A RESEARCH ANALYSIS OF INDIAN CEMENT INDUSTRY

A STUDY UNDERTAKEN AS A PART OF THE COURSE-RESEARCH METHODOLOGIES IN MANAGEMENT

Submitted By
MSP RANI G SANJUSHA 1226110118 1226110135

SECTION-A MBA (IB) 2010-12

Under the Guidance of

Dr. B. PADMA NARAYAN
Faculty Of GITAM SCHOOL OF INTERNATIONAL BUSINESS

DECLARATION
We hereby declare that the dissertation work titled RESEARCH ANALYSIS OF THE INDIAN CEMENT COMPANIES, is a record of independent study carried out by us under the guidance of Dr. B. Padma Narayan, Faculty, Gitam School of International Business, Gitam University, Vishakhapatnam. This dissertation has not formed the basis for the award previously of any Degree/ Diploma or any other similar titles of any university.

Date: Vishakhapatnam MEMBERS M.S.P Rani 1226110118 G. Sanjusha- 1226110135

ACKNOWLEDGEMENT

We would like to express our profound gratitude and grateful thanks to Dr. B. Padma Narayan, our faculty for Research Methodology for giving us the opportunity to study this course and undertake this research. We would like to express our deep gratitude to her for showing interest in our research and giving us her timely and valuable inputs and suggestions.

MEMBERS M.S.P Rani G. Sanjusha

CONTENTS
EXECUTIVE SUMMARY INTRODUCTION y Evolution of Cement industry y Structure of industry y Performance of industry y Current scenario y Government initiatives y Issues relating to cement industry y Industry in 2010 OBJECTIVES AND METHODOLOGY y Objectives of the study y Scope Of The Study y Methodology o Research design o Research plan y Limitations of the study DATA ANALYSIS AND INTERPRETATION y y y 6 9

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Top company profiles Multiple Regression analysis 31 o Analysis and findings Comparative study of financial performance using taxonomy 37 o Analysis and findings 42 46 48

CONCLUSIONS/ SUGGESTIONS BIBLIOGRAPHY ANNEXURES

EXECUTIVE SUMMARY

Executive Summary:
The Indian cement industry has witnessed revolutionary development reforms in the 1980s, when the Government partially deregulated the industry to provide it the well deserved growth impetus. Since then the Indian cement sector has experienced unparallel growth both in terms of capacity expansion and consumption. The sector today comprises of approximately 150 large cement plants having an installed capacity of almost 265 million metric tons. The cement sector also occupies a significant place in the Indian economy due to its strong linkages to other sectors such as power, transportation, construction and infrastructure. The report titled A Research analysis of Indian cement industry provides a detailed overview and a succinct, but deep dive analysis of the current status and overall growth of the Indian cement sector. The report provides an insight into the behaviour of prominent value chain determinants of the cement industry including sales turnover, consumption and financial performance substantiating key findings with necessary statistics. The report also provides information on the key issues relating to the cement industry affecting the sales and financial performance of the companies. Besides this, the report gives information regarding various initiatives and capacity expansion plans undertaken by the Government and private sector in order to infuse growth in the sector. The study is an outcome of research and analysis of the Indian cement sector. Th report is attempted at examining the sales revenue is consumption pattern and the financial performance of companies in North India. The report also provides a competitive landscape of the sector, shedding light on the business overview, key financials and recent business highlights of the key players. Key findings:
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Domestic demand for cement has been increasing at a fast pace in India due to the growing infrastructure needs and has surpassed the economic growth rate of the country.

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Cement consumption in India is forecasted to grow by over 10% in 2011-12 Sales revenue of the top companies is consumed mainly by the power and fuel expenses followed by distribution expenses and raw material expenses. Advertisement expenses have little or no impact

Birla Corporation Ltd ranks first in the financial performance among the cement companies in North India followed by Shree cements Ltd in 2010

Sanghi Industries Ltd and Prism Industries Ltd have shown a poor financial performance in the year 2010

Key Issues and Facts Analysed:

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Factors that are fuelling growth into the Indian Cement Industry Evolution, structure and performance of Indian Cement Industry Issues faced by cement industry in the current scenario Expenses that constituted a major share of sales revenue consumption of top companies in India in 2010

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Financial performance ranking of top cement companies in North India in 2010 Economic environment of cement industry in India Future outlook and impact of Budget on cement industry

Key players analysed: This study provides an overview of the performance and financial performance of key players in the Indian Cement Industry having a large market share. Prominent players in the cement industry including ACC Ltd, Ambuja Cements Ltd, Birla Corporation Ltd, Ultra tech Cements Ltd etc. and other top players in North India like Shree cements Ltd, JK cement Ltd. Research Methodology: Data collection: Secondary data has been collected from various journals and web sources including Capitaline, Prowess database and other companys websites and databases Analysis Method: Multiple Regression analysis and Taxonomic Method have been using software tools have been used for analysis and processing of information The study has been concluded based on the results obtained and necessary suggestions.

INTRODUCTION

Cement is an essential component of infrastructure development and most important input of construction industry, particularly in the governments infrastructure and housing programs, which are necessary for the countrys socioeconomic growth and development. It is also the second most consumed material on the planet. Indian cement industry is on a growth path basically on account of the GDP growth which resulted in a booming housing and real estate sector, global demand, and the increasing activity in infrastructure development such as state and national highways drive the demand for cement. It is the key raw material in construction industry. Also, it has highly influenced those bigger companies to participate in the growing sector. At least 125 plants set up by the big companies in India with about 300 other small scale cement manufacturers, to fulfil the growing demand of cement. Being one of the vital industries, the cement industry contributes to the nation's socioeconomic development. The sum total utilization of cement in a year indicates the country's economic growth. The Indian cement industry is the second largest producer of cement in the world just behind China, but ahead of the United States and Japan. It is consented to be a core sector accounting for approximately 1.3% of GDP and employing over 0.14 million people. Also the industry is a significant contributor to the revenue collected by both the central and state governments through excise and sales taxes. Evolution: Indian Cement Industry is a century old industry and started getting organized in the early 1900s. In 1914, India Cement Company Ltd was set up in Porbandar. The World War I gave the initial push to the cement industry in India and the industry started growing at a fast rate in terms of manufacturing units, and installed capacity. During the earlier years, production of cement exceeded the demand. Society had a biased opinion against the cement manufactured in India, which further led to reduction in demand. The government intervened by giving protection to the Industry and by encouraging cooperation among the manufacturers. In 1927, the Concrete Association of India was formed with the twin goals of creating a positive awareness among the public of the utility of cement and to propagate cement consumption. The price and the distribution control system came into being in the year 1956, so as to ensure fair model for consumers as well as manufacturers.

