Cement companies that have forayed into merchant power trading are expected to manage the cyclical downturn in the industry in a better way, say analysts. Industry experts too look at power trading as a profitable option.
“Shree Cement, JK Lakshmi Cement and Dalmia Cement—whoever has excess power, is trading it. However, Shree Cement will be doing it on a big scale. Cement is a cyclical industry, so it will help their (those companies trading in power) position now.
With the power segment, they will be able to manage their margins better than other companies which are not trading in power. They would at least be able to manage the cycle,” said Amit Srivastava, research analyst, Karvy Stock Broking Ltd.
Cement companies at present are enjoying higher sales and a rise in price due to the peak demand cycle. However, analysts believe this surge in demand to be a short-term phenomenon and expect a price correction by March-April 2010. In the long term, the cement industry is expected to face an overcapacity situation, thus affecting the demand-supply ratio and cement prices.
Speaking on the profitability of trading excess captive power, R Gurumoorthy, spokesperson for Dalmia Cement Ltd said, “We will continue to trade excess captive power. Any player in any sector, who has excess power, will continue to sell to the grid as India needs power. While power generation costs you only around Rs3-Rs3.50 per unit for thermal energy, you are allowed to sell it at Rs12 per unit in a state like Maharashtra during peak hours. Even if we sell it at around Rs6 to Rs7 per unit, you still make a huge amount of profit. One always has 5% of the captive power available for sale.”
Addressing the problem of coal linkage for power production, he added, “The issue as to whether there would be sufficient coal linkages available can be addressed by importing coal.”
Dalmia Cement Ltd has already been trading its excess captive power. The company has a total power production of around 160 megawatts (MW) for both its sugar and cement plants. The company is also planning a solar power project in Jodhpur as a pilot project. Power produced from this plant will be available both for captive use and sale.
As per an ICICIdirect research note, JK Lakshmi Cement Ltd is expanding its captive power capacity to 66MW by setting up a 12MW waste heat recovery plant (WHR) and 18MW thermal power plant at Sirohi in Rajasthan. If the company is able to operate its cement plant at 100% capacity utilisation, then there will be no surplus power in FY10 and FY11. The note stated an expected revenue of Rs146.10 crore in FY2012 from the sale of 24.4 crore units (24.4MW) on merchant basis. The meaningful profitability from sale of power will begin only from FY12 with the 12MW WHR and 18MW thermal power plants coming on stream.
For the WHR plant, variable cost will be Rs 0.3-0.4 per unit only and it will generate carbon credit income. With the power purchase agreement (PPA) kicking in and captive power plants coming on stream, the company will have surplus power capacity, which it intends to sell on merchant basis.
Recently, Shree Cement announced plans to set up a 300MW merchant power capacity at Beawar in Rajasthan. The power generated from this plant will be sold in the open market and not used for captive purposes.