May 23, 2002|
Cement: Efficiency benefits
The cement industry in India is slowly moving towards consolidation. The major players in the country are in the process of forming alliances in order to corner maximum market shares. Large size and better operational efficiency have emerged as the key success factors in today’s highly competitive environment.
Consolidation has led to the formation of two large alliances in the country. A careful look at these two alliances points out that the companies in these alliances have the advantage of large capacities. Companies like Gujarat Ambuja (GACL), ACC, Grasim and L&T have large cement plants spread across the country due to which cement demand can be catered to across the country. Though large capacities help, operating efficiencies decide whether the business is viable in the long run.
Among the major cement manufacturers mentioned above GACL boasts of the highest operating margins (OPM) in the range of 30-33% followed by Madras Cement (nearly 31%). The turnaround in ACC has helped the company improve its OPM to 15% from a dismal 6% two years ago.
* Selling and Distribution
|Capacity (m tonnes)
|Number of employees/ m tonne
|employee costs/operating expenses (%)
|freight costs/operating expenses (%)
|S&D *costs/operating expenses (%)
|coal consumption (in Rs/t)
|electricity consumption (KWH/t)
ACC has the highest number of employees per tonne of production capacity, while GACL has the lowest. ACC has a surplus staff of nearly 2,000 employees; its employee rationalisation drive has led to paring down of staff by about 4,200 employees. The low employee numbers highlight that most of the GACL plants are modern and require less labour. Madras Cement also enjoys good plant efficiencies due to low average employee figures.
Due to low employee numbers GACL’s total expenditure on employees is low. This is not so in case of Madras Cement, thought the number of employees is low the expenditure on employees has increased considerably during FY01. Employee expenditure is high in case of ACC due high numbers. Freight costs constitute a major part of total operating expenses, as most of the cement is transported by road to different markets. The freight costs as a percentage of operating expenses are abnormally high in the case of GACL due to costs involved in exporting cement. Madras cement has its cement markets near to its production facilities hence freight costs are low. The large spread of ACC helps it to keep its freight costs low.
Selling and distribution (S&D) expenses as a percentage of operating expenses are very high in case of GACL and Madras Cement. In case of GACL this is due to high freight and advertising expenses. High sales taxes and advertising expenses have increased (S&D) expenses in case of Madras Cement. High advertising expenditure is not without its payback; GACL and Madras Cement have high brand loyalty and awareness in the markets where they operate. Power costs are the least for GACL and Madras Cement. While it is comparatively high for ACC. Expenditure on coal has been optimized by all three cement manufacturers.
GACL and Madras Cement are faring well on the efficiency front though there are concerns for Madras Cement as far as reach is concerned. Madras Cement has historically focused on the southern markets, with the southern market flooded with capacity Madras Cement needs to expand its reach to rest of the country. The focus on efficiency has helped GACL out perform the industry on a continual basis. ACC has successfully turned around, a large reach and improving operating efficiency portrays encouraging prospects for the company. Large market reach and high operating efficiency are likely to be the key success factors for the future ahead.
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