N. Srinivasan, CEO, India Cements: Ultimately, size didn't matter

India cements has improved its operational efficiency, but on key parameters like consumption of coal and power, it still ranks much below the competition

The beginning of the end came slowly, without the trademark drum roll that accompanies it in the typical Kollywood melodrama. It was a moment of high drama that was being played out at the Annual General Meeting of India Cements Limited on September 16 when its 57-year-old CEO Narayanaswami Srinivasan admitted that he was willing to sell some of the company's cement plants, or some equity to a strategic partner in an effort to improve its financial position.

Nothing has gone right for Srinivasan since he completed his last acquisition, that of Shree Vishnu Cements, in 1999. His company weighed down by debt, Srinivasan has watched his stock take a beating, from a high of Rs 114 in October 1999, to its recently traded price of Rs 19 on September 20, 2002. The expected benefits of scale haven't materialised, largely on account of India Cements' inability to manage a multi-brand portfolio, although factors outside Srinivasan's control, such as the glut of cement in South India, have played a part too. India Cements has seen its sales drop from Rs 1,441 crore in 2000-01 to Rs 1,188 crore in 2001-02. In numerical terms, India Cements couldn't have scripted a finer tragedy for itself. In 1999, analysts expected its net profits, fuelled by a spate of acquisitions, to be in the region of Rs 150 crore by the turn of the century. The company made a loss of just over Rs 81 lakh in 2001-02 and a staggering Rs 53.84 crore in the first quarter of 2002-03.

Well Begun, Half Done

Things looked a lot brighter in the 1990s when Srinivasan-he refused to speak to Business Today for this story and did not respond to a faxed questionnaire-was the toast of investment bankers and the market. His aggressive strategy transformed India Cements from an also-ran to, for a brief period in 1999, the fourth-largest cement company in the country. On paper, Srinivasan's strategy couldn't have looked better: all his acquisitions were in South India, traditionally a cement-deficient region. Better still, cement prices in the region have always been more stable than those in other regions. Unfortunately for Srinivasan, other cement CEOs were thinking along the same lines.

Madras Cements expanded its capacity by 1 million tonnes, Chettinad Cement by just under a million tonnes, and ACC invested in a new plant at Wadi with a capacity of over 2.6 million tonnes while simultaneously expanding the capacity of its existing plant in Coimbatore. Even a small company like Dalmia Cements doubled its capacity to 1 million tonnes. Most companies also worked on improving their efficiency and, on an average, 3 million tonnes of new capacity was added every year for the past three years.

The resultant glut-even today, the South consumes 30 million tonnes of cement, against an installed capacity of 44 million tonnes-caused prices to crash and Srinivasan, who had borrowed heavily to fund his acquisitions, hoping to meet his debts once prices stabilised, was left high and dry. In January 2002, India Cements sold one of its units (ironically, Shree Vishnu) to Zuari-Italcementi for Rs 349 crore, but that just delayed the inevitable. In June, this year it defaulted on redeeming debentures worth Rs 30 crore, and in August 2002, credit rating agency care downgraded its bonds from AAA (implying high safety) to care-D (implying liable to default). The state government has sent India Cements a bill for Rs 59 crore for availing sales tax concessions where none were applicable. The company is contesting this in the Madras High Court. It doesn't help that Srinivasan is perceived to be close to Union Commerce Minister Murasoli Maran of the DMK, while Tamil Nadu is ruled by the party's old nemesis, the Jayalalitha-led AIADMK.

Crack In The Concrete

India Cements' marketing strategy hasn't helped either. With three brands and seven factories at its disposal, the company went about shuffling brands across factories and markets, resulting in the erosion in the brand equity of premium brands like Shankar and Coromandel. And short-term financial motives drove some marketing gambits: in an attempt to improve the financials of the loss-making Vishnu Cements prior to its sell-off, the company aggressively pushed the Vishnu brand into the distribution system. "Now the company is doing the same thing with Raasi," says an industry analyst. ''But customers are wiser.''

The trade, too, isn't happy with the company. The preferential treatment meted out to a few dealers has seen close to 30 per cent of the company's channel partners switching loyalties in the past three years. And the company's efforts to push inventories into the channel could, one dealer claims, work against it in the long-term: "Almost 60 per cent of its market dues could turn into bad debts." The company can ill-afford that.

