ACC is the largest producer of cement in the country but its low operating margins have for some time now, remained a cause of concern. In this article, we try and find out how does ACC compares vis-a-vis two of the most cost effective players in the industry, Gujarat Ambuja and Madras Cements, and what steps has the company taken to improve its cost competitiveness.
Three of the most vital cost components of the cement industry are freight costs, power costs and raw material costs. Therefore, in order to become cost competitive, it is imperative for the companies in this industry to focus on these major components.
Cement industry is a freight intensive industry and transporting it over long distances can be uneconomical. Gujarat Ambuja set a precedent of sorts when it transported cement through sea, from its Gujarat plant to Mumbai. Ever since, it has relied on this mode of transport since it is much economical than transporting cement by road or rail. Madras Cements also exports some of its cement to Sri Lanka by sea. ACC does not have this advantage because all its plants are land locked and as a result has freight costs higher than its other two competitors. Given the fact that freight costs are governed by factors such as the price of fuel (especially diesel, which is rising consistently), we do not expect ACC to do much to reduce them considerably.
Cement industry is one of the major consumers of power and in order to avoid erratic supply of power from state electricity boards (SEBs), almost all the major players have started setting up captive power plants. ACC was a late starter in the sense that it realised the virtues of captive consumption a little late than its competitors. Also, it had to face problems from certain SEBs who made it mandatory for the company to use power from the state grids. However, the company is fast catching up and now has close to 83% of captive power consumption. Although ACC's power costs are slightly greater than the other two, we expect them to come down in the near future.
Although, ACC's cost of materials runs neck to neck with that of Madras Cements, it is much higher than that of Gujarat Ambuja. As per our interaction with the management, raw material costs for the company are most likely to move in line with the output of the plants and hence any further improvement in the same is ruled out at this stage. Although ACC can do little to reduce freight costs and also the raw material costs(they are regulated by government), it has taken steps to increase its captive power consumption and thus has narrowed the gap between it and its competitors.
Besides these, ACC had started modernizing its plants and in a short span of six years has upgraded approximately 50% of its manufacturing capacity to global standards, retired about two m tonnes of cement capacity consisting of obsolete assets. The company has also increased cement capacity from 7 to 16 m tonnes in the last six years. The new assets thus created compare with the best in the industry. Therefore in view of the above measures, we expect the company to improve its operating margins in the years to come. This will help in reducing the pressure on its topline and enable it to absorb price cuts better.
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