Period of Restriction (1969 -1982) The cement industry in India was severely restrained by the government during this period. Government hold over the industry was through both direct and indirect means. Government intervened directly by exercising authority over production, capacity and distribution of cement and it intervened indirectly through price control. In 1977 the government authorized higher prices for cement manufactured by new units or through capacity increase in existing units. But still the growth rate was below par. In 1979 the government introduced a three tier price system. Prices were different for cement produced in low, medium and high cost plants. However the price control did not have the desired effect. Rise in input cost, reduced profit margins meant the manufacturers could not allocate funds for increase in capacity. Partial Control (1982 -1989) To give impetus to the cement industry, the Government of India introduced a quota system in 1982.A quota of 66.60% was imposed for sales to Government and small real estate developers. For new units and sick units a lower quota at 50% was affected. The remaining 33.40% was allowed to be sold in the open market. These changes had a desired effect on the industry. Profitability of the manufacturers increased substantially, but the rising input cost was a cause for concern. After Liberalization In 1989 the cement industry was given complete freedom, to gear it up to meet the challenges of free market competition due to the impending policy of liberalization. In 1991 the industry was de licensed. This resulted in an accelerated growth for the industry and availability of state of the art technology for modernization. Most of the major players invested heavily for capacity expansion. To maximize the opportunity available in the form of global markets, the industry laid greater focus on exports. The role of the government has been extremely crucial in the growth of the industry. Structure of the Industry: There are many characteristic features that define the structure of Indian cement industry.  Size: Firstly, it is a combination of mini (more than 300 units) and large capacity cement plants, where majority of the production of cement (94%) in the country is by large plants. 10

The conventional method of cement manufacturing used by large plants (Rotary Kiln) needs high capacity, huge deposits of lime stone in its vicinity, high capital investment and long gestation period. Hence mini cement plants based on Vertical Shaft Kiln technology, suiting the small deposits of limestone are becoming popular. Also they cr eate less environmental pollution. Against the requirement of Rs. 3500 per tonne of capacity of large plants, capital costs for mini-cement plants come to about Rs. 1,400 to Rs. 1,600 per tonne (ICRA 2006).  Cluster formations: One of the other defining features of has resulted in its evolving in the form of clusters. The proximity of coal deposits constitutes another important factor in cement manufacturing. Since cement is a high bulk and low value commodity, competition is also localized because the cost of transportation of cement to distant markets often results in the product being uncompetitive in those markets. There are at present seven clusters, where Satna (Madhya Pradesh) cluster is the leader in capacity as well as production (CMA 2007).  Tax structure: Traditionally, cement has been a heavily taxed sector with both the central and the state governments levying the taxes which amount to around 30% of the selling price of cement or around 70% of the ex-factory price (excluding local transport and dealer margins) (ICRA 2006). The major taxes/ levies comprise central excise duty; sales tax levied by the respective state governments; royalty and cess on limestone and coal; and, duties on power tariff. The excise duty rates on cement are on specific basis, as against ad valorem rates on most products.  Energy Intensive: The cement industry is energy intensive and thus power costs form the most critical cost component in cement manufacturing, of about 35% to total cost of production. The issues here is the technology used (dry versus wet process), fuel efficiency (efficient use of coal/lignite/any other material used for burning) and power efficiency (power availability, use of alternative fuels, unit power consumption, cost and availability of captive power). The scope for cost reduction through better energy efficiency may now be limited for better performing companies since they have already reached the best feasible levels.  Capital intensive: Since the capital intensity of a new cement project is high, access to capital has become a significant entry barrier. The cost of a new cement plant can be equivalent to about 3 years of revenue (WBCSD 2002).  Cyclic nature: The market and consumption is closely linked to the economic and climatic cycles. In India, cement production normally peaks in the month of March while it is at its 11

lowest in the month of August and September. The cyclical nature of this industry has meant that only large players are able to withstand the downturn in demand due to their economies of scale, operational efficiencies, centrally controlled distribution systems and geographical diversification.  Climate change and sustainable development: The cement industry produces 5% of global man-made carbon dioxide, a major gas contributing to climate change (WBCSD 2005). In short, the main environmental challenges facing the cement manufacturing industry are (Environment Agency 2005), releases to air of oxides of nitrogen, sulphur dioxide, particulates and carbon dioxide, use of resources, especially primary raw materials and fossil fuel and generation of waste.

Performance of the industry

Price and distribution controls lifted on 1st March 1989 and licensing abolished since 25th July 1991, gave fresh impetus to the key infrastructure industry. However, the performance of the industry improved all the more after late 1990s guiding it to newer heights. The process of improvement in key performance indicators of the industry can be analyzed during changing policy regimes of the government. All the indicators are grouped into primary and other indicators, which clearly reflect the status of the industry in control and decontrol periods.  Installed capacity: The installed capacity of the Indian cement industry has continuously shown an increase over the period. The industry started with 0.0010 million tonnes (m.t.) of installed capacity in 1914 and reached 3.28 m.t. in 1950 and 9.30 m.t. in 1960. The growth in the capacity has been traced from 1970 onwards when the industry fell in the hands of government control. In the period between 1970-71 and 1988-89, the installed capacity of the cement industry grew from 17.61 m.t. to 58.97 m.t. at the ACGR of 7.47%. Following this, the period after total decontrol till 2006-07, the capacity addition although increased at rates approximately equal to previous period at 7.09% annually  Production: When the industry started in 1914, production was mere 0.0001 m.t. of cement. This slowly increased to 1.5 m.t. in 1940 and 2.2 m.t. in 1950. The following two decades witnessed enough production making it 14.40 m.t. in 1970-71. The period from 1970-71 to just before decontrol and delicensing of the industry i.e. till 1988-89, the production saw ACGR of 6.69%, just below the 12

growth rate in installed capacity. This indicated oversupply, because of which whole of the industry suffered. The next period of decontrol, though compensated for this excess. Here the ACGR is seen to be 8.09%, well above the previous rates, which is also more than the growth in installed capacities of 7.09%.During September 2010, the cement production touched 12.54 million tonnes (m t), while the cement despatches quantity was 12.56 m t during the month. The total cement production during April-September 2010-11 reached 81.54 m t as compared to 77.22 m t over the corresponding period last fiscal. Further, cement despatches also witnessed an upsurge from 76.50 m t during April-September 2009-10 to 81.10 m t during April-September 2010-11.  Capacity Utilization Starting with 10% in the beginning of the industry, the capacity utilization peaked to around 99% in 1937-38. But this could not be sustained and the capacity utilization fell sharply to 67% in 1950, improving marginally in the following two decades. The period of controlled market, was characterized by oversupply in the industry, which got reflected in negative ACGR of -0.73%. Whole of the period of 1970-71 to 1988-89 saw fluctuations, moving utilization levels to as low as around 65% in some years. But after total decontrol, there was some sort of upturn in this trend due to increased production levels and the ACGR went up to positive 0.93%. In January 2007, it even went up to 100%, highest ever, guiding it to the average of 94% for the financial year. This became possible only because the installed capacities did not increase as much as production did, finally leading to closure of gap between supply and demand  Export The export of Indian cement has increased over the years mostly after decontrol, giving the muchrequired boost to the industry. The demand for cement is a derived demand, for it depends on industrial activity, real estate, and construction activity. Since growth is taking place all over the world in these sectors, Indian export of cement is also increasing. India has an immense potential to tap cement markets of countries in the Middle East and South East Asia due to its strengths of locational advantage, large-scale limestone and coal deposits, adequate cement capacity and production of world-class quality of cement with the latest technology. Hence, the firms in the industry are capitalizing on the opportunities, provided by the government accompanied by favorable economic conditions. In volume terms, the exports from Indian cement industry increased from 1.43 L.t. in 1989-90 to 58.70 L.t. in 2006-07. Abounding in about 130 big and 300 small cement plants, India's cement production capacity stands at 167.36 million tonnes. Currently, the cement industry in India is positioned at number 2 in the world. 13

