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Cement: ACC vs. Madras Cements

Dec 12, 2006

In an earlier article we had given a perspective on how two of the largest cement players in the country ACC and Gujarat Ambuja compare with each other. As a follow up to that, in this article we have made a comparison between ACC and a smaller player Madras Cements to exhibit how differences in scale impact the dynamics of cement players. Cement being a commodity, is a volume game. To increase their share in volume, companies need to scale up their capacities and operations. In terms of production, ACC, the only company with pan India presence, is the market leader with 12% market share. Though the company has large scale of operations and caters to all the regions in the country, it is not feature very favourably in efficiency terms when compared to a smaller player like Madras Cements. Madras Cements, despite the company not having looked beyond southern markets, is one of the most cost effective players in the country on account of its operational efficiencies.

Lets us understand how efficiency along with scale is important for a commodity like cement.

Capacity and capacity utilization: ACC has large cement plants spread across the country, which enables it to cater to the demand across regions. This leads to geographical de-risking. On the other hand, a regional player like Madras Cements is unable to mitigate the impact of lower realisations during cyclical downturns. Large capacity cannot be the sole criteria to judge a company from investment point of view. What is more important is how well it is managed and whether the economies of scale are sustainable from long-term perspective. ACC has huge set up capacities but Madras cements has been improving capacity utilization levels, which has helped it to reduce costs. As seen in the table below, despite being a relatively smaller player as compared to ACC, Madras Cement fares well due to higher utilization levels. Infact, the latter enjoys better margins despite operating in a region of over supply (of approximately 11 m tons).

Particulars ACC* Madras Cements
Capacity (MT) 18.3 6
Capacity Utilisation (%) 71.0% 78.30%
Operating costs per tonne basis 1,684 1,305
EBITDA per tonne basis 339 451
EBITDA margin (%) 16.2% 21.0%
Net profit margin (%) 8.3% 7.9%
Total debt/Equity (x) 0.5 0.7
Interest coverage ratio (x) 7.4 4.4
RONW (%) 10.9% 14.3%
EV/Tonne (US$) 244 157
* 9mths ended CY05    

Operating efficiency: As discussed, huge capacities with large market reach help, but business viability is determined by the operating efficiency of the company. Madras Cements is considered as one amongst the least cost producer on account of higher EBITDA levels. The company was able to maintain around 24% EBITDA margins in the recent past but since FY05 the margins have declined on account of rising input prices. During FY06, there was a steep increase in diesel price, leading to increase in the limestone raising cost, transportation cost of raw materials and finished goods, which in turn squeezed Madras Cements’ EBITDA margins. The rise in input cost was steep as compared to realizations and this can be gauged from the fact that though prices recovered, margins continued to remain under pressure. In case of ACC, the company’s turnaround strategy revolved around improving its core business i.e. cement. ACC has changed a lot in recent past and the major difference is the fact that after burning fingers on its venture into non-cement businesses, it has learnt that cement is what it is good at. The company has divested almost all its non core businesses, and its plants now manufacture cement based on the ‘dry-process’, which further marginalised its operating costs (wet-process is costlier than dry-process). This has proved beneficial for the company as the cost per tonne of power reduced from Rs 516 in FY04 to Rs 506 in CY05. Yet, the company’s operating costs are higher as compared to peer Madras Cements on account of its old plants and higher employee costs. The company has undertaken modernisation, de-bottlenecking and capacity expansion plans in order to improve efficiency while reducing costs. The effects of these will be visible in the coming years. Madras Cements is also trying newer ways of reducing rising power costs by setting up wind mills and captive power plants, to improve efficiency.

Leverage ratios: In case of Madras Cements the debt to equity ratio has gone down from 1.6 times in FY01 to 0.7 times in FY06, which is a result of improved cash flow. This, in turn, is also reflected in the interest coverage ratio, which has gone up from 1.6 times in FY99 to 4.4 times in FY06. ACC was also a highly leveraged company till 2001. The restructuring improved company’s performance as a result of which its debt to equity ratio pared to 0.5 times in CY05 from a high of 1.4 times in FY01. Lower debt to equity ratio saves on interest cost, which in turn reduces downward pressure on net margins.

To conclude…
Though Madras Cements is widely considered as the lowest cost cement producer, its ability to sustain efficiency level and maintain or improve market share by spreading out in other regions is a matter of concern. ACC has successfully turnaround in last couple of years. Going forward, larger market reach, high operating levels along with efficiency will be the key deciding factors that will bridge or widen the gap between the two players.

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