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Cement: Size does matter

Feb 20, 2002

Consolidation in the cement industry has ensured that only the fittest survive. We analyzed three pure cement-producing companies to try and ascertain the characteristics that are required to survive and grow in this new environment of increased competition. The analysis is focused on ACC, GACL and Madras Cements.Madras Cements is one of the most efficient cement companies in India with operations concentrated mainly in the southern region. Its plants are most efficient in terms of energy consumption; also they use the latest technology available in cement production. The company is placed in a region where it is able to obtain higher realizations. The company has a strong brand called Ramco Cement, which has a major presence in Kerala and Tamil Nadu. Increased focus on blended cement and nearness to the markets ensures lower costs. The company commands one of the highest operating margins in the industry. Recently, the company has focused attention towards the ready mix concrete market where the demand is steadily increasing due to its preference in infrastructure projects. As part of the recent expansion drive the company has increased its cement capacity to 6.5 m tonnes.

Associated Cement Companies (ACC) is the largest cement manufacturer in the country with a capacity of over 16 m tonnes. The company has a major presence in the western and the northern regions. The company entered in to a strategic alliance with GACL two years ago where GACL acquired 14.4% stake in ACC. GACLs expertise in low cost production has greatly benefited ACC to control costs thereby increasing operating profits from 6% in FY00 to nearly 12% FY01. The company has considerable capacities for ready mix concrete. Also, the demand for the same has increased recently. The company is increasingly focusing attention on cost control initiatives in order to improve operating efficiencies.

Gujarat Ambuja Cements (GACL) is one of the largest producers of cement and the most efficient of all the cement producers in the country. It has the highest operating margin among all domestic cement manufacturers. GACL has the most efficient plants in the country, which employ the latest in cement manufacturing technology. It is one of the largest players in the western and the northern markets of the country. GACL has acquired a strategic stake in ACC; this has helped the company to obtain an entry in to the southern and the eastern markets where it had limited or no access.

FY01ACCGACLMadras Cement
Realization per tonne2,3812,3712,274
Cost per tonne (direct costs)2,0431,6121,619
Operating margins11.2%32.3%28.8%

ACC and GACL command better realizations due to their large presence in almost all parts of the country. In the case of ACC its exposure in the south and west, regions with high cement prices, has enabled it to obtain higher realizations. GACL has a market share of nearly 22% in Mumbai where the cement prices are the highest. Also, its cement brand commands a high premium compared to others. This has helped GACL to obtain better realizations.

GACL is the lowest cost producer of cement in the country followed by Madras Cements. Due to such low cost of production, both GACL and Madras Cements have been able to realize high operating margins. Both these companies employ the latest technology in manufacturing cement.

ACC has not been able to limit its operating expenses in the way the other competitors have done. This has lead to lower operating margins. This situation may be changing as the company has initiated cost control measures over the last two years, which have improved margins to 12.0% from about 6.5% in FY00.

FY01ACC GACLMadras Cement
EV/Tonne (US$)5811340
D/E ratio1.61.12.0

The Enterprise value per tonne is the highest for GACL, this indicates that the market seems to have accorded greater value to the company, as the management has made efficient use of its assets. The statement is vindicated by the high return on net fixed assets for the company. Even though the operating profits of Madras cements is very high, the enterprise value of the company is low. Madras Cement derives all its revenues from the southern markets. Consequently, the company is exposed to geographical business risks. Also the company has a high debt to equity ratio, which has further depressed valuations.

The low EV/tonne for ACC is due to the low efficiency of its assets, which may be due to the fact that most of its production capacity is based on older technology compared to the competitors. A low EV/tonne may also be due to a high debt to equity ratio, which may have depressed valuations for the stock.

FY-01ACCGACLMadras Cement
Effective interest9.9%8.6%8.3%
Interest cover2.03.22.5

ACC has the highest cost of debt among the three pure cement-manufacturing companies. This coupled with a low return on fixed assets and capital employed, highlights inefficient operation by the company. GACL is the best performer showing good returns on assets and capital employed. Nearly 51% of ACCs operating profits go towards interest repayments. This figure is one of the highest in the industry. This greatly reduces the profitability of ACC.

The analysis shows that the importance of efficiency cannot be stressed more. The larger reach of ACC and GACL in the market will help them to hedge against any adverse regional demand-supply conditions in the future. Madras Cements will have to expand capacities and look for new markets in order to survive in the face of increased competition in the Southern region.

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