 Technology The Indian cement industry has undergone vital changes through technological up gradation and assimilation of latest technology in the pursuit of cost efficiency and the drive for consolidation. Modernisations at the plants and the improvement of plant processes have also helped reduce manpower requirements (IBEF 2009). Cement production is an energy-intensive process in which a combination of raw materials is chemically altered through intense heat to form a compound with binding properties. These can be ground as a dry mixture or combined with water to form slurry. The addition of water at this stage has important implications for the production process and for the energy demands during production. The three different cement manufacturing processes in the country are: (a) wet process, (b) semiwet process, and (c) dry process. The dry and semi-wet processes are more fuel-efficient. The wet process requires 0.28 tonnes of coal and 110 kWh of power to manufacture one tonne of cement, whereas the dry process requires only 0.18 tonnes of coal and 100 kWh of power (IBEF 2009). The proportion of cement capacity by the wet and semi-wet processes has been decreasing over the past decades. In 1950-51, the major share of cement capacity was from the wet process (97%); the semi-wet process contributed only 3%, with no plants using dry process for production. Since then there is no looking back for the technological up gradations, as today only 2% of capacity uses wet process.  Prod uct Differentiation India is producing different varieties of cement, based on different compositions according to specific end uses, like Ordinary Portland Cement (OPC), Portland Pozzolana Cement (PPC), Portland Blast Furnace Slag Cement (PBFS), Oil Well Cement, Rapid Hardening Portland Cement, Sulphate Resisting Portland Cement and White Cement etc. The basic difference lies in the percentage of clinker used. These different varieties of cement are produced strictly under BIS specifications and the quality is comparable with the best in the world. The production of Ordinary Portland Cement has decreased since deregulation, it being 71.28% in 1989-90 slipping to 31.21% now. Percentage of production of Portland Pozzolana Cement has steadily increased from 1989-90 to 2010-11. This is a favourable change in the product mix of Indian cement industry as PPC in more specialized type of cement.

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In an environment of growing competition witnessed in the post decontrol era, one of the major developments has been the introduction of higher grades of cement. Grade is the 28 days compressive strength of Ordinary Portland cement, when tested as per Indian Standards under standard conditions. Depending upon the strength requirement, OPC is thus classified as OPC-33 grade, OPC-43 grade and OPC-53 grade. However, realization is growing fast amongst the consumers at large, that the properties of durability are of greater importance than strength.  Regional Concentration Cement, being a bulk commodity, is freight intensive and transporting cement over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions, viz., North, South, West, East and the Central region. In terms of capacity historically, the southern region has always dominated the industry and is excess in capacity owing to the availability of limestone, but the western and northern regions are the most lucrative markets. East has most of the consumption of cement as of now due to growing infrastructure. The distribution of capacities of cement in India has now become more balanced thus reducing the concentration in the southern region of the country. In 1950-51, the maximum capacity was in Southern region i.e. 34.91% while North had the least of 17.59%. This scenario remained the same in the following decade and in 1970-71, when south installed 35.24% of capacities whereas North deteriorated with 15.60% of capacities. Situation was the same till 1980s. It was only in 1990s when West grew up to first position in terms of capacity. But as the fifth geographical division came up, with MP moving to center with a major chunk of capacity, the concentration has reduced. Also earlier capacities were concentrated around limestone deposits only but market access has become very important determinant of location of cement plants. In 2006-07, South again dominated the capacities with 32.22%, which are actually excess, East, West and Centre has more or less equal capacities of 14%, 18% and 15% respectively whereas North is second highest at 21%.  Market Concentration and Increased Competition Though the industry saw consolidation by domestic players starting in the mid-1990s, it was only in the late 1990s that foreign players entered the market. The structure of the industry can be viewed as fragmented. There are around 20 prominent companies in India in the cement domain. These 20 companies together contribute almost 70 percent to the total cement production in India. The fragmented structure is a result of the low entry barriers in the post decontrol period and the 15

ready availability of technology. The extent of concentration in the Indian cement industry has increased over the years. This concentration is mainly because of the focus of the larger and the more efficient units to consolidate their operations by restructuring their business and taking over relatively weaker units. Also the relatively smaller and weaker units are finding it difficult to resist the cyclical pressure of the cement industry. The cement industry is witnessing a number of multinationals entering the market and mergers and acquisitions in domestic market itself, bringing smaller players under the umbrella of larger companies, and larger companies coming under the umbrella of global players. The booming demand for cement, both in India and abroad, has attracted global majors to India. In 2005-06, four of the top-5 cement companies in the world entered India through mergers, acquisitions, joint ventures or green field projects. These include France's Lafarge, Holcim from Switzerland, Italy's Italcementi and Germany's Heidelberg Cements. The consolidation witnessed in the industry in recent times has resulted in two crucial domestic deals. First being the de-merger of L&Ts cement (renamed as Ultratech Cement Ltd.) division and its acquisition by Grasim. This has led to the creation of cement giant, making the Ultratech- Grasim combine the market leader in the country in terms of market share, particularly in the South. The other consolidation effort was seen when Gujarat Ambuja acquired 14.4% stake in ACC in 2000 (India Infoline 2003). Following this Holcim took a big stake in ACC in the year 2005 and has recently announced an acquisition of 14.8% in Gujarat Ambuja Cement Ltd., now Ambuja Cements Ltd. Thus, the top two groups in the industry, Aditya Birla Group (Grasim and Ultratech Cements Ltd. combine) and Holcim Group (Ambuja Cements Ltd. - ACC Ltd. combine) now control more than 45 % of total capacity in the country. Company ACC Gujarat Ambuja Ultratech India Cements JK Group Production 17,902 15,094 13,707 8,434 6,174 Installed Capacity 18,640 14,860 17,000 8,810 6,680

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Current Scenario: With the capacity of 224 Million Tonnes (MT), the Indian cement industry is today truly big in size and hence accommodates a number of cement companies in the market. Not only that, more growth is further expected in the coming years, which will also lead to the growth of top cement companies in India. The overall capacity increased to 224 million tonnes (MT) as on April 30, 2010, according to the Cement Manufacturers Association from 151 million tonnes in FY2004-05 translating into a CAGR of 11% YOY. The average capacity utilisation and cement dispatches both maintained a steady growth. Total dispatches recorded 181 million tonnes during 2008-09 against 141 million tonnes in 2005-06. Most players, large as well as small have expanded their installed capacities in the recent past. There was a capacity addition of 13.51 million tonnes in the last fiscal despite the slowdown. More than 75% of this (9.85 million tonnes) came through Greenfield projects. The remaining 3.66 million tonnes came through Brownfield projects. South India which had consumption of 54.3 million tonnes in the previous (the highest amongst all the four regions in the country) witnessed three Greenfield projects by the Madras cement, Chettinad Cement and Rain Commodities. Each has a capacity of two million tonnes. The total cement production the country in FY09 was 210 MT. It is further expected to reach 236.16 MT in FY11 and 262.61 MT in FY12. As per data from Central Statistical Organisation, the production of asbestos cement sheets grew by 13% to 2.16 lakh tonnes in April 2010. But the production recorded y-o-y fall of 1.0%, 0.6%, 22.1%, 14.3% and 21.4% in May, June, July, August and September 2010. After such y-o-y fall for five months in succession, the industry resumed marginal 0.8% growth in October 2010. As per industry sources, the good South West monsoons impacted the sales in the quarter ended September 2010. But, contrary their expectations, the growth momentum are not up to the mark in the 2010. As a result, though the prices of inputs including cement have hardened, the players are not able to adequately pass on the rise in costs through hike in asbestos cement sheet prices. This is set to worsen the margins of the players, in the midst of accelerating costs, sluggish demand and moderate increase in selling prices.

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Government Initiatives The cement industry is pushing for increased use of cement in highway and road construction. The Ministry of Road Transport and Highways has planned to invest US$ 354 billion in road infrastructure by 2012. Housing, infrastructure projects and the nascent trend of concrete roads would continue to accelerate the consumption of cement.
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Increased infrastructure spending has been a key focus area. In the Union Budget 2010-11, US$ 37.4 billion has been provided for infrastructure development.

The government has also increased budgetary allocation for roads by 13 per cent to US$ 4.3 billion.

