Apartment rates, not cement prices, unfair says India Cements MD N Srinivasan

When cement prices rose from Rs 300 per bag of 50 kg to 360 last month in Tamil Nadu, the builders began to whine. They said that the price increase when demand was poor, and the industry operating at around half the capacity, was unfair and manipulative. Some political leaders jumped into the issue and called for reduction in cement prices.

Reacting to these developments, N. Srinivasan, Vice Chairman and Managing Director, India Cements, said that the builders demand was unjustified and unwarranted. He said a half a bag of cement (or roughly 25 kg) is required for a square foot of construction. Even at current price of Rs 360 per bag, the total cost of cement in a square foot of construction is just Rs 180. The builders sell apartments at anywhere between Rs 2,500 and Rs 20,000 per square foot in Chennai.

"There is no reason for them to complain about cement prices. People must instead ask why builders are pricing the apartments high when compared to the actual cost of construction," he said.

On builders plan to buy and run cement capacities, he said that it was not the first time. Builders in the past had owned cement capacities. He wished them well. He was speaking to the media after releasing India Cement's first quarter results.

Srinivasan said that cement prices have historically been cyclical. When the prices are low, the builders take full advantage of it and start complaining when the prices get corrected. He also reminded that builders buy in bulk and do not pay market prices.

"Even today, they do not pay the retail price of Rs 360 per bag. They buy in bulk at Rs 310 per bag levels and still they complain," he added. He said that without a strong cement industry, the builders will have no cement to build anything.

"Cement industry is a capital intensive industry and we make money in a few years and lose money in some. The average return we get is marginal," he emphasised.

For the first quarter of 2013-14, the company, largest cement producer in south India, posted a Rs 2.95-crore loss as against Rs 25.73 crore profit in the first quarter of the previous fiscal (2012-13). The capacity utilisation during this period was 69 per cent. In 2013-14 the company had posted a loss of Rs 35.85 crore.

A study conducted by India Cements using publicly available data revealed that in 2009, cement prices were Rs 250 per bag in Chennai, and today it has risen to Rs 350 per bag. During the same period, the selling price per square feet of buildings has risen far more sharply.

In the Adyar area of Chennai, for instance, the selling price per square feet rose from Rs 7,500 to Rs 15,000. The average increase across Chennai was anywhere between Rs 3,200 and Rs 11,000. "Such a sharp increase in per square foot rate when construction costs have not risen much should be questioned and not the rise in cement prices," India Cements officials argue.

As regards demand, Srinivasan is optimistic. He says some of the steps taken by the Modi-led NDA government will fuel demand. He expected offtake to increase in the next six to nine months.