ACC plans major restructuring

In a move that reflects on the consolidation fever that is gripping the cement sector, Associated Cement Companies (ACC) have announced a major restructuring exercise. The recast is aimed at improving efficiency and productivity while at the same time increasing the focus on cement manufacture. ACC is India's second largest cement company with a capacity of 11.6 m tonnes per annum. The company commands an 11.5% stake in the Indian cement market.

The company's approach is mainly four pronged:

• Identifying the unviable manufacturing units
• Selling off the wet process cement manufacturing units (5% of turnover)
• Adding fresh capacity to the viable plants
• Hiving off the research and consultancy directorate (RCD) (a research centre on cement)

ACC, which currently operates from 11 locations, is saddled with some low volume plants that are uneconomical to run. It also has some plants that are based on the wet process. These again are uncompetitive mainly due to their higher costs of production (as compared to dry process plants). The company's decision to either sell off or shut down such plants is likely to significantly improve its profitability. This will be mainly due to better operating efficiencies at the manufacturing level (a smaller number of plants will meet the entire demand) that will result in lower manufacturing costs.

ACC's decision to add capacity will enable it to capitalise on the increasing vibrancy in cement demand. Moreover, as the new capacities are more likely to be brown field expansions (as against green field projects) the company will be able to expand capacity in a shorter time and at a lower cost. This will help the company in maintaining its market share while at the same time minimising the debt burden on its balance sheet.

Although the company has drawn up plans to dispose of unviable and wet process based plants, it is unlikely that it will be able to go ahead with the expansion plan without raising debt or diluting equity (LTD/E Ratio: 1.1, FY99). In case of debt, the company would be saddled with higher interest burden, while issuing equity shares may not be in the best interest of the stockholders (as it would dilute earnings). Moreover, with cement price realisations having recently come under pressure it is unlikely that the company would have enough internal resources to fund the entire expansion plan. Then there is a doubt whether ACC would be able to dispose of the units, and if yes, at what price.

ACC seems to have responded to the need of an improvement in efficiency and productivity in order to survive in this intensely competitive commodity market. However, implementing it will pose a greater challenge for the company.