Gujarat plans to treble its cement production capacity in 3-5 years. Proposals have been invited from cement companies such as ACC, ABG, Ambuja Cement, Emami, Indiabulls, Adani group, Ultratech and L&T and the state hopes to raise its capacity from 20 million tonnes per annum to 70 million tonne. The state will host the biennial Vibrant Gujarat Global Summit in January 2011 and expects to witness investment proposals worth US$ 13.2 billion in the cement sector.

The key issues relating to the cement industry:

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Carbon Dioxide emissions:

The cement industry is responsible for 8% of global carbon emissions. It is the key ingredient in concrete, and one that is rapidly emerging as a major obstacle on the world's path to a lowcarbon economy. The manufacturing process involves burning vast amounts of cheap coal to heat kilns to more than 1,500C. It also relies on the decomposition of limestone, a chemical change which frees carbon dioxide as a byproduct. So as demand for cement grows for schools, hospitals, luxury hotels and car parks, so will greenhouse gas emission.
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Transportation costs:

Cement being a high bulk and low value commodity, outward freight accounts for close to one fifth of the total manufacturing cost. In addition, for every tonne of cement produced, close to 1.7 tonnes of raw material (including coal) is transported. In this scenario, the location of the cement 18

plant becomes crucial. While deciding on the plant location, there is a trade-off between proximity to raw material sources and proximity to markets. The plant has to address issues of logistics (evacuation of cement by rail, road or waterways), power availability in the region, and the first strategy is to locate manufacturing facilities near the consuming centers. In this case, outward freight is minimized and marketing flexibility enhanced at the cost of higher raw material assembly costs. The second strategy is to locate the plant close to the mineral deposits, so as to minimize raw material assembly costs. Given that 1.4-1.5 tonnes of limestone are required per tonne of clinker, locating the plant along the limestone deposits is the logical corollary. Thus, there can be two broad locational strategies, which is not merely to minimize unit manufacturing cost, but to minimize unit delivered cost as well. The freight cost becomes a significant factor in determining the landed cost of cement. This has resulted in very low volumes of international trade in cement. World cement trade has averaged just around 6 -7% of the total production. Most of the cement plants in India are located in and around the limestone clusters. These clusters are distant from the markets for cement. Thus, cement companies have to rely on extensive transportation for moving coal from the coal pitheads to the cement plants and for dispatching cement from the plant to the markets. As both coal and cement are of low value and are bulky in nature, freight costs are considerably higher for cement plants. Cement companies use both road and rail to transport cement and to receive coal. Rail despatches amount for about 33% while roads carry the balance 66%. The balance 1% is accounted by sea transportation. The share of road over rail has only gone up over the years. For coal transportation, the dependence on rail network is still very high and accounts for around 70% of coal movement Although rail transportation is more economical for distances beyond 250-300 km, cement companies have started preferring road transportation even for longer distances because of several reasons. Rising railway traffic coupled with insufficient investments by the railways for increased wagon supplies and the fact that the cement industry is not an important customer of the Railways (cement cargo accounts for just 7-8% of the total railway freight) have resulted in a shortage of wagon supply to the cement industry.

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Coal prices:

Cement is made from a mixture of calcium carbonate (generally in the form of limestone), silica, iron oxide and alumina. A high-temperature kiln, often fuelled by coal, heats the raw materials to a partial melt at 1450C, transforming them chemically and physically into a substance known as clinker. This grey pebble-like material is comprised of special compounds that give cement its binding properties. Clinker is mixed with gypsum and ground to a fine powder to make cement. Coal is used as an energy source in cement production. Large amounts of energy are required to produce cement. Kilns usually burn coal in the form of powder and consume around 450g of coal for about 900g of cement produced. Coal, accounting for almost 35-40 per cent of cost of production of cement, is in short supply. This has forced cement firms to buy local coal from the open market at a 30 -60 per cent premium. According to a report in economic times in 2007, the supply situation would continue to remain tight for the rest of the financial years. As a result, it is expected that there would be upswing in cement prices as tightness continues.
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Other Environmental Impacts:

The cement industry does not fulfil the requirements of environmentally sustainable industry because of the following reasons:
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It uses non-renewable raw materials and energy, such as coal. It sources its raw material by mining, which destroys the local ecology. It produces products that are not recyclable such as mercury, cadmium, arsenic and cobalt.

In India, approximately 70% of cement plants have communities residing near their mines within 1 km radius. And 90% of the limestone, a major raw material for cement production is extracted via blasting. As a result, the local communities face the following problems:
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Blasting has high environmental impact- noise, vibration and dust. There are also complaints related to building damage and dust problems due to blasting, mining and material transportation.

Mining also results in depletion of groundwater levels.

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Mixed fortunes for the cement industry in 2010: The first and second halves of calendar year 2010 told two very different stories for the industry. The construction sector remained buoyant in the early part of the year, supported by the governments fiscal stimulus measures and easy monetary policy. This resulted in cement demand growth of almost 10% in the first quarter. However, in subsequent quarters, as interest rates began to rise and stimulus programmes were partially rolled back, demand growth slowed and finished at just over 7% for the first half. The early onset of monsoon compared to 2009 had a further negative impact on cement demand growth in the third quarter, as severe flooding in some regions caused major disruption to construction activities. The anticipated pickup in demand following the major festival season in November & December was then slow to materialise, partly as a result of further un- seasonal weather conditions in several regions. Finally the overall demand growth for 2010 was 6%, as industry despatches increased from 192.5 million tonnes to 204.0 million tonnes. Export markets remained in the doldrums, as a result of the slow global recovery, and

particularly the slump in construction in the Gulf region. This created added pressure in the western region of India, as greater quantities of cement and clinker were diverted to the domestic market. On the supply side, there have been significant cement capacity additions, totalling approximately 60 million tonnes during the past two years, taking total industry capacity to around 300 million tonnes at the end of 2010. As a result of various delays in commissioning and ramp up of plants, in addition to the strong demand growth, this did not lead to a major imbalance until the second half of 2010. But during the latter period, average industry capacity utilisation fell as low as 70%, and even lower in the southern region, which saw the highest capacity additions. The combination of slower demand growth and increased supply put pressure on cement pricing and margins, and realisations declined sharply during the third quarter, particularly in the South. Prices stabilised to some extent in the fourth quarter, however, for the full year average prices were slightly lower than in 2009.

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OBJECTIVES AND METHODOLOGY

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OBJECTIVES OF THE STUDY

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To analyze the performance of top Indian cement companies and working of Indian cement industry

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To see how revenue is dependent on various expenses for top 20 companies in India To compare the financial ratios of the leading companies in the industry located in North India.

SCOPE OF THE STUDY: This study will help in understanding the performance of cement industry and the main factors which affect or influence the sales revenue of the top companies in India. It will also help in analyzing, interpreting and comparing the financial performance of North Indian companies. This Study will reveal which are important factors that a company should focus on in order to optimise their cost and improve their financial performance. METHODOLOGY OF STUDY Research design Research was initiated by examining the secondary data to gain insight into the study. By analyzing the secondary data, the study aim is to explore the short comings of the present system and techniques used will help to validate the analysis of secondary data besides on unrevealing the areas which calls for improvement. For the proper analysis of data statistical techniques such as multiple regression analysis and Taxonomic method were used which helps in making a required analysis from the data available. The data which was collected from a sample of population was assumed to be representing entire population as interest. Factors like annual sales turnover and regional performance were used for the classification purpose. Multiple regression analysis has been used in order to study and measure the dependency of sales revenue of the companies on manufacturing expenses like Raw material, Distribution, Advertisement and expenses towards Power and Fuel. Taxonomic Method is used to compare the various financial ratios of the companies located in North India and was used as a tool to rank the companies based on their financial performance.

