The Hindu Business Line : Cement industry: Findings of a sample study

Against a 17 per cent rise in demand last year, cement industry saw a sluggish growth in installed capacity, at only a little more than 1 per cent, says a recent study conducted by the Government.

Is there a slack capacity? Not much, it seems, because 9 plants in the sample achieved a capacity utilisation of more than 100 per cent (the highest being 122 per cent) in 2006; in 2005, only 5 plants crossed the 100 per cent capacity utilisation mark. Q ueerly, however, production could be enhanced only by 10.2 per cent.

The study, conducted as a pilot project, took a sample of 19 companies operating in the cement industry. It drew on the electronic filings of companies, and looked at parameters such as capacity, production, inputs, utility, overheads, financial measures , inventory, excise and so forth.

How was the profitability for cement companies in 2006? Sales revenue of the sample shows an increase of 28 per cent during the 2006 financial year, over the previous fiscal. Astoundingly, operating profits increased by 65.51 per cent. Profits as a perce ntage of sales increased from 12 per cent to 15 per cent. Lower interest and factory overhead costs resulted in increase in net profits, finds the study. "Margins from exports were highest, followed by margins from trading and domestic sales. In fact exp orts generated higher sale realisation of more than 70 per cent making it a profitable venture in 2006. The industry recorded 20.5 per cent return on capital as compared to 12.3 per cent in the previous year."

What about the costs? Total material cost in absolute terms rose by more than a quarter. "Due to higher increase of net sales (by 28.14 per cent) than material cost, expenditure on raw-materials as percentage of net sales has marginally declined," reads a finding in the report. A marginal improvement in the usage of major raw materials is also postulated by the study.

Fuel, power
On fuel, there are interesting findings. While coal consumption in terms of quantity is higher than the standards, quantity of consumption of coal per MT decreased marginally, even as the quantity in terms of kilocalorie has marginally increased. Though higher grades of coal are used, the energy efficiency appears to have decreased, notes the report.

Positive news on the power side is that units producing cement from clinker were able to reduce the consumption of power marginally by about 2.5 per cent. "For composite units, power consumption was lower than the standards. Saving of 3.35 per cent was a chieved in consumption of power as compared to previous year."

Power consumption remained lower than the standards for producing major grades of cement, records the study. "Average power consumption for packaging of one MT of cement over previous year 2005 decreased by 7.37 per cent. Average power consumption in ter ms of value over previous year 2005 decreased by 14.03 per cent."

Other expenses
In absolute terms employee costs increased by 19 per cent, but as percentage of net sales it fell by almost 6 per cent, as a result of 'higher efficiency'. Similarly, administrative overheads, as percentage of net sales, saw a decline by 7 per cent due t o higher sales. Interest cost too registered a drop from 5 per cent to 3.7 per cent of net sales.

Meanwhile, the share of selling and distribution expenses in net sales increased by 6 per cent as compared to previous year. Expenditure on royalty and technical know-how, research and development, quality control, repairs and maintenance, pollution cont rol saw increases ranging from 15 per cent to 78 per cent.

Inventory
Growth in demand saw an 18 per cent decrease in stock. Strangely, the value of closing stock increased by more than 13 per cent. "The study indicates that inventory is overvalued to the extent of Rs. 13.65 crores resulting in excessive profits shown in t he financial accounts," is a disquieting snatch about the sample under focus. "Though value of non-moving stock has decreased as compared to previous year, it is still about 6 per cent of the total stock. Some of the units under study have more than 20 p er cent of their stock as non-moving resulting in blockage of substantial funds."

Taxman might wish for more revenues from the industry, though excise duty payable increased by more than 16 per cent in the industry, and excise duty paid increased by nearly 13 per cent in 2006 compared to the previous year.

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