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S. Vaidya Nathan

Gujarat Ambuja Cements has weathered a difficult period on the pricing front with considerable comfort. Mr Anil Singhvi, Executive Director (Finance,) provides insights on the company's strategies in tackling the industry situation. In this second and concluding part of the interview, Mr Singhvi also shares his views on some key issues impacting cement manufacturers.

Excerpts from the interview:

Barring Gujarat Ambuja and to a lesser extent, Grasim, the rest seem unable to make money at prevailing prices. Do you see this as a problem for Gujarat Ambuja?

Being a commodity business where prices are low the only way a company can make money is by running plants efficiently and by keeping costs low. The smaller players find it difficult to achieve efficiencies and hence not able to make money. There are, however, some smaller players who have reined in costs, operated plants efficiently and earned a tidy sum for themselves.

Which factors could improve profitability levels in the industry?

First, the industry has been operating at lower capacity utilization, increasing the same could result in increased efficiency. Another way to raise the bar is for the plants to be more efficient. GACL has been operating at both high capacity levels and efficiently and has shown that it is possible. Of course a simpler way is increase in cement prices.

Gujarat Ambuja has been aggressively pushing volumes in the last 12-15 months. Is this a conscious effort to capture market share even if it means slightly lower price levels?

We have always been efficient producers, with very high productivity from all our plants. The growth has come due to commissioning of our new 2MT plant at Chandrapur, in Maharashtra.

Ambuja Cement sells a premium brand in all the markets and commands a premium over all other cement sold, thus there is no issue on selling cheaper to capture volume.

One of the main reasons why GACL has managed to earn decent returns as compared to its peers is its efficiency and keeping costs low despite lower cement prices. Our philosophy of high productivity with efficiently managing costs has paid off.

Gujarat Ambuja has for over a decade been at the forefront on operating efficiencies? In which areas do you expect to see further improvement?

We will continue strive to reduce our costs. Our direct costs have been coming down each quarter and we will find ways to reduce it further.

With the addition of our 2MT plant at Chandrapur we will be able to reduce our costs further since we have a coal-based captive power plant that will help us cut our energy costs. We see this as a major driver of cost reduction in the months to come.

What are your plans for capacity enhancement? Are you still looking at possible buys for inorganic growth? What kind of capacity levels would interest Gujarat Ambuja if it decided to pursue acquisition?

Further growth will be accomplished largely by inorganic growth. It is not necessarily the size that matters, what is important is to see whether the location fits into our strategy. Today GACL is a market leader in a contiguous area from Maharashtra to Jammu & Kashmir and any plant that would complement our strengths would be welcome.

Are more MNCs likely to join the bandwagon in the next few years? What would be the implications of their entry for bigger domestic players?

The entry of a bigger and more stable players is good for the industry as it weeds out weaker, smaller players and it does not make substantial difference whether he in India or a multinational player. However considering that most of the MNCs cement players today are not rolling in cash, acquisition in Indian market looks a bit difficult.

There has been government intervention in the form of higher duties and taxes if prices exceed prescribed threshold levels in Tamil Nadu? Do you see such a trend emerging in other States as well?

It would be difficult to comment but with introduction of VAT, parity of taxation rates would be obtained.

Do you see the hike in excise tariffs as a threat to profitability, or have the companies been able to pass it on?

The hike in excise duty was definitely uncalled for. It has only resulted in increasing the tax on cement, which was the highest in the world. Besides, cement consumption in India was at 110 mn tonnes last year; thus the Rs 50 per tonne increase in excise would net the exchequer Rs 550 crore.

If the excise hike has to rolled back, the Finance Ministry will have to raise Rs 500 crore from some other source to balance the cut announced in excise duty on tyres, aerated soft drinks, polyester filament yarn, air-conditioners and motor cars.

The decision of the Government goes against the basic tenets of its policy. While acknowledging that rationalisation of excise rate structure and reduction of the multiplicity of rates was integral to the total tax reform process, the Finance Minister has proposed a 3-tier excise duty structure of 8 per cent, 16 per cent and 24 per cent.

But, on the other hand, by increasing excise duty on cement and clinker by Rs 50 per tonne the government has made it the highest taxed commodity. The specific tax at Rs 400 per tonne on cement works out to 30 per cent ex-works, which is not only the highest rate of duty but also a highly retrograde step. On the one hand, the Government is trying to promote infrastructure and housing and, on the other, such an increase would make the input costlier.

Are cement price trends driven by genuine competition trends or is there some kind of informal understanding between producers that is helping hold price levels from time to time and in certain markets?

It is a myth that there is understanding between producers to hold prices, for the history of past several years indicates that cement prices have not held their ground and often slipped. Had there been such an understanding, cement prices would have remained firm.

Besides, if there is an attempt to shore up cement prices after it reached nadir, it would be foolhardy to call it an attempt to hold prices. The cement business, as any other business, needs to earn a decent return for the investment it has incurred.

Do you think imports could emerge as a significant threat, at least in some parts of the country? What is the outlook on the export front?

Cement imports are not a threat. Cement import can be economical only if there are cement terminals to handle the import and the domestic cement prices are attractive enough for someone to enter the Indian market. As far as exports from India is concerned they are all set to grow. Companies such as L&T and Sanghi, which plan to export clinker, or GACL, the largest cement exporter, will continue with exports.

With the current international prices ruling at $25 per tonne it is an attractive proposition to export. Reconstruction in Iraq is likely to offer increased opportunities to Indian companies to export to that market.

(Concluded)

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