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Developing the research plan The data for this research project has been collected through self Administration. Due to time limitation and other constraints secondary data is used. The Secondary Data was collected from internal sources. The secondary data was collected on the basis of organizational file, official records, news papers, magazines, internet, management books, preserved information in the companys database and website of the company. The major source of data has been obtained from web sources like Capitaline, Prowess and Proquest. Sample size The sample size has been decided for a meaningful conclusion. For designing the sample size, it was thought proper to cover a very small percentage of population in various regions based on their sales turnover and consistent performance. For conducting a multiple regression analysis a sample of 20 cement companies from all over India has been decided based on their performance in the year 2010. A sample size of 10 companies located in North India has been decided for Taxonomic method. The basic aim of doing the research is academic; hence most convenient way is selected. Techniques and tools used This study conducted is a conclusive causal statistical study; where a decision which is precise and rational has been taken. The study is conclusive because after doing the study, it is believed to give a conclusion regarding the position of the companies in the industry. The study is statistical because throughout the study several statistical techniques have been used to analyse the data. Thus, it is the best study for this purpose as it provides the necessary information which is utilized to arrive at a concrete decision. Tools like Microsoft Office Excel 2007 have been used for the study. LIMITATIONS OF THE STUDY:
y y

The study is limited to selection of top 20 cement companies in India. The number of years used for comparing the performance of these companies is only 1 i.e. for the year 2010

24

DATA ANALYSIS & INTERPRETATION

25

The Indian Cement Sector is divided on the basis of regional operations. Companies fall within the categories of:
y y y y

INDIA MAJOR NORTH INDIA MAJOR SOUTH INDIA MINOR NORTH INDIA MINOR SOUTH

MAJOR COMPANIES The top 20 cement companies have been selected based upon their performance in the last financial year i.e., 2010. The net sales turnover has been used to judge performance. The 20 major companies are A C C Ltd. Ambuja Cements Ltd. Binani Cement Ltd. Birla Corporation Ltd. Century Textiles & Inds. Ltd. Chettinad Cement Corpn. Ltd. Heidelberg Cement India Ltd. India Cements Ltd. J K Cement Ltd. Lafarge India Pvt. Ltd. Madras Cements Ltd. My Home Inds. Ltd. O C L India Ltd. Orient Paper & Inds. Ltd. Penna Cement Inds. Ltd. Prism Cement Ltd. Rain Commodities Ltd. Samruddhi Cement Ltd. [Merged] Shree Cement Ltd. Ultratech Cement Ltd.

26

Top 5 Cement companies overview ACC LIMITED Established in 1936, ACC has been a pioneer and trend-setter in cement and concrete technology. A prominent overseas presence and figuring on the elite list of consumer super brands of India but most importantly ACC has been amongst the first Indian companies to make environmental protection, it is a cornerstone of its corporate objectives. The historic merger of ten existing cement companies led to the establishment of ACC melding into a cohesive organization in the year 1936 at Maharashtra. Its a big company in cement manufacturing and offers the services of Ready mixed concrete and Consultancy service. This company is listed by Bombay Stock Exchange, National Stock Exchange and in London. The company received an award as 'Good Corporate Citizen' for the year 2005-2006. During the year 2007 company acquired 100 % of the equity stake of Lucky Minmat Private Limited for Rs 35 crores and also acquired 14.3 % equity stake in Shiva Cement Limited. Meanwhile the company divested its entire equity shares in Almatis ACC Ltd to the Almatis group. The overseas contract with YANBU Cement Company in the kingdom of Saudi Arabia is successfully ongoing relationship from last 28 years and has been renewed up to February 28, 2011. The company has developed comprehensive expansion plans to meet the requirements of its agenda for growth with a view to attain leadership position in the cement industry, for that company made a project for augmentation of clinkering and cement grinding. As a result with this the capacity of Gogal works stands increased to 4.4 Metric Tonnes Per Annum. ACC planed to expand the unit of Bargarh works capacity to 2.14 MTPA together with 30MW captive power plant is underway. The implementation of the projects for augmenting grinding capacity at Madukkarai by 0.22 MTPA and New Wadi by 0.60 MTPA. ULTRATECH CEMENT LTD. UltraTech Cement Limited was incorporated as a public limited company on 24th August 2000, as L&T Cement Limited a 100% Subsidiary of Larsen & Toubro Limited. The name of the Company was changed to UltraTech CemCo Limited with effect from 19th November 2003. The
th name of the company was again changed to UltraTech Cement Limited with effect from 11

October 2004.

27

UltraTech Cement Limited has an annual capacity of 18.2 million tonnes. It manufactures and markets Ordinary Portland Cement, Portland Blast Furnace Slag Cement and Portland Pozzalana Cement. It also manufactures ready mix concrete (RMC). UltraTech Cement Limited has five integrated plants, six grinding units and three terminals two in India and one in Sri Lanka. UltraTech Cement is the countrys largest exporter of cement clinker. The export markets span countries around the Indian Ocean, Africa, Europe and the Middle East. INDIA CEMENTS India Cements was set up in 1946 and the company's first plant was established in 1949 at Sankarnagar, Tamil Nadu. Since the India Cements Ltd. has been established, it has risen in stature to become the biggest cement producer in south India. India Cements has 7 plants spread across Andhra Pradesh and Tamil Nadu. The total production capacity of the plants is around 9 million tons per year. In south India, India Cements Company has a 28% market share and it plans to achieve a market share of around 35% in the near future. Around 90% of India Cements Company's produce is sold in the Tamil Nadu and Kerala markets. India Cements Company has a distribution network which is very strong - it has over 10,000 stockists out of which around 25% is devoted to the company. The India Cements Ltd. owns famous brands such as Rassi Super Power, Sankar Super Power, and Coromondal Super Power (In the year of 1990, ICL acquired Coromandel Cement plant at Cuddapah,consequently installed capacity rose to 2.6 million tonnes per annum). The India Cements Company has subsidiary companies which include ICL Financial Services, Industrial Chemicals & Monomers, ICL International, and ICL Securities. In 1997 India cements acquired Aruna Sugars Finance Ltd which was later renamed as India Cements Capital & Finance Ltd. It also acquired Cement Plant of Visaka Cement Industry, at Tandur, Ranga Reddy district of Andhra Pradesh with Installed capacity 9,00,000 Tonnes.The cement division of Raasi Cement (RCL) was vested with the company from April.1998 under a scheme of arrangement AMBUJA CEMENT The company's cement plant was commissioned in 1985. It was set up in technical collaboration with Krupp Polysius, Germany, Bakau Wolf and Fuller KCP. The company got necessary approvals for setting up another cement plant with 1 million tonne capacity per annum at Himachal Pradesh in the year 1991. The Company undertook bulk cement transportation, by sea, to the major markets of Mumbai, Surat and other deficit zones on the West Coast. Transportation was to be 28

