Chettinad Cement is one of the best managed cement companies and can be called the Gujarat Ambuja of the south. As far as generating value for the shareholders goes, Chettinad's record is better than GACL. In the last four out of five years, the exception being 1996-97, its return on capital employed (RoCE) has been higher than its weighted average cost of capital (WACC). The main reason is that equity has not been diluted and the debt:equity ratio has consistently been 1.7 or higher. The sole exception was 1994-95, when D/E was low at 0.89:1. The reliance on debt was mainly to fund the modernisation programme. Working capital management has been excellent. Though free cash flow has been negative in the last three years, this is not a cause of concern as the investment was made in modernisation and this will ultimately result in lower cost and higher margins.Chettinad Cement switched over to dry process from wet way back in 1988-89. Its modernisation and cost cutting (project cost:Rs 100 crore) projectconcentrated on reduction in per unit power consumption and lower fuel consumption. Its record in reducing power consumption has been reasonable. Post modernisation (from 1998-99), according to the management, power consumption will be 90-92 units. To achieve this, existing five old cement mills (where grinding is done) have been replaced by single vertical roller mill. This itself will reduce power consumption by 8-10 units. For increasing clinker production, existing grate cooler has been modified by introducing continuous flow gate system. This will not only result in higher clinker production but also 30-35 Kcal/kg lower fuel consumption per Kg of clinker produced.
The product mix is also shifting in favour of Pozzolana Portland Cement (which is a better product) from Ordinary portland cement (OPC). OPC accounted for 24 per cent of the production in 1995-96 and 15 per cent in 1996-97. The location of plant (0.6 mtpa) is another advantage. The plant is located on the TN-Kerala border and the entireproduction is sold within 50 kms radius resulting in one of the lowest freight costs of Rs 54/tonne.
Its limestone reserves are expected to last for another 30 years. The operating profit margin is already plus 3 per cent and the cost reduction will ensure that in 1998-99, despite lower cement realisations, the margins will remain in line with 30.7 percent enjoyed in the first-half of 1997-98.
For all its advantages, the first half 1997-98 results were poor. Clinker sales accounted for almost 15 per cent of sales (0.52 lakh tonne). In 1997-98, clinker sale is expected to be at least 1 lakh tonne. For the full year, cement despatches are expected to be 8.5 lakh tonne. But while Chettinad Cement has all these excellent qualities, it also has a few current weaknesses. The shipping division of the company will be a liability. Volume growth cannot be expected as due to understated installed capacity, the utilisation has been consistently above 130 per cent (in first five months of current year utilisationwas 144 per cent). To overcome this problem, capacity is being doubled (45 kms away from the existing site) at the cost of Rs 280-Rs 300 crore. The land has already been acquired. Equity dilution is imminent. With the GACL jetty coming up at Kochi, the status of Kerala as a cement haven is about to end and prices will find more realistic levels. The capital cost of almost Rs 5000/tonne will prove to be a burden.
The expected negative cash flows are already reflected in price (Rs 76.4). Post-equity dilution and with resultant lower scrip price, the company can certainly be considered as a takeover target. Equity dilution will also improve the liquidity which is low due to low capital of Rs 8.43 crore. Promoters hold 38 per cent of total equity. Due to the current low price, the prospective price-earnings ratio will not be higher than 4. If Raasi attracts buyer at Rs 300/share and Saurashtra Cement at Rs 75/share, Chettinad in the range of Rs 60 will be an excellent takeover target. All the more so, if itcan be used as a unit to serve the Kerala market. The acquirer can also scrap the expansion programme as he will be practically getting a one million tonne modern unit.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
