Background Note

Gujarat Ambuja Cements Ltd. (GACL) was established as Ambuja Cements Private
Ltd. (ACPL) in 1981 by Narotam Satyanarayan Sekhsaria (Sekhsaria), a businessman
from the western Indian state of Gujarat. Originally a cotton trader, Sekhsaria
entered the cement business because of factors such as stable demand, lack of
substitutes and limited competition. With the support of Gujarat Industrial
Investment Corporations (GIIC1), Sekhsaria and his two partners, Suresh and Vinod
Neotia, set up APCL. Suresh Neotia was appointed Chairman while Sekhsaria was
made the Managing Director. In 1983, the company floated a public issue and its
name was changed to GACL. The same year, production started at a 0.7 million tons
per annum (mtpa) plant, named Ambuja Cements, in Ambuja Nagar, Gujarat. GIIC
sold its stake in GACL in two tranches to Sekhsaria in 1987 and 1990.

In 1993, GACL commissioned its second cement plant at Ambuja Nagar (capacity 1
mtpa), named Gujambuja Cements.
Attracted by buoyant cement demand in the northern regions, GACL commissioned
a 1.5 mtpa plant at Suli in Himachal Pradesh (HP), named Ambuja Cements
Himachal Unit in 1995. In the same year, GACL floated a wholly owned subsidiary in
Mauritius Cement Ambuja International Ltd. (CAIL). A year later, GACL floated
another subsidiary, Ceylon Ambuja Cements (Private) Ltd., through which it
acquired a small company, Midigama Cement, in Sri Lanka. In 1996, GACL set up its
third 1 mtpa plant at Ambuja Nagar, named Guj Line II (capacity 1 mtpa). GACL
also established grinding and packing units at Ropar (Punjab) and Panvel
(Maharashtra). In 1997, GACL acquired Modi Cements sick 1.4 mtpa plant at Raipur
(Madhya Pradesh) for Rs 1.66 billion. This plant was renamed Ambuja Cement
Eastern Ltd. After the acquisition, GACL revamped its processes to bring them at par
with the standards of its other plants. In 1998, GACL acquired the Nadikudi (around
100 kms from Guntur) and Proddatur (near Cuddaph) limestone mines in Andhra
Pradesh to strengthen its presence in southern India.
In December 1999, GACL acquired a 51% stake in Delhi based DLF Cement for Rs
3.5 billion. DLF Cement had started its operations in 1997 in Rajasthan with a plant
of capacity 1.4 mtpa. After this merger, GACL became the fourth largest cement
manufacturer in India after ACC, L&Tand Grasim. In the same month, GACL also
acquired a 7.2% stake in Associated Cement Companies (ACC) for Rs 4.55 billion.
ACC was the largest manufacturer of cement in India. With 14 manufacturing units
in India, it had a total capacity of over 11 mtpa. It was one of the largest integrated
cement companies in the world.

By the late 1990s, GACL had emerged as one of the most energy efficient and technologically
advanced cement manufacturers in India. In December 2001, GACL began trial production at a
new 2 mtpa plant in Chandrapur, Maharashtra, taking its total capacity to 12.5 mtpa (Refer
Exhibit I). For the financial year 2000-01, the company recorded a turnover of Rs 12.52 billion
and a net profit of Rs 1.5 billion (Refer Exhibit II). GACL had a large distribution network of
11,500 outlets. It was one of the first cement companies in the country to recognize the
importance of brand building. The company's cement, sold under the Gujarat Ambuja brand
name, enjoyed good brand equity and sold at a premium. The company was the overall market
leader in the Indian cement industry (Refer Table I). Table I
Indian Cement Industry - Companies and their Marketshare (2001)
Region

East South North West Total

(Mkt. Size in
million
tonnes)

-14

-23.8 -28.1

Grasim-L&T
Combine

20

21

13

37

22

GACL-ACC

24

10

36

23

24

JK Group

16

India
Cements

22

Madras
Cements

22

Lafarge

23

Others

33

35

35

40

36

24.6

-90.5

Source: www.equitymaster.com

ACL was not only the market leader, it ALSO ranked very high on the profitability
criteria. Its new plants, use of better quality limestone, innovative energy
management efforts, and strong retail presence in Mumbai, Gujarat and Punjab
gave it a strong edge over its peers. Its cost per rupee of sales was much lower than
most of its competitors, resulting in much better operating margins (Refer Tables III,
IV and Figure I).Table II
Cement Companies - Operating Margins
(%)

