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Cement: The manpower perspective! - Views on News from Equitymaster
 
 
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  • Dec 6, 2006

    Cement: The manpower perspective!

    India is a developing country and so there are good growth opportunities. India's GDP is expected to grow at 8% annually and so the cement sector, being a core infrastructure sector, is expected to grow at 8% to 10% annually. In view of this, global cement majors have been eyeing the Indian cement market for some time now and 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.

    If one compares total operating costs per tonne of cement produced, ACC and Gujarat Ambuja (GACL) are almost neck and neck, but GACL EBITDA margins are substantially higher than ACC's. This is on account of GACL's better realisations, owing to its strong presence in western region and greater brand recall. Madras cements though being in a region of high demand supply mismatch also enjoys higher EBITDA margins compared to ACC, a fact that could be attributed to its continued improvements on the cost savings front. So for ACC to expand its margins, it will have to curtail costs as realisations, which are vastly superior to its peers will be hard to come by on account of the commodity nature of the business. While ACC is better off in terms of geographical de-risking, its old plants and higher employee costs does present it in poor light when compared to peers.

    From the table below, it is clear that ACC has the highest employee cost per tonne, while GACL has the lowest. Madras cements have been able to reduce employee cost per tonne and now is almost in line with GACL.

    Employee cost per tonne of production
    Company FY04 FY05 FY06 CAGR-FY04 to FY06 (%)
    ACC 139 140 142* 1.1%
    Gujarat Ambuja** 82 104 96 8.2%
    Madras Cements 100 106 98 -1.0%
    * 9mths ended CY05

    Employee expenditure is high in case of ACC due to high number of employees. This can be gauged by the fact that number of employees per tonne of production capacity is highest for ACC, while it is lowest for GACL. Due to low employee numbers, GACL's total expenditure on employees is low but has increased at CAGR of 8.2% between FY03 and FY05, the highest among the three. Though employee cost per tonne basis has increased, its number of employees per tonne of production of capacity has declined at CAGR of 10.8%, indicating an increase in productivity. Higher employee costs can be attributed to the fact that the company may have revised salaries in line with inflation. Madras Cement has also been able to extract more out of its employees but at the same time has also been able to reduce employee expenditure.

    Number of employess per tonne of production
    Company FY04 FY05 FY06 CAGR-FY04 to FY06 (%)
    ACC 622 587 705* 6.5%
    Gujarat Ambuja** 200 203 165 -10.8%
    Madras Cements 451 431 359 -9.2%
    * 9mths ended CY05

    We believe economies of scale also play an important role in the cost structure of cement companies. To put things in perspective, in FY03 GACL operated at 109%, the highest in past 3 years and during this time, its employee cost per tonne was the least.

    Capacity Utilisation
    Company FY04 FY05 FY06
    ACC 90.7% 91.2% 71.0%*
    Gujarat Ambuja** 109.3% 80.6% 96.3%
    Madras Cements 61.6% 63.5% 78.3%
    * 9mths ended CY05

    Further evidence of economies of scale could be obtained from the fact that though the number of employees is low in case of Madras Cements, the expenditure on employees was on a higher side in FY03 and have come down as capacity utilization levels went up.

    Thus it is clear that for a commodity player, control on employee costs along with scale of operation matters. In the long run, the efficient and cost effective player survives.

    **Gujarat Ambuja has changed its accounting year from financial to calendar year. The data mentioned in the above tables pertains to FY03, FY04 and FY05.

     

     

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