carried out by three specially designed ships during the year 1992. During the year 1994, the company's Muller location 1.5 million tonne cement project with clinkeriation facility at site in H.P and grinding facility both at Suli & Ropar in Punjab was bespoken. In 1997, Kodinar plant of the company was originated its commercial production with an enhanced capacity. In the last decade the company has grown tenfold. It was the first company in India to introduce the concept of bulk cement movement by the sea transport. The company's most distinctive attribute, however, is its approach to the business. Ambuja follows a unique homegrown philosophy for successful survival. Ambuja is the most profitable cement company in India, and one of the lowest cost producers of cement in the world. The company was awarded for its credit, the National Award for commitment to quality by the Prime Minister of India, National Award for outstanding pollution control by the Prime Minister of India, Best Award for highest exports by CAPEXIL and Economic Times - Harvard Business School Association Award for corporate excellence in different years. The company was adjudged as the top Indian company in the cement sector for the Dun and Bradstreet - American Express Corporate Awards 2007. The company developed a unique homespun channel management model called Channel Excellence Programme (CEP) for marketing their product. Over 7000 dealerships and 20,000 retailers across India are covered under this model. The company name was changed from Gujarat Ambuja Cements Limited to Ambuja Cements Limited on April, 2007, the word Gujarat was dropped to reflect the true geographical presence of the company SHREE CEMENT LTD. Shree Cement Ltd., belonging to the Calcutta-based industrialists P D Bangur and B G Bangur is one of the largest cement producer in Rajasthan was incorporated in the year 1979. Shree has two plants in Beawar, Rajasthan with 2.6 million tonne installed capacity. Shree's is the largest single location manufacturer with production in Northern India. The company markets its products under two brands- Shree Ultra Ordinary Portland Cement (OPC) and Shree Ultra Red Oxide Cement. The company has undertaken new activities in the field of leasing and hire purchase during 1994- 95. The company has tied up with Christian Pfeiffer & Company, Germany, for installing a horizontal impact crusher to pre-crush clinker before using it in the cement mill to upgrade cement output and save energy. It has also tied up with IKN, Germany, to incorporate their KIDS system in the clinker cooler to improve efficiency of the clinker cooler and save heat. The company has been awarded by KPMG 29

Quality Registrar, USA certificate of ISO 9002 during the year. In Oct.'97, the Raj Cement was commenced production. The company has successfully commissioned its new cement plant of 1.24 million tonne capacity and has already attained 100% capacity utilization. The company's modernization and expansion plan to increase its installed capacity from 20 to 26 lakhs TPA was implemented in December 10,2001. During 2004-05 the company was in the process of setting up a new plant with a capacity of 1.2 MTPA which is scheduled to start functioning by the third quarter of this year at Village Ras, about 32 kms away from the existing location. This plant is designed to produce a premium grade of cement 'Bangur Cement'. The estimated project cost was Rs.304 crores. During August 2005 the company has commissioned a 6 MW Captive Thermal Power Plant at its cement manufacturing facility Rajasthan. The total capacity of its Captive Thermal Power Plant has gone up from 36 MW to 42 MW. The additional capacity would enable Company to meet requirement of power for its upcoming 'Bangur Cement Project'.

30

MULTIPLE REGRESSION ANALYSIS

Variables Defined This study will examine four variables that likely impact the sales revenue of the cement company. These variables included Raw material expenses (X1 ), Power, fuel charges (X2), Advertising expenses (X3 ), Distribution expenses (X4). We used these independent variables to see the effect on Sales Revenue which is dependent variable, in the regressions. Multiple regression In our initial regression, we fit the model using each of the four variables in order to examine what our entire model would be like. The variables consisted of four continuous variables and one categorical variable, i.e. independent variable. So then we examined the whole-model test of sales revenue turnover predicted by the four-variable regression against actual sales revenue as seen below:

Regression Statistics
Multiple R R Square Adjusted R Square Standard Error Observations 0.991999602 0.984063211 0.9798134 341.301029 20

The regression fits the actual sales revenue turnover remarkably well with an Rsquare value of 0.9840 and an Rsquare Adjusted value of 0.9798134. These high quantities indicate that the above regression accurately explains the effect on sales revenue. We found the variables Raw material expenses (X1), Power, fuel charges (X2 ) and Distribution expenses (X4) to be the most significant in our initial regression. Raw Materials expenses, Power and Fuel expenses and Distribution expenses have greater significance than Advertizing, which is not very significant at all. All these variables carry positive parameter estimates as would be predicted. This is because these variables all have a pronounced impact on sales revenue, increasing it as they are increased.

31

These three assumptions fundamentally generate the fact that the residuals of the regression (i.e. the difference in the actual sales revenue from the sales revenue predicted) must be identically independently distributed with a mean of zero and a variance of
2

. These three assumptions

revolve around the concept of linearity, homoscedasticity, and independence in the order they are listed above. We will go into greater detail of examining residuals later in this report; however, this introduces the idea of checking the Gauss-Markov assumptions before analyzing statistical data.

Coefficients
Intercept X1 X2 X3 X4 166.9327483 1.700199708 1.631209876 3.586095987 3.417664893

Standard Error
134.2799983 0.432055505 0.843622733 2.900475547 1.123571714

t Stat
1.243169128 3.935141874 1.933577429 1.236382079 3.041786162

P-value
0.232886696 0.001322966 0.072264187 0.235327067 0.008240354

Y=Sales Revenue X1 =Raw material expenses X2 = Power, fuel charges X3 = Advertising expenses X4 = Distribution expenses Y = 1.7 X1 + 1.63 X2 +3.58 X3 + 3.41 X4 + 166.93 Another flaw that crept into the regression fitting of the four variable model is multicollinearity. Multicollinearity causes a negative pestering effect on regressing using the best possible p-values through the Stepwise Regression heuristic. Therefore, next we examine potential multicollinearity in our sample data and attempt to rectify the problem.

32

Multicollinearity Before we move on to the next step in our analysis we must first search for multicollinearity, the bane of multiple regressions. The first signal that our model may have multicollinearity is the Variance Inflation Factor (VIF) in our Parameter Estimates window of our first multiple regression with all four variables (shown below).

Raw
Raw material

material Power, charges

fuel Advertising expenses

Distribution expenses

expenses
expenses Power, charges Advertising expenses Distribution expenses fuel 1

0.636866627

0.578484071

0.623596715

0.736644621

0.673431688

0.706444967

Multicollinearity is checked by observing the values so that the sample correlation coefficient must not exceed 0.75. If the values exceed then multicollinearity exist between the variables and that means instead of considering both variables we can go with one of those two variables. But in our problem there is no co linearity between the variables we can consider all the independent variables. Testing of Hypothesis Testing that individual coefficients take a specific value such as zero or some other value is done in exactly the same way as with the simple two variable regression model. Now suppose we wish to test that a number of coefficients or combinations of coefficients take some particular value. In this case we will use the so called F-test Suppose for example we estimate a model of the form. We may wish to test hypotheses of the form {H0: b1=0 and b2=0 against the alternative that one or more are wrong} or {H0: b1=1 and b2-b3=0 against the alternative that one or more are wrong} or {H0 : b1+b2=1 and a=0 against the alternative that one or more are wrong}. We will not outline the underlying statistical theory for this. We will just describe the testing procedure. 33

F Test for overall significance The multiple regression model as calculated is Y = 1.7 X1 + 1.63 X2 + 3.58 X3 + 3.41 X4 + 166.93 The hypotheses for the F-test involve the parameters of the multiple regression model. H0 :
1

4=

H1 : one or more of the parameters is not equal to zero. If H0 is rejected, the test gives us sufficient statistical evidence to conclude that one or more of the parameters are not equal to zero and that the overall relationship between Y and the set of independent variables X1, X2, X3 and X4 is significant. However, if H0 cannot be rejected, we do not have sufficient evidence to conclude that a significant relationship is present. Test Statistic In the analysis of variance part of the output, we see that MSR value as 26972961.01 and MSE value as 116486.3924 and we got the F value as 231.5546087 F= MSR / MSE Rejection Rule There are two types of approaches P-value approach : Reject H0 if p-value <=

Critical value approach : Reject H0 if F >= F Here in this we are using only critical value approach for rejection rule.
df
Regression Residual Error Total 4

SS
107891844 1747295.886 109639139.9

MS
26972961.01 116486.3924

F
231.5546087

15 19

34

Where F is based on an F distribution with p degrees of freedom in the numerator and n - p - 1 degrees of freedom in the denominator. F test statistic ( F ) = 231.554 and F - Table Value ( F )= 2.67 So F >= F we Reject H0

The Equation Y = 1.7 X1 + 1.63 X2 - 3.58 X3 + 3.41 X4 + 166.93 is Significant.

