization level in the region is expected to increase significantly.