BT Corporate: This House Has Got To Rock

CORPORATES: TURNAROUND
This House Has Got To Rock
Its rock solid reputation notwithstanding, cement major ACC will have to follow through its cost-cutting steps with real gains in productivity.

By Abir Pal

Time was when the two were in sharp contrast with each other. We're talking about Churchgate Station in downtown Mumbai and its neighbour across the road, Cement House. The former, which handles an estimated 20 lakh commuters a day, is the nearest you can come to a perpetual motion machine. And the latter? Well, the headquarters of the country's second-largest cement manufacturer, ACC, used to seem like one place where time had no choice but to stand still. ACC was a staid company, steeped in tradition and, as some cruel critics would add, inertia. As it went about its none too glamourous business, the 65-year-old company created few ripples-either inside Cement House or outside.

But beginning October 2000, there's been an uncharacteristic buzz in Cement House's corridors. And a flurry of activity that must have startled its mute walls. The buzz is all about becoming more competitive, efficient, and lean. For a clue to what's happening, over to ACC's Managing Director T.M.M. Nambiar. ''In order to survive in today's environment, we realised that we've got to become much more efficient. And I think that the cost-cutting measures initiated about a year back are only now beginning to bear fruit,'' says Nambiar.

Call it realisation or a rude jolt. Late last year, the Rs 2,818.66-crore ACC was in a mess, its bottomline a deep red after losses in four consecutive quarters, and its marketshare in the cement segment falling from 13.1 per cent (in 1996-97) to 11.2 per cent. That's around the time Nambiar and his senior colleagues realised something drastic needed to be done. They started with knives, shredding costs. ''Our strategy centred around three core areas-cut distribution costs, improve price realisations through branding, and push sales,'' explains A.K. Jain, President (Marketing), ACC. ''The biggest challenge for ACC was keeping pace with technology. We had inherited a 60-year-old legacy and it is only now that we can say that the process is completely over with all capacities having been modernised.'' Back in 1989, as much as 40 per cent of ACC's total production of over 132 lakh tonnes per annum came from the inefficient 'wet process'. Today, this has been reduced to 3 per cent, with 97 per cent of its output manufactured under the more efficient dry process.

Reining In Costs

The cost-cutting measures helped. Quickly, ACC's bottomline went back into black, with the cement major posting a profit after tax (PAT) of Rs 14.64 crore in the quarter ended December 2000-demonstrating that old-fashioned belt-tightening works. By cutting down on power consumption through more efficient use of resources and better technology, ACC managed to lower its per tonne consumption of electricity from 130 units to 92 units; on another front, it held raw material costs at the same levels even though input prices had crept up 6-8 per cent. Through such measures, as well as by increasingly adopting better technology, ACC claims it has been able to cut its cost of production by 4 per cent.

Simultaneously, in a drive to move up the value chain and increase realisation per tonne of output, ACC has stepped up its marketing efforts. ACC's main competitor, Grasim Industries, is an aggressive marketer and has been successful in positioning its brands like Grasim Super and Vikram Premium as products that command a premium in the market. ACC is trying to counter the competition by stepping up its marketing and positioning of blended cement, i.e., cement blended with slag and fire ash, as a premium product. Blended cement accounts for 70 per cent of ACC's product portfolio compared to the industry average of 30 per cent and the realisation from blended cement is higher because cost of producing it is lower than that of producing conventional portland cement. This year, ACC wants to hike its output of blended cement to 80 per cent of the total.

ACC is also picking up tips from its new strategic shareholder Gujarat Ambuja, which has a 14.45 per cent stake in the company. Like Gujarat Ambuja, which ships its cement in bulk rather than in bags, ACC is trying to see whether it can reduce its freight costs. Says Ramnath. S, Analyst, Taib Securities (India): ''It is just a question of taking the initiative. It takes, say, Rs 30 to transport a 50-kg bag from North to West India. This could probably be reduced by as much as half, if transported in bulk.''

Of course, Nambiar refutes suggestions that Gujarat Ambuja could play a bigger role in managing ACC. But he admits that an association with what is perhaps the most efficient cement producer in India could benefit ACC. He adds: ''Gujarat Ambuja's involvement has been beneficial, especially its expertise in areas like project planning and execution and, principally, for improving operational efficiency.''

Shedding Debt

Nambiar is wielding the scalpel elsewhere too. Like on ACC's balance sheet. As on March 31, 2000, ACC was burdened with borrowings of Rs 1,444 crore, giving it a debt-equity ratio of 1.43:1. Nambiar is categorical not only about bringing it down to a more acceptable 1:1, but of maintaining it there. Analysts say a simple debt-restructuring could easily save the company Rs 20 crore in interest costs alone. Last year, ACC paid interest charges of Rs 161.77 crore.

Curbing ACC's forays into unrelated areas is yet another highlight of Nambiar's strategy. ''We will focus only on cement. There will be no further investment in non-core areas and we will gradually exit from these.'' On the block, therefore, are Floatglass India, ACC Nihon Castings, ACC Machinery and Bridgestone Tyre, a joint-venture of the Tatas, Bridgestone, and ACC. Keen on a speedy exit, ACC is in fact said to be already in consultations with potential buyers.

But retiring debt will depend on how much Nambiar can boost ACC's profits. Last year, most cement companies were in the red-squeezed by excess supply on one hand and rising raw material costs on the other. The only way out-cement manufacturers realised-was to regulate production, create a scarcity, and keep markets artificially high. And this is exactly what seems to have happened. Since October 2000, cement prices have been heading northwards and with them the profits of most cement companies. In fact, the top five cement producers-who control about half the market-are today under investigation under alleged charges of 'cartelisation' or manipulating market prices.

If prices move up, ACC stands to gain. Says Ramnath of Taib Securities: ''For a price rise of every Rs 1 per bag, ACC's operating profits could rise by a whopping Rs 17 crore.'' But keeping hopes pinned on higher prices would be a short-term approach to boosting ACC's bottomline. It would have to look for strategies that will last longer. Otherwise, the buzz in the once-staid Cement House will die out as quickly as it started.

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