Raw Companies Names
A C C Ltd. Ambuja Cements Ltd. Binani Cement Ltd. Birla Corporation Ltd. Century Textiles & Inds. Ltd. Chettinad Ltd. Heidelberg Ltd. India Cements Ltd. J K Cement Ltd. Lafarge India Pvt. Ltd. Madras Cements Ltd. My Home Inds. Ltd. O C L India Ltd. Orient Paper & Inds. Ltd. Penna Cement Inds. Ltd. Prism Cement Ltd. Rain Commodities Ltd. Samruddhi Cement Ltd. Shree Cement Ltd. Ultratech Cement Ltd. Cement India Cement Corpn.

Sales
8803.17 7763.93 2068.02 2391.34 4980.26 1531.18

Material Expenses
891.51 1170.85 138.38 333.86 966.67 168.11

Power Fuel Cost

1539.65 1422.75 429.85 382.1 915.58 310.57

Advertisin g Expenses
53.16 59.65 28.64 7.04 7.56 9.15

Distribution Expenses
1224.1 1121.69 343.32 270.85 572.56 137.13

1045.15 3943.07 2248.07 1608.87 3103.33 923.92 1509.3 1824.67 1515.69 2992.89 1046.35 4755.36 4014.08 7729.13

220.99 334.02 199.13 94.91 384.15 123.36 378.87 476.14 129.19 601.13 46.43 644.98 444.65 985.03

176.54 999.85 411.39 224.93 597.76 188.53 197.81 267.97 313.91 308.54 230.13 831.57 610.48 1433.04

6.72 30.16 26.31 8.5 8.71 4.57 4.19 29.71 5.34 33.15 0 147.95 0 134.05

113.57 591.1 376.76 272.56 468.39 192.17 107.76 205.47 230.96 288.63 0 735.02 456.15 1228.79

35

Analysis and our findings The model that we followed shows the effect on Sales revenue that can be predicted using the estimated parameter and the value of the four variables that represent all Manufacturing expenses of 20 cement companies. This study clearly outlines the effects of multiple variables that influence the sales revenue of the cement company. The way they utilize their manufacturing expenses in producing cement achieves their expected sales revenue turnover. The only three variables that we used in our regression showed a very high level of significance.
y

It is found that Sales revenue of the top companies which have more than 90% market share is consumed mainly by the power and fuel expenses followed by distribution expenses and raw material expenses. These constitute the maximum percentage of expenses incurred in production selling and distribution functions.

y
45 40 35 30 25 20 15 10 5 0 Raw material expenses Power, fuel (including wheeling charges paid by electricity companies) & water charges Advertising expenses Distribution expenses (including outward freight) Others

Series1

The Sales revenue is not consumed much by the advertisement expenses. This indicates that the cement industry spends little on advertisement and the sales are mainly consumed by expenses incurred to acquire the raw material, power and fuel and to run the large cement plants and distribution logistics.

36

A COMPARATIVE PERFORMANCE OF TOP 10 CEMENT COMPANIES IN NORTH INDIA (TAXONOMY) The study has provided an empirical analysis on the derivation of a composite index of performance based on 10 financial ratios reflecting the various dimensions of performance for the 10 North-Indian Cement Companies. A composite measure of performance for each cement company is computed based on more indicators of production activity. Despite the disparate performance of the 10 companies as revealed by the composite index of performance numbers, statistically speaking there appeared to be a movement towards convergence of the performance levels during 2010. The Ten Cement Companies of NorthIndia 1. A C C Ltd. 2. Ambuja Cements Ltd. 3. Birla Corporation Ltd. 4. Heidelberg Cement India Ltd. 5. J K Lakshmi Cement Ltd. 6. J K Cement Ltd. 7. Prism Cement Ltd. 8. Sanghi Industries Ltd. 9. Shree Cement Ltd. 10. Ultratech Cement Ltd The Ten Financial Ratios that have been considered to evaluate the financial performance : 1. Current Ratio 2. Operating Margin 3. Free Reserves Per Share 4. Inventory Turnover Ratio 5. Material Cost Component 6. Fixed Assets Turnover Ratio 7. Long Term Debt-equity Ratio 8. Return On Long Term Funds 9. Adjusted Cash Flow Times Debt 10. Selling & Distribution Cost Comp 37

Composite Measure of Performance A Composite measure of performance for each cement company is computed based on more mundane indicators of production activity. The index involves convection of all the income, expense and other ratios into a distance measure from an ideal defines from within the group. The methodology basically consists of converting all the original indicators - each indicator is called a characteristic dimension of performance - into standardized scores. For a set of N units, each unit is characterized by M features of performance. These N units with Ma characteristics can be represented by a matrix of N*M dimension. In view of the variability in units of measurement, the characteristic features of the N units are converted into standard normal variates first to remove the scale effect. The ideal value is defined for each characteristic as the highest standardized values for positive features and the least standardized values for negative features of performance. Given the M features, the distance vector di for unit i will have 10 components as 10 financial ratios are considered for measuring the composite index of performance. The length of the distance vector from the ideal for unit I is then measured by: di = [ mj=1 ( Zij - Zoj )2 ]1/2 Zoj is the standardized score on feature (financial ratios) i for the ideal unit. The lower the di value, the closer the position of unit i to the ideal components vector, and the lesser the distance from the ideal. In order to make this into a comparable index we define the performance measure. P= 1-[di / (d bar + 3 Sd) ] Where d bar is the mean and sd is the standard deviation of di . In this 99 percent of the time the Nunit di values lie within the positive 3-sd distances of d bar. Thus, the higher the P the better the performance of the company and vice versa. The performance measure P lies between zero and unity. Ranking to the companies is given based on the Pi values obtained. Analysis and findings:
y

Ambuja cement maintained the least debt to equity ratio of 0.01% during this period which was much below that of the industry standard. Thus we can say that the company was more dependent on its equity. Considering the scenario it can be said that a lower debt would be 38

favourable for the company as it would be relieved of the interest burden. However Sanghi Industries Ltd had the highest Long term debt equity ratio at 1.34%.
y

When compared to others, Heidelberg Cement India Ltd has the best current ratio of 1.98% was well above the industry standard of 1.07%. Thus the company has had an efficient working capital position. It was followed by J K Lakshmi Cement Ltd with 1.35%. However the working capital position of ACC and Ultra Tech at 0.67 % has not been encouraging.

The comparison of the fixed asset turnover ratio of the top performers shows that the Prism Cement Ltd with 1.61% and Birla Corporation Ltd with 1.51% have been efficiently utilizing their fixed assets for the generation of the sales as compared to the others and also succeed their industrial standard of 1.07. However the fixed asset efficiency of the others is moderate and some companies are below industry standards.

J K Lakshmi Cement Ltd. has the highest inventory turnover ratio among the Northern major players indicating that the inventory can be turned in a given operating cycle for greater profit whereas the lowest is that of Ambuja Cements Ltd which is a bad sign because products tend to deteriorate as they sit in a warehouse.

Shree Cement Ltd. has the highest operating margin indicating that is has enough profits available which need to be paid such as preferred stock dividends and income taxes and shareholders. It also gauges the quality of a companys activity to in comparison to its competitors. Heidelberg Cement India Ltd on the other hand a lower operating margin which means there will be less money for owners, expansion, debt reduction, or anything else management hopes to achieve.

