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Madras Cements Vs India Cements

Apr 2, 2007

In our previous articles, we had given a perspective on how leading cement manufacturers fare on the different cost heads. In continuation to that we are now analyzing two major southern players. In this article, we will analyse the cost efficiencies of Madras Cements and India Cements with regards to 3 major cost heads, raw materials, power and salaries and wages and their impact on margins.

Company profile:

India Cements: India Cements is a southern player with an installed capacity of about 9 MTPA. The company enjoys approximately 20% market share and is the largest producer of cement in the South and a leading exporter. The company has access to huge limestone resources and plans to expand capacity by de-bottlenecking and optimisation of existing plants as well as by acquisitions.

Madras Cements: Madras Cements is a major player in the blended cement category in south India, with a total installed capacity of 6 million tonnes per annum (MTPA). It accounts for 4% of the total cement capacity in the country. It was the first company in South India to convert all its capacity to the dry process of manufacturing cement (more cost efficient as compared to the wet process).

The three that matter: Proximity to markets and proximity to raw materials is equally important for cement manufacturers. In some cases, cement plants are located near markets as transporting it over large distances can prove to be uneconomical or at times, they are located near the limestone reserves (a major raw material for cement), as to manufacture 1 tonne of cement, almost 1.5 to 1.7 tonnes of limestone is required, depending upon quality. Cement grade limestone is located only in certain areas in the country, leading to establishment of cement plants in clusters.

Though both the companies are located in limestone rich region (south), cost per tonne basis have increased over the years as limestone raising costs have gone up in recent times due to inflationary pressures on commodities such as diesel, coal etc. Apart from increase in royalty on limestone, the cess on limestone has been increased from Rs 1/tonne to Rs 3/tonne, which resulted in increased cost pressure. In the case of India cements, raw material costs per tonne of production is on a lower side compared to Madras Cements on account of cheap access to huge limestone resources and continuous efforts to increase production of blended cement. Madras Cements on the other hand, has been severely affected on account of rising diesel prices that led to increase in limestone raising costs.

On the power costs front, Madras Cements fares well compared to India Cements as its manufacturing facilities operate on dry process (energy efficient process), leading to substantial cost savings. The company uses power generated by captive power plants and windmills. However, recently power costs have gone up on account of increase in furnace oil prices, making captive generator sets usage uneconomical. Cement, being a capital-intensive industry, economies of scale matters. With increased capacity utilisation levels, power costs have come down in FY06 compared to FY05.

India Cements uses imported coal as fuel for its cement plants, increasing its exposure to coal price volatility. The company currently uses around 65% to 70% imported coal and 30% of indigenous coal. This may further impact cost of production if prices of imported coal strengthen. As a cost reduction measure, company has been sourcing power from alternative sources like wind mill, Waste Heat recovery System and availing gas power. During FY06 the mentioned cost reduction initiatives along with increased capacity utilisation helped to reduce costs.

Particulars Madras Cements India Cements
  FY04 FY05 FY06 FY04 FY05 FY06
Raw material cost/ tonne (Rs) 286 309 323 238 267 261
Power cost/tonne (Rs) 479 559 539 658 790 665
Salaries & Wages cost/tonne (Rs) 100 106 98 156 144 112
EBITDA/tonne (Rs) 430 400 448 172 229 343
EBITDA margin (%) 23.4% 20.8% 21.0% 9.2% 10.9% 16.3%
Capacity Utilisation (%) 61.6% 63.5% 78.5% 70.3% 71.4% 94.4%

Employee expenditure is high in case of India Cements due to more number of employees as compared to Madras Cements. However, the company has been continually reducing its manpower through voluntary separation schemes. This is evident from the fact that in case of Madras Cements, the expenditure on employees increased at CAGR of 11.4% in last 3 years, while in case of India Cements, at 10.3% CAGR during the same period. Both the companies have benefited on account of higher capacity utilisation in FY06 compared to FY05.

Thus, it is clear that how cost efficiencies affect cement manufacturer’s operating margins. The above three are crucial cost heads for any cement manufacturer and hence assume great significance while analysing cement companies. Madras Cements enjoys higher EBITDA cost per tonne compared to India Cements on account of its consistent performance and ability to control costs. On the other hand, India Cements underwent a corporate debt-restructuring (CDR) programme in September 2002, on account of its inability to fulfill its financial obligations during the downturn in the South. The buoyancy in the industry in recent times however, has enabled the company to reduce costs, the effects of which are reflected in its expansion in margins.

The improved margins are not only on account of improved efficiency but also on account of favourable pricing scenario. In fact, improved realisations have been the major cause of increased profitability of the companies as demand growth outpaced supply growth. However, the companies’ efforts on cost reduction measurers should not be ignored.

Geographical diversification is a useful strategy for a commodity business like cement. However, the two players share a common risk in this regard as they both operate in the Southern region, which has suffered from supply overhang in the past. On account of this, all the players in the region fetched lower realisations as compared to other regions in the country. Hence, to choose between the two stocks, one must consider long-term sustainability of their margins and ability to maintain reasonable debt levels, even at the times of cyclical downturns. In case of a commodity player, control on costs along with scale of operation matters, as in the long run, these are the only means to survive and grow.

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