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S. Muralidhar
S. Vaidya Nathan

Size, per se, is good, but it does not deliver a major advantage in cement. If you go up from 10 million tonnes to 20 million tonnes, you do not necessarily get economies of scale. We started off with a million tonne capacity. ACC then was 12 times our size. But our profitability and reach were far superior.

As one is ushered into the corporate headquarters of Gujarat Ambuja Cements, what stands out is `I Can' — the company's motto — on a spotlessly clean white door and a painting of a drooling child, playing with colours that buttresses the `I Can' message. Mr Anil Singhvi, who has been with the company for close to two decades now, has been the brain behind the financial savviness that has driven Gujarat Ambuja's growth through the greenfield and acquisitions route. Soft-spoken, at ease with numbers as well as matters of corporate strategy, Mr Singhvi deftly combined articulateness with discretion.

Mr Singhvi, Executive Director (Finance) — appeared optimistic about the higher growth in the economy. "I am very encouraged by the team we have at the centre — Dr Manmohan Singh, Mr P. Chidambaram and Mr Montek Singh Ahluwalia. These three doors cannot be opened with money. Never have we had the combination of the three primary posts being held by professional economists, persons of high integrity, and, with an understanding of common issues.

If there is political stability and these three economists cannot deliver, I would have little faith in democratic institutions. We will then be ruled by real politicians.'' It was on this note that Mr Singhvi ended a wide-ranging interview with Business Line.

Excerpts from the interview:

How do you view the emergence of Grasim as the single largest player in the industry with a capacity that is twice that of Gujarat Ambuja (excluding ACC)?

What Grasim has done is very good. It is a win-win situation for Grasim, Larsen and Toubro and the industry. Finally, what we are looking at is consolidation. It is good that an existing cement player has acquired the capacity. Had the capacity gone to somebody who was not in cement, we would had a new player who may have not understood the game of cement.

Size, per se, is good, but it does not deliver a major advantage in cement. If you go up from 10 million tonnes to 20 million tonnes, you do not necessarily get economies of scale. It is dispersed production facilities. If you have more capacity in a location, you may have an advantage.

The other important aspect in cement is the brand. You cannot have two brands from the same capacity. You have to have two different brands coming from two different capacities.

You cannot cut down the cost of logistics, dealer networking and branding. Though there is a duplication of expenses, you have to absorb such a cost structure, as you have to live with two brands. You cannot have one brand, as it would be difficult to manage. It would be hard for them to get a market share if they were a single brand.

For instance, in Maharashtra, L&T had a market share of 20 per cent and Grasim, 12 per cent; totally 32 per cent. If you have 32 per cent with one brand, penetration would be greater. So it is important for them to have two brands and the costs of maintaining these would be higher.

Take Coke. Globally, Coke never had a second cola brand. In India, it is a different situation. They incur expenses for Coca-Cola as well as Thums-Up. Even today, the brand recall of Thums-Up is superior to Coke. Then it is Coke and Pepsi. There are issues in brands that cannot be changed or done away with.

Do you think brand loyalty is so strong in cement?

Definitely. L&T was a premium brand. Now, it is easier for Grasim to get into the premium brand market.

What would be Gujarat Ambuja's competitive advantage in the emerging industry structure, especially with the huge difference in capacity compared to Grasim?

That (the larger capacity of Grasim) does not matter to us in terms of our strategy, as there is enough room for us to grow. There is space for our brand to be the premium brand. Somebody becoming very large does not necessarily impact us in terms of business profile. When we started off, we just had a million tonne capacity. ACC then was 12 times our size.

But our profitability and reach were far superior. It is a question of how we approach our business. We have always raised the bar, even when our capacity was just a million tonne.

Do you think the pace of consolidation could be affected as cement stocks have become more expensive than an even year ago?

In cement, mergers and acquisitions do not happen when the going is bad. They happen when the going is good, as every seller in cement has a price tag in his mind.

He would not sell at below that level. We also do not have any demanding lenders; even if his company is not making money, lenders are not making him go out of business. Why should he get out? So what the seller wants is a price that can be paid by the buyer only when the going is good.

A premium of between 30 per cent and 40 per cent over the market price is the norm. Even Grasim paid Rs 342 for L&T and the market price of UltraTech CemCo is about Rs 260.

You cannot acquire cement capacities at $40 a tonne even if the market capitalisation may suggest that, as no seller would be willing to sell at that level.

If he is expecting $70-80 a tonne, a buyer can pay that price only when he has the capacity and capability, and he also thinks that the outlook for cement is good, as only then that he can make money out of that asset. If the industry is not doing well, merely by changing a team, you are not going to make money.

What would be the impact of the imminent enhanced levels of consolidation in the industry?

The top five players would have 75-80 per cent of the capacity over the next five years. This could lead to a situation where there is better pricing stability, which would be good for the buyer and the seller.

Volatile prices are not good for consumers, too. Even in bidding for infrastructure projects, construction companies will benefit from a more stable trend in cement prices, as it would help them price their bids better. Now even `cost-plus' contract are difficult to price.

The benefits of consolidation would also come from not having heavy investments, irrational situations and non-serious players. We would have more stable pricing and mature players. Finally, the customer should be benefited.

Don't you think that customers have had a better deal over the past five years, even if the price trends were volatile and uneconomical for the players?

True. If you correct for inflation, cement prices today are lower than what they were ten years ago. In real terms, prices have not risen. Even in nominal terms, they are only slightly higher.

If you observe the commodity index of the RBI, the appreciation in cement prices has been among the least across all commodities, and not just construction materials and steel. Rightly so, as it is a competitive business. It is because of this factor that we have become efficient players and cut our costs to the bone. As far as the four largest players are concerned, we are one of lower cost producers in the world.

Over the next five years, what key changes do you visualise in the industry structure?

The maturity of the players would be one. There will be four or five top players controlling a vast proportion of the capacity. I see the emergence of multinational corporations (MNCs) in India. We will definitely have a considerable presence of MNCs. We have so far just had Lafarge and Italcementi. The former's presence is bound to increase.

There are only two large cement-consuming countries with high growth prospects — India and China. The topline growth of MNCs will depend largely on their presence in these two markets.

If MNCs gain control over sizeable capacities, what could be the nature of changes in the industry dynamics?

As long as we have the emergence of serious, mature, long-term players, it would be good for the industry.

What we are scared of is the entry of smaller, non-serious and non-cement players, as they do not have a long-term commitment to the industry and the customer.

They cut corners. If the MNCs come, compete and grow the markets, it would beneficial. The cement market is large enough for all of us to have good growth rates through the organic as well as inorganic route.

(To be concluded)

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