Organic growth is much cheaper than acquisitions: Hari Mohan Bangur

Kolkata: It has its share of small acquisitions, but one of India’s most respected cement companies, Shree Cement Ltd, has decided that the next phase of its growth—it plans to increase capacity from 27 million tonnes (mt) to 40 mt in five years—will be driven organically. New plants will be funded from accruals, Shree Cement managing director Hari Mohan Bangur said in an interview. It is much cheaper to expand organically, he explained. “To pursue growth organically, you only need forward planning and patience,” he said. Edited excerpts:

Why only organic?

We want to grow at a constant pace, which we set for ourselves. Project execution is indeed time-consuming. So, you have to start to plan early. We typically plan for four-five years, and from our experience, we can say that projects can be executed within a year’s margin of budgeted time frame—sometimes you are ahead by a year, sometimes behind.

Organic growth is much cheaper than acquisitions. Because when you buy an existing plant, you pay for all uncertainties that you didn’t have to deal with. We have confidence in our ability to execute projects, so we do not want to pay for uncertainties.

Also, we have dealt with the same set of vendors for the past 15 years. As a result, all our plants have the same construct and our engineers do not have to deal with new machines and technology. We do not want to disrupt that by buying plants that we didn’t build ourselves.

But even with right planning, projects are sometimes hobbled by uncertainties beyond your control such as land acquisition...

Acquiring land is indeed difficult anywhere in India. To overcome the problem, you have to give the people selling their land a fair deal.

These days, people want to be sure that you are genuinely going to pursue the project for which you want them to sell their land. The biggest challenge is to convince people; this takes time. This is our experience everywhere.

It takes up to a year to build your goodwill and convince people about your plans. We do that by engaging with the local community through CSR (corporate social responsibility) activities.

It takes around three years to acquire the identified land and to obtain necessary clearances. Those who do not invest these three years have problems executing projects within the budgeted time frame.

In which regions are you looking to expand?

In the north, we are already No. 1 by market share. We should gain a meaningful share in every market where we sell. Lately, we have emerged as the highest selling brand in Bihar.

We are now looking to grow our business in West Bengal, Jharkhand and Odisha, where we intend to set up 2.5-3 mt grinding units. They are going to be of the same standard and design. We have already started to work on these projects—we have started to buy land for each—and they are expected to materialize in three-four years.

That apart, we are expanding the Chhattisgarh unit and building a new plant in Karnataka. In both these states, we have limestone reserves. The Chhattisgarh unit is expected to be commissioned by March 2018 and the one in Karnataka by December that year.

How are you going to fund the proposed capacity addition?

Our existing operations are generating enough cash (in excess of Rs1,000 crore a year) to support this expansion, which is estimated to cost around Rs8,000 crore in all. And as we scale up production, we are only going to generate more cash. We have a debt of around Rs1,200 crore invested in the business, and we have a cash reserve of Rs3,900 crore.

Your Rs10 shares are currently priced at around Rs15,000 each. Why not split your shares and make them more affordable to increase liquidity?

To my mind, subdivision will only encourage speculation. In our calculation, the current price is not coming in the way of fair price discovery, so there is no point in increasing liquidity.

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