FY97 FY98 FY99 FY00 FY01

Grasim

NA

NA

14

13

17

L&T

NA

NA

11

15

17

ACC

14

11

16

India
25
Cements

24

25

23

24

Madras
35
Cements

33

31

31

31

GACL

36

36

36

37

36

Source: www.equitymaster.com

Table III
Cement Companies - Capacity Utilization (1996-97)
Company

(in
%)

Grasim

79

L&T

87

ACC

95

India Cements 94
Madras
Cements

98

GACL

102

Source: Analyst, March 1998.

Industry observers unanimously agreed that GACL was the

most efficient cement manufacturer mainly because of its operational excellence.
The company had done well in spite of the fluctuations in the cement industry by
adopting aggressive productivity improvement and cost-cutting measures. GACL
had won a host of awards for management excellence, quality, business strategy
and environment management (Refer Exhibit III). Ever since its inception, the
company believed in doing things in an innovative and unconventional way, so as to
reap benefits in new ways, using new methods.
Working HARD towards Operational excellence.
According to analysts, GACL's strategic farsightedness was evident in its decision to
locate its plants in backward areas, so as to take advantage of substantial sales tax
and income tax incentives2. GACL's units in the states of Gujarat, HP and Punjab
also received sales tax incentives. This was possible as all new investments in
cement after 1986 enjoyed a sales tax benefit of up to 90% of the value of fixed
assets for a period of 14 years.
To get the sales tax incentives on a continual basis, companies needed to incur
constant capital expenditure. Thus, GACL continually expanded capacities in Gujarat
and Punjab. The Himachal Pradesh plant had the advantage of prioritized power
supply at a guaranteed cost for five years from the date of commissioning. The
decision to set up a plant in HP made all the more sense because the region was
cement deficit at that point of time. Also, the plant was closer to the mines and the
Punjab grinding unit. Another reason GACL finalized the plant location in HP was
that the area had substantial limestone deposits. However, there were three hills
directly between the quarries and the nearest piece of flat land large enough for the
plant.
Though the actual distance was just a few kilometres away, the only way existing
was a 17 km stretch of road full of potholes. This would have involved time delays

and large fuel bills for transporting the limestone to the plant location. GACL
engineers decided to get a conveyor belt built across the three valleys, through the
mountains. After many big construction firms refused to do the job, GACL built the
conveyor belt on its own, in just 18 months. The distance was cut down to just 2.8
kms and the belt moved 800 tonnes of limestone every hour.
Even the company's latest plant at Chandrapur was set up to take advantage of
substantial sales-tax benefits for almost 18 years. This unit was situated at the pithead of coal mines, to save on freight costs. GACL's management realized that the
time taken to set up a plant was not entirely in its hands. The company's actual
work began after it had identified the right location, acquired the necessary license,
power and water supply connections and machinery. From this point onwards, the
work at the site was something the company could control. GACL decided to let its
engineers define their own jobs and gave them the authority to take on-the-spot
decisions regarding capital expenditure and schedules for achieving targets. The
engineers were also allowed to set daily, weekly and monthly tasks for themselves.
This empowerment of engineers proved to be very advantageous for the company:
job functions were more clearly defined and response time was reduced by as much
as 90% since engineers did not have to wait for approvals. GACL's plant engineers
placed orders for machinery well before the site was chosen. So the equipment was
ready for installation by the time the site engineers had acquired the land.
As a result, GACL was able to cut down substantially on the commissioning time of
its plants. The very first plant at Ambuja Nagar was commissioned in just 22
months. This was a significant achievement, as a plant of similar size normally took
three years to install. Even the second plant was commissioned in a record time of
13 months. GACL was able to save a lot of money just in terms of inflationary costs.
Anil Singhvi (Singhvi), Treasurer, GACL said, "By squeezing the project time, you
save 10 per cent on account of inflation alone; plus we estimated an interest cost
savings of around Rs 250 million."
Once GACL got the plants running, it realized that to compete with the established
players, who had larger plants and economies of scale, cost control would be
important. The major cost components of cement are fuel (20%), freight and raw
material (17% each) and power (16%), with other components accounting for the
balance 30%. GACL decided to adopt a two-pronged strategy to achieve total cost
management (TCM): enhancing plant productivity and reducing costs on each of the
cost components individually.
Enhancing Productivity
GACL worked hard to reduce mining expenses. Cement companies normally operate
their own limestone mines. Mines were not only extremely destructive
environmentally, they were also expensive to operate. The explosives used for
mining were on the negative list of imports and substantial costs were involved in

