Gujarat Ambuja Cements Limited (GACL) has the distinction of being the most efficient cement producer in the country. The strategic alliance with ACC has helped the company expand its reach to almost all parts of the country. With consistent improvements in operating margins year on year, the company has portrayed an image of a lean and mean organisation with a ‘cement only’ focus.
One of the most important strengths of the company is a very proactive management, which is quick to spot new opportunities and to capitalise on existing ones. With focus only on the cement business, the company has managed to gain expertise in all the related fields, from operating efficiencies to project implementation. Having said that it will be interesting to discuss the prospects of the company in the coming years.
It is important to analyse why GACL has been able to sustain such high levels of operating margins. Captive power production, coal imports, tax concessions and new technologies have enabled the company to function efficiently year after year. However, once the tax concessions go, it will be interesting to see how these high margins will be maintained. Another cause of concern for the company has been the fact that the landed cost of imported coal has already increased by 27% in FY01.
GACL is a major player in the northern and the western regions where the realisations are high. The issue now is whether the company will be able to sustain the premium it charges on its cement brand in the face of tough competition posed by the L&T-Grasim combine in these regions. Recently this region has witnessed the formation of a fragile cartel of ACC-GACL combine with L&T-Grasim combine. Current trends show that this cartel may breakdown as the individual players are sacrificing margins in order to increase market share.
The northern and the western regions have witnessed large capacity additions in the recent past. This indicates the thrust by the major players to increase market share in these regions. GACL’s recent capacity addition in Maharashtra shows that even GACL is wary of competitors in this region. Grasim by adding capacities in the Punjab is trying to dislodge GACL from the north. These recent capacities will add to the glut in cement supply in these regions, which will further put pressure on the cement prices. With realisations not seen improving, operating margins of GACL are likely to come under pressure.
There seems to be limited scope of increase in its profit margins in the short term. Also, though GACL’s exports are growing, weak international cement prices are likely to keep GACL’s pricing power under check.
However, Gujarat Ambuja may have a way out. It can focus on changing its product mix. Currently, the company focuses on production of Grade 53 and Grade 43 cement, which sell at a premium in the western markets. Higher margins may be realised by increasing the production of blended cement, as raw material costs are lower for this product. Blended cement is a substitute for regular cement. It sells at almost the same price and offers the same strength.
What Gujarat Ambuja does next in order to maintain operating margins and to expand market share in the present scenario will be a test of its experience and its strategic objectives for the future.
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