And while India Cements has worked on improving its business processes it has largely ignored power costs, which account for close to 40 per cent of its operating expenditure. "India Cements has improved its operational efficiency," explains Kaushal Shah, an analyst with Mumbai-based LKP Securities, "but on key parameters like the consumption of coal and power it still ranks below other companies like Gujarat Ambuja and Madras Cements." Thus, while Madras Cements converted all its plants from the outdated and sub-optimal wet process to the dry process in time to weather the crisis caused by the glut, India Cements was content to let some of its plants, such as the one at Shankaridurg, run on the wet process technology. Analysts like Jigar Shah, the head of research at Mumbai-based K.R. Choksey Shares & Securities, believe that mere financial restructuring won't help the company. "What is needed is a complete change in mindset."

INDIA'S CEMENT NOBILITY
GROUP	COMPANIES	TOTAL CAPACITY	COMPETITIVE POSITION
A.V. Birla Group	Grasim, L&T**	27.96 Million Tonnes	K.M. Birla, A.V. Birla group Efficient processes; Grasim had a ROCE of 16.5 per cent in 2001-02; key markets are 300 km of plants ensuring efficient distribution.
Gujarat Ambuja*	Gujarat Ambuja Cements Ltd, ACC	26.64 million tonnes	N. Sekhasaria, Gujarat Ambuja Among the most competitive cement companies; returns close to 12.5 per cent on capital.
India Cements	India Cements	8.8 million tonnes	N. Srinivasan, India Cement Uncompetitive, largely because of its mamoth debt burden; it currently has a ROCE of around 1 per cent.
* Gujarat Ambuja holds strategic stake of 14.6 per cent in ACC ** A.V. Birla Group holds a strategic 14.15 per cent stake in L&T

Plugging The Leak

India Cements wasn't the only cement company to go on a buying spree. The Aditya Birla group increased its cement capacity from 5.3 million tonnes in March 1999 to 12.7 million tonnes now through the acquisition of Dharani Cement and Shree Digvijay Cement. More recently, it acquired a strategic stake in L&T that has been trying to spin off its cement business and divest some stake in it to a strategic investor. MNCs Lafarge, Italcementi, and Cemex have been, and still are on the prowl (and will likely be looking closely at India Cements itself). And Gujarat Ambuja acquired a strategic 14.6 per cent stake in ACC in early 2001. "There is still scope for consolidation in the cement industry," says A. Dharmakrishnan, CFO, Madras Cements. "But there should be a balance between acquisition at any cost and acquisition after assessing project viability."

India Cements wasn't the only company to take on debt-although none of its competitors really borrowed funds of the same magnitude. Gujarat Ambuja Cements Ltd (GACL), too, funded its acquisition of ACC through debt but later converted that to equity. After picking up a controlling stake in DLF Cements (now Ambuja Cement Rajasthan), Modi Cements (now Ambuja Cement Eastern), and a 14.4 per cent interest in ACC, GACL found itself with nearly Rs 1,500 crore in debt. It created a company Ambuja Cement Corporation, transferred the ACC stake and Ambuja Cement Eastern to it and sold 40 per cent of it to FIIs. This move eliminated most of the debt from GACL's balancesheet.

Srinivasan's seemingly insatiable appetite for more capacity may have been driven by the simple fact that India Cements had lots of catching up to do: before it embarked on its M&A rampage in 1997-98 with the acquisition of the Visakha plant and B.V. Raju's Raasi and Shree Vishnu units, its capacity was a mere 3.2 million tonnes. Only, everything that could go wrong, did, and the company finds itself in a position where it will probably have to sell most of its acquisitions and then some. And even a possible revival in the demand for cement in South India can't change that-much of the company's hypothetical gains will go in interest payments.

At prevailing market rates of acquisition (Rs 3,500-4,000 for every tonne of installed capacity), Raasi Cements, with a capacity of 2.4 million tonnes, could fetch India Cements Rs 633 crore. "India Cements may expect between Rs 700 crore and Rs 800 crore out of this one deal," guesses an analyst. "Offers would probably be in the Rs 500 crore range." Visakha Cements (capacity: 1.1 million tonnes) doesn't quite have the same brand equity as Raasi and could fetch between 10 and 12 per cent lower per tonne. Still, MNCs with deep pockets that are chary of pumping money into greenfield investments will look seriously at India Cements. Only, sitting on the other side of a deal must be a new experience for N. Srinivasan.