implementing safety measures. In 1997, GACL sent its engineers to Australia to

study the extraction of metals. On their return, GACL implemented new
technologies that could access limestone in smaller areas where blasting was not
possible. To reduce the noise and vibration that occurred during the conventional
drilling, blasting and crushing process, the company introduced an Australian device
called Surface Miner. The Surface Miner was not only energy efficient, it also
recovered more material from a given area.
GACL engineers found that by focusing on kiln operations, they could not only
ensure cement quality, but could also reduce power consumption. A company
official said, "You have to make sure that the reactivity is such in the burning zone
that whatever you burn is converted into clinker3 minerals. And all this depends on
the burning process, which we had no way of monitoring from the outside.
Inadequate heating yielded inferior quality cement and over cooking made the
clinker harder to grind."
In the early 1990s, during a visit to a cement plant in Japan, GACL engineers learnt
that factors like retention time (time elapsed in the kiln and the speed of burning),
temperature, and rate of cooling could be judged from the microstructure of the
clinker minerals. The Japanese engineers physically scanned the clinker pieces
extracted from the kiln under a microscope to determine on the basis of their
experience, whether the clinker had been heated to the right temperature. After
undergoing extensive training, GACL's engineers tried the above procedure at their
own plants and successfully brought down power costs from 120 units/ton to 90
units/ton.
At GACL's second plant in Ambuja Nagar, kiln productivity ranged between 28003000 tonnes. While setting up the third plant in the area, GACL engineers realized
that if they had a larger pre-heater (in which the limestone was heated before being
fed into the kiln), they would be able to put more material into the kiln and thereby
increase production. However, the company's supplier of pre-heaters said it was not
possible to make a bigger pre-heater without modifying the kiln. The engineers told
the supplier to make a bigger pre-heater, while they themselves modified the
existing kiln.
After spending two month studying the data available on kilns from the other plants,
the engineers eventually worked out a plan for kiln modification. After the above
plans were implemented, the same kiln began producing 3500 tonnes per day. With
a marginal investment of Rs 24 million, the plant was now producing 0.17 million
tonnes more per year.
To ensure consistency in the quality of material and kiln temperature, GACL installed
a centrally operated computerized process control system. The system controlled
around 3,000 operational parameters to ensure quality at each step of the
production process. The system utilized raw material management software to

evaluate the optimum mix and redesign accordingly to get consistent quality and
optimum utilization of raw material.
In 1990-91, capacity utilization of the first plant at Ambuja Nagar was 140%.
However, GACL's engineers continued their drive to improve capacity utilization
further and installed a 24-hour monitoring system and introduced weekly checks to
check faults before a breakdown occurred for certain key components. As a result of
these measures, capacity utilization went up to 143% that year. GACL decided to
run its plants non-stop for 40 days against the industry average of five. This was
again inspired by the visit to the Japanese cement plant, which ran for 100 days
continuously. As a result of all these initiatives, GACL achieved more than 100%
capacity utilization during 1999.
GACL's focus on quality control practices was manifested in its decision to introduce
the practice of reporting quality related data 48 times a day instead of just once.
And to ensure that bags contained the right quantity of cement, GACL used Zero
Error Electronic Rotary machines which checked the quantity of cement in randomly
picked bags. In the case of 50 kg bags, GACL permitted a maximum variation of 200
gm. The company also invested around Rs 60 million in pollution control equipment
to limit dust and debris in emissions and dust suppression and extraction systems at
brushing and grinding units.
These pollution control measures led to a significant decline in the plant's repair
bills. Since dust particles cause wear and tear of equipment, the decrease in such
particles led to a sharp fall in the number of breakdowns in moving parts and gear
boxes. Around 81,000 trees were planted in Ambuja Nagar and an artificial lake was
also built. A portion of an old quarry was reclaimed and converted into a vegetable
garden. Because of the stringent environmental pollution control norms at its plants,
GACL was even able to maintain a rose garden near the Ambuja Nagar plant. The
conveyor belt set up for the HP plant was totally covered and no limestone dust
escaped into the fragile ecosystem around the
conveyor. And because all three motors for the conveyor belt were located at the
plant site, there were no engine noises and noxious vapors along its entire length.
Cutting Costs
- POWER
Power accounted for a large part of GACL's cost of production. GACL realized that a
captive power plant would increase savings substantially as power sourced from the
power grids was both unreliable and costly. So it set up fuel based captive power
plants in Gujarat (40 MW) and Himachal Pradesh (12 MW) in 1998. GACL's captive
power generation cost was only Rs 1.30 per kilowatt (excluding interest and
depreciation), compared to Rs 4.50 per kilowatt for power supplied by the Electricity
Boards. Soon, the company was not only getting around 60.3% of its total power

