"Our first priority is to remove inefficiencies" - Views on News from Equitymaster

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"Our first priority is to remove inefficiencies"

Mar 1, 2000

ACC no longer enjoys the reputation of being India's largest cement company. But that has not stopped it from making headlines, whether it be the Tata connection or the recent partnership with Gujarat Ambuja

equitymaster.com had an opportunity to meet up with the managing director of ACC - Mr. T M M Nambiar. His long innings at ACC spans 25 years during which he moved from the position of financial controller to occupying the seat of managing director in 1996.

In an interview to equitymaster.com (EQM) Mr. Nambiar, MD, ACC, found time to answer questions on a wide range of issues.

EQM: How do you view the budget from the macro perspective and particularly its impact on the cement sector?

Mr. Nambiar: I would go along with the sentiments coming in from various quarters that the FM has missed the bus. People expected a tough budget and would have accepted it, had he also created right kind of environment for growth, put the economy on the right track and controlled the deficit. Since there is nothing to suggest, I think he has missed the bus.

EQM: Do you see that he has missed the option to cut the government expenditure by imposing more taxes?

Mr. Nambiar: Well, you know fiscal deficit is one area of concern. I think he has missed on both counts. Talking about the revenue side the widening of the tax net, bringing in more people under the tax net and tax compliance are some of the issues that were absent. On the expenditure side there are also obvious lapses. For example the disinvestment target of Rs 100 bn is nothing compared to the kind of assets that are there.

EQM: Referring to the cement industry what were you expecting?

Mr. Nambiar: In cement we were worried a little that the government might introduce the ad valorem taxes and cement as an industry does not lend itself for ad valorem. If it had happened it would have caused unnecessary litigation and perhaps even affected the revenue collections because ad valorem in case of cement is severe. It would not have been desirable at all. It is wise that they have not included cement in this budget. As a result the industry is happy.

But in addition to this, we were also looking for some positive features as it was widely acknowledged that the construction industry is one which generates a lot of employment apart from the positive impact of generating demand for other industries such as cement and steel. There is nothing very significant in this budget in that area. Of course there has been some additional allocations for rural housing and some increase in tax concessions for housing loans, but there nothing very significant. The last budget did give a fillip to this and we saw a direct and immediate impact of that on the industry. We were expecting the government to continue with that, but it didn't happen. There would not have been a significant impact on revenues because of this but it would have had a positive impact that would have boosted the housing demand.

EQM: In all these years you have seen various themes in each and every budget. Is there a theme in this budget that you have been able to identity?

Mr. Nambiar: Well, theme in terms of intent yes. I think he has taken the right line in the run up to the budget but what followed later was disappointing. When it came to the actual rational deliverance it left a lot to be desired. That is the general view and I agree with that.

EQM: Your views on the uniform sales tax and its affect on the cement sector?

Mr. Nambiar: Intentions are noble. If it is implemented it will be certainly very helpful. There are two components of this. One is to avoid the unhealthy competition among states to woo investment. These incentives lead to lopsided developments in states as projects are set up on the basis on incentives and not economic considerations.

This is very positive strategy and if implemented I would welcome that, because we have seen a lot of industrial growth taking place, which on fundamentals is not justified but it is only justified because you are getting some sales tax benefits. The investor also sees that he is receiving funding from the state government and therefore feels that this is an investment with no risk at all, but it was not in the overall interest of the country. And for the cement industry it resulted in unnecessary oversupply situation, in a way much above the government intended. That is one aspect of it. So if its implemented I would personally welcome it even though some of the investments we have made were guided by those considerations. This is a welcome step if it is uniformly implemented.

The other thing is to have a simple uniform sales tax rate, which again if it happens is a very positive step. But in the name of simplification, what very often the government does is to introduce additional burden on the investors. If it happens that way then of course, it is not desirable.

And the second aspect wherever it has been implemented it has been on the higher side and again that is undesirable. The idea is noble but the concern lies in the implementation of the process to make taxes uniform across states.

EQM: Has the introduction of a three-tier excise structure affected cement companies in any way?

Mr. Nambiar: We are still working out the implications for the inputs that go into making cement. However, as cement companies are charged a specific rate of duty, we are unaffected by the rationalisation process.

EQM: Were you looking for a reduction in the import duty on coal?

Mr. Nambiar: The imports have provided an opportunity to procure coal at economical prices and also counter the domestic monopoly in the coal sector. In the absence of imports, all the inefficiencies of Coal India were being passed onto the cement sector. And anything else, which would give an impetus to competition we would welcome. We are using imported coal for our plants in the South and in Himachal Pradesh, as it is economical to do so. In fact as prices increase we would shift to using imported coal for more of our plants. The problems with domestic coal are many including leakage and shortage. Moreover, at times the coal supplied is a grade or two lower than actually paid for.

EQM: ACC is a conservative company while Gujarat Ambuja is a more aggressive new comer. What do you think brought about this get together between the two.

Mr. Nambiar: In a competitive environment it's important that you are aggressive, you remain competitive and in Ambuja we have a partner that is considered successful. It is for the good of the company. We certainly welcome that. In any case looking from the broader point of view the industry has been clamoring for consolidation. It is a step in the right direction. It does help in deriving the benefits of consolidation particularly in the areas of marketing where coordination can help both the companies. One can always learn from others in operational matters and one cannot ignore that Gujarat Ambuja is the most successful company in terms of financial performance.

EQM: What role do you foresee for MNCs in the Indian cement sector?

Mr. Nambiar: From a macro point of view we encourage foreign direct investment. In case of the cement sector, one looks at technical skills, marketing skills and operational improvement. What is the contribution MNCs can make that Indian companies are not doing. There may not be much of a case looking at it from that point of view because we are self sufficient in terms of machinery equipment for cement plants, we understand the domestic markets better and our operating ratios are comparable with the best.

EQM: What the foreigners have is a lot of cash while you have the skill sets in terms of operations and marketing and distribution?

Mr. Nambiar: No, even the cash is available. If you have a good project one can even raise money from the primary markets. Money is not a problem.

EQM: Maybe the multinationals will spur the much-needed consolidation in the cement sector?

Mr. Nambiar: As is generally the case, the MNCs do not want to run the risk of setting up green field plants. They prefer to acquire and in that sense it could spur consolidation in the sector. Take the case of Lafarge. There are conflicting reports that the company is looking at financing a large chunk of its investments plans by raising funds from the domestic markets. But one should also understand that cement is not like other high technology sectors like telecom where you need foreign know how. We do not need that in cement.

EQM: If you were given three wishes what would you ask for?

Mr. Nambiar: First one is poverty removal. Education will definitely help in that and change the face of India.

EQM: Where do you see ACC in five years from now in terms of size, market shares, production etc.

Mr. Nambiar: In ACC, because of its historical past, we have to first of all see that the inefficiencies that exist are removed in order to make it more competitive. That is our first priority. It might mean modernisation or increase in capacity. This will of course be achieved in the next couple of years.

Apart from that we are also looking at participating in the growth of the industry. So we are looking at growth rates that are in line with industry growth, along with the process of modernisation and increase in operational efficiencies. That's what we are doing. In the current year alone we have reduced our employee base by over 2,500 people. A lot needs to be done and it's a very difficult task. Running a modern cement plant is much easier in terms of operating aspects. Our problems are much more complex. These are our priorities and we would like to go on pursuing this.

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