Beneficial interest AvH: 18.55%
AvH Contact: John-Eric Bertrand
2015 was characterized by a general improvement in the business climate in India. The government of Prime Minister Modi initiated reforms by liberalizing foreign investment, improving the competitiveness of the manufacturing industry, and reinitiating large infrastructure projects. Stable inflation figures and a sharp decrease in oil prices also stimulated the economy.
Although overcapacity in the southern region of India persisted, prices increased as a result of a gradual recovery of demand, a stable capacity level, and the prospect of new infrastructure investments in the new state capital, following the split of the Andhra Pradesh state. The diversification of Sagar Cements outside its core markets, Andhra Pradesh and Telangana, which were affected by an unfavourable dynamic of supply and demand, helped to improve margins. In 2011, those two states still accounted for around 70% of the turnover, compared to just around 40% in 2015. The profitability of Sagar Cements was positively influenced by substantially lower coal, electricity and freight costs following a sharp decrease in worldwide raw material prices.
The acquisition of BMM Cements, based in the south of Andhra Pradesh, with an annual capacity of 1 million tonnes of cement and its own 25 MW power plant, was finalized in August 2015. This acquisition expands the total annual production capacity of Sagar Cements to 3.75 million tonnes. Moreover, it puts Sagar closer to its markets, allowing it to reduce transport costs. In the fourth quarter of 2015, the government of Andhra Pradesh granted BMM Cements a lease for limestone mining. This should reduce raw material costs. In the past, Sagar sold cement from the BMM plant under its brand name ‘Sagar’, and sourced limestone from external suppliers.
Sagar not only reduced its transport distances by acquiring a second plant, it also invested in the construction of a railway line linking the production plant in Matampally to the nearby national railway. The line became operational in September 2015. The switch from transport by road to rail should reduce the costs of sales to other states as well as inbound transport costs for raw materials such as coal.
Sagar Cements realized a one-off high profit of 32.7 million euros in 2014 as a result of the capital gain on the sale of its 47% stake in the joint venture with Vicat (AVH share: 6 million euros).
The states of Andhra Pradesh and Telangana are currently engaged in major infrastructure projects such as seaports, airports and industrial corridors. Since no extra capacity is expected to be brought into operation in southern India until 2018, the utilization level for the region are expected to increase significantly from 55% today to more than 65% in 2018.