requirement from these plants, it was also selling the excess power it generated to
the local state governments. B S Dulani, Vice President, Operations, at the
Gujambuja plant said, "Small measures like modifications in higher capacity motors
for fans, coolers etc. according to specific requirements (shifting from AC to DC
drive, which allows regulation of current) wherever possible, and many other simple
steps helped reduce GACL's power consumption from 120 units/tonne of cement in
1987 to 88-90 units per tonne in 1995 against an industry average of 121 units per
tonne."
Coal is an important source of energy for the cement industry. However, while most
of the coal production in India is located in the central and eastern parts, the
cement industry is concentrated in western and southern parts. Thus, the cost of
transporting coal to the cement plants was very high. Moreover, the quality of coal
was also very poor. Cement companies had to decide whether to use imported coal
or substitutes like lignite, natural gas and oil.
GACL decided to import cheaper, higher quality coal from South Africa. The
company also began importing better quality furnace oil for its diesel generator
(DG) sets for its power requirements. This led to a considerable reduction in the
operating costs of their power plants. GACL consumed only 96 kwh of power per
tonne of cement against the industry average of 110-115 kwh per tonne. The
company's coal consumption was also the lowest in the industry. GACL consumed
170 kg per tonne of cement while the industry average was 250 kg per tonne. FUEL
Contd...
Since the company's Ambuja Nagar plants were located in the agricultural belt of
Saurashtra, where groundnut husk was available in plenty, GACL engineers tried to
use groundnut husk instead of coal to fire the kilns in one of the plants. The idea
worked wonderfully and the company was able to bring down the overall coal
consumption by 3%. In another plant, GACL replaced coal with crushed sugarcane.
The use of sugarcane however, created problems because the water content
differed with every batch, leading to fluctuations in kiln temperature. So the
company's engineers designed a special mechanical system that could adjust the
rate of feeding to ensure a stable temperature in the kiln. In the process, GACL
brought the energy bill down by Rs 20 for every tonne of crushed sugarcane.

GACL also began using fluorspar,4 a waste dumped by Gujarat Mineral

Development Corporation to reduce fuel consumption. They modified many higher
capacity motors for fans, coolers, and other equipments to reduce power
requirements by 1 to 1.5 units per tonne.

The company also replaced V belt drives (which consumed more energy due to
friction) with flat belt drives. Even though mechanical conveyors gave rise to
problems like spillages and breakdowns, GACL did not shift to pneumatic conveyors,
which consumed more power. Instead, the company devised an improved version of
the mechanical conveyor to eliminate its drawbacks.

- FREIGHT
According to analysts, the most successful of GACL's innovative strategies was the
development of a sea transportation route for its cement. At a company meeting in
the early 1990s, a Marketing Manager said, "As we all know, Bombay is the
country's largest cement market. It consumes a vast 2 lakh tonnes a month. The
city is also 1060 kms away by rail. The transportation and packing costs alone will
be phenomenal." Road transport was very costly and rail transport was not feasible
due to the limited number of wagons available with Indian Railways. Just when it
seemed that the company would have to agree to bear the road/rail transportation
costs, an employee in the Logistics department said, "I can bring Bombay closer to
our plant."
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4] A calcium fluoride compound which, combined with other minerals, lowers the
melting point.