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ACC – Research meet extracts
Mar 18, 2005

Research meet with Mr. G. Sivakumar - ACC (Manager – Finance)
We recently met with ACC to get an insight into this country’s second largest cement producer and to understand the dynamics of the Indian cement industry and where are both of these headed. Following are the key excerpts from the same.

What is the company’s business?
ACC is the country’s oldest cement manufacturer, having a capacity of 17.6 MT (million tonnes) per annum, thereby accounting for nearly 12% of the total domestic capacity. With 14 units and a strong dealer network of over 9,000, the company has a strong presence across the country. However, the major markets that the company caters to are the northern and eastern segments. The company recently acquired a 75 MW power generation capacity at Wadi from Tata Power for a consideration of nearly Rs 2.4 bn.

Industry
FY05 review:  The industry has grown at about 7% in the first 11 months of the current fiscal and ACC has managed to grow at about 8% in the same period. While 1HFY05 was devoid of much activity, things have looked better in 2HFY05. Just to out things in perspective with respect to ACC, while 1HFY05 witnessed production and despatches growth of a little over 6% YoY, the same was over 10% in the five months in 2HFY05. Further, the numbers would have had been better for 2HFY05 (to date) had there been no aberration seen in the month of February 2005, where despatches were affected owing to contraction witnessed in construction activities in the northern markets.

Demand-supply:  The difference prior to 2002 and post the same has been the fact that there has been an improvement in the demand-supply situation, thanks to the lack of any significant capacity coming up in the industry owing to the withdrawal of the sales tax incentives.

It must be noted that the cement industry was enjoying sales tax incentives that worked out to almost Rs 300 per tonne for new cement capacities. This worked against the industry as players, both new and old, started to expand capacities without any respect to the demand-supply dynamics of the industry. This led to a massive build up of capacity in the sector, which as per estimates was in the region of about 40 MT between 1994 to 1999 or a 50% rise in capacity over 1994 industry capacity!

Going forward, with no significant greenfield capacities in sight over the next 2 to 3 years, the scenario is favorable. Though some brownfield capacity expansion is a reality (estimated to be around 5 to 6 MT), this is unlikely to spoil the demand-supply equation.

User industries:  As per the company, the housing sector continues to remain the biggest driver for the growth of the industry, which will help the sector to maintain its 8% CAGR growth witnessed in the last decade (1.2 times GDP growth rate). It must be noted that housing is the major consumer for the sector with almost 75%-80% share, the balance demand coming from government infrastructure and other corporate projects. The company believes that at the current rate of infrastructure spending, the industry could witness an incremental demand of only 2 to 3 MT per annum in the next two years and thus, this should not be read much into.

Cement prices:  The current capacity utilisation of the industry is well above 85% and is set to cross the 90% levels in the following fiscal. ACC is also operating at 90% capacity utilisation levels. This along with sustained strong demand and lack of capacity additions would aid the strength in cement prices for the next 2 to 3 years. However, on a regional basis, ACC believes that while cement prices in the eastern, northern and central markets could see some improvement (about 5% in FY06), the southern and western markets could at most manage to hold on to current price levels. The company also believes that exports of cement/clinker to the Middle East nations will act as a strong cushion to prices in the western market (Gujarat Ambuja and Ultra-Tech will be the key beneficiaries). Export realisations are to the tune of US$ 40 to 45 per ton.

ACC – Operations
Raw materials:  The company has access to good quality of limestone. Also, it has coalmines all over the country, which insulates it to some extent from strengthening coal prices.

Freight:  This cost component depends on various factors like the mode of transport, distance from the market, terms of sale and would vary from market to market. However, the company intends to improve its rail-road transport ratio from the current 60-40 to 50-50. This is because within a distance of 300 kms, road transport works out to be relatively cost effective.

Power:  Currently, the company meets almost 70% of its power requirements through its captive power plants (CPP). This is set to improve with another CPP being set up at Lakheri (Rajasthan), which is likely to be commissioned by September-October 2006. Further, a 15 MW CPP at Chaibasa would be commissioned early next fiscal. It must be noted that only its capacity at Gagal does not have a CPP.

Employees:  ACC currently employs close to 9,000 employees, which is considerably higher on the employees per ton basis compared to other cement majors (the company has attributed this to its presence in other businesses like refractories, own CPPs and relatively old plants). Overall, the company is now concentrating on improving its Total Delivered Cost (TDC) to a particular market by adopting measures like improved logistics, avoiding discounts, transportation by using larger vehicles, etc.

Capacity & Capex:  The company’s 1.3 MT is likely to be commissioned by April 2005. Further, the company would increase its capacity at Lakheri in Rajasthan from the current 0.6 MT to 1.5 MT, which would be supported by a 25 MW CPP. Post this, i.e. in FY07, ACC’s capacity would stand augmented to almost 20 MT and the company sees the same keeping pace with the industry growth going forward.

The capex for this and for other modification work with respect to its refractories is estimated to be about Rs 3 bn. The regular maintenance capex would be in the vicinity of about Rs 1 bn per annum. In the current year, the company has incurred a capital expenditure of nearly Rs 6 bn, which includes the purchase of the CPP from Tata Power. However, it has managed to meet much of the requirements from internal accruals as net borrowings have been about Rs 1 bn so far.

On Value Added Tax (VAT):  The company expects the benefits from VAT to arise in the southern region where sales tax is high in the region of about 16%-18% while the VAT rate, as determined by the empowered committee, has been fixed at 12.5%. It must be noted that the company has a 1 MT plant at Madukkarai (Tamil Nadu) and has a combined 4.6 MT of cement capacity at Wadi and New Wadi in Karnataka.

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