Shree Cement Ltd has the highest free reserve per share ratio of indicating that the company has enough accumulated reserves over the years which it can distribute as dividends and also it could keep up its reputation in times of inadequate profits. However, Prism Cement Ltd and Heidelberg Cement India Ltd have very low free reserve per ratio and hence there is a need for accumulating reserves in order to be able to pay dividends.

A significant and a high return on long term funds ratio has been shown by Birla Corporation Ltd having an inherent return generating capacity with a cost lower than the

39

return on return on investment. Whereas, Sanghi Industries Ltd showed much less return on long term funds.
y

Ambuja Cements Ltd. and Heidelberg Cement India Ltd have shown a good debt maintenance capacity with highest adjusted cash flow times the debt ratio at 0.04%. Sanghi Industries Ltd has shown poor performance in this regard with 5.41%

The selling and distribution cost component was found to be the highest for J K Cement Ltd with around 33.46% of revenue being consumed by this component alone. This throws light on the heavy competition and inefficiency to cover high logistics costs in the industry. Birla Corporation Ltd showed a lower selling and distribution component at 13.32 %.

The material cost component is the highest for Prism Cement Ltd. with 45.62% of its revenues being consumed by raw material costs. It could be because they are inefficient in managing their raw material inventory as their sales were also low compared to other companies in this region. In contrast, Sanghi Industries Ltd has shown a good material cost component of 10.36%

Overall Ranking based on all financial ratios using Pi values

Ranking
1 2 3 4 5 6 7 8 9 10

Companies
Birla Corporation Ltd. Shree Cement Ltd. J K Lakshmi Cement Ltd. Ultratech Cement Ltd. A C C Ltd. Heidelberg Cement India Ltd. Ambuja Cements Ltd. J K Cement Ltd. Prism Cement Ltd. Sanghi Industries Ltd.

Pi
0.50849043 0.507532861 0.45553892 0.413320683 0.374124432 0.371736813 0.35665659 0.250233509 0.230669591 0.118979229

40

Ranking analysis:
y

Birla Corporation Ltd ranks first in the financial performance among the cement companies in North India. It is found that the company has a high fixed asset turnover ratio and also high return on long term funds. Also, the selling and distribution component is low, all of which led to a high operating margin of 33.31% despite its material cost component, debt equity ratio and other indicators which were high compared to companies like ACC, Ambuja and others.

Shree Cements ranks next to Birla Corporation in its performance. Shree cements is found to have the highest operating margin of 41.4% along with high free reserves per share ratio, return on long term funds and fixed asset turnover ratio. This means the company has well accumulated profits and reserves over the years with which it is able to pay dividends and also improve its performance.

Sanghi Industries Ltd has shown a poor financial performance ranked behind others at 10. This poor performance of the company can be attributed to its highest debt equity ratio at 1.34%, lower return on long term funds, poor adjusted cash flow times the debt and lowest fixed asset turnover ratio. It also has a high selling cost component eating away its revenues.

Prism Industries Ltd is also ranked low in its financial performance. The company is found to have very low free reserves per share and also a high material cost component as high as 45.62%.

JK Lakshmi cements Ltd is ranked third, whereas other top companies like Ultratech ltd and ACC ltd are ranked at fourth and fifth positions followed by Heidelberg Cements, Ambuja and JK cements

41

CONCLUSION

42

Conclusion/ Suggestions:
y

It was noted that production costs of all the companies are very high especially in the core areas of power and fuel. The Cement Industry is a power-intensive Industry. Due to erratic and undependable nature of grid supply coupled with poor quality, most of the units have set up captive power facility. In order to reduce these costs and also with a view to reducing GHG emissions into the atmosphere, it is imperative that more emphasis is laid on generation of power through renewable and non-conventional sources.

A major portion of sales revenue is also found to be dependent on the distribution expenditure which is very peculiar to the cement industry. Hence in order to maximize the profits on revenues, the companies are suggested to re-organize their supply chains in order to curb these costs.

Raw material expenses also constitute a significant percentage of the revenue consumed. Right inventory management which is carefully planned and monitored is suggested to bring down the raw material expenses in the cement industry.

Cement companies are spending bare minimum on advertisement and hence it is not affecting their sales revenue. However, to sustain in the global competitive environment it is suggested that they should spend a reasonable amount on advertisement to maximize their profits.

It was noted that companys capital size has very little impact on its overall financial performance. Companies with comparatively less capital performed exceedingly well with efficient management of resources and also maintaining a high operating capital ratios. So the companys must make adequate research before making investments.

Companys who are maintaining good inventory ratios falter in debt equity ratio maintenance which overall shows high discrepancy in management of financial resource s of the company. Companies must take steps to ensure and maintain financial ratios in a balanced and efficient way

Debt and equity ratio are inversely related. Companies should try to reduce their debt on external sources as companies with less debt ratio fare better due to less burden of interests. Also the companies should explore new avenues for raising finances and also for investing them

43

Economic Overview The demand for cement would continue to remain strong in 2011. A growth of 10 % is expected in view of continued focus on infrastructure development and the benefits from a relatively

good monsoon boosting demand from the rural segment. In the next fiscal, additional cement capacity of Rs.27 million tonnes is likely to go on stream. With the bulk of the capacities coming up in the South, the demand supply imbalance in 2011 would continue to be a cause of concern in the South, though it is expected to improve or remain in a status quo position in other regions. The dwindling availability of linkage coal and the move to sell high grade indigenous coal at international prices are likely to impact power and fuel costs. The prices of other major inputs mainly slag; gypsum and fly ash are likely to further harden in 2011, whilst the increase in petroleum product prices would continue to impact freight costs. A shortage in railway wagon availability may adversely impact despatches in peak months. The long term outlook for the industry continues to be bright given the high growth trajectory of the Indian economy and the growing demand from the infrastructure sector where the planned spend between 2012-2017 is over US $ 1 trillion. Strong demand from the housing sector is also anticipated arising out of increasing urbanization, the burgeoning middle class with higher disposable incomes and Government stimulus for enhancing rural income and affordab le housing. Budget Impact The Union Budget 2011-12 has made radical changes in the excise duty calculation for cement. But on a net to net basis, despite change in methodology of calculating excise duty. Hitherto, the excise duty incidence at lower rate on higher Retail Sale Price. Now, the government has moved to ad valorem rates, which means the higher excise duty will be on lower ex-factory prices. Net to net, the incremental excise duty for major plants will hardly be Rs 10 to 20 per tonne. On the other hand, the differential excise duty will be slightly more beneficial for the mini cement plants, especially when the Retail sale prices are in excess of Rs 190 per 50 kg bag. Excise duty on ready mix concrete at 5% with cenvat credit and 1% without cenvat credit will add to costs of players. Pet coke users like Ambuja Cement, Ultra Tech Cement Company, Shree Cement etc can save marginally as import duty has been halved from 5% to 2.5%. Though most of the players use domestic pet coke, these prices are linked to landed cost of imports. So, cut in import duty on pet 44

coke should be marginally beneficial for cement players using pet coke. The impact of cut in import duty on gypsum is negligible as most of the domestic players use indigenous product, which are not priced in line with global prices. Future Outlook Indian Cement Industry today ranks Second in the world, producing quality cement that matches the world's best and has its footprints in around 30 countries of the world through Cement/Clinker exports. With the thrust on Infrastructure projects, the industry supply-demand dynamics went haywire with the commissioning of 92 million tone capacity between 2007 and 2010, which is about 47% of 195.8 mt added in the last 16 years. The installed annual capacity by end of November 2010 stood at 270 million tones and is expected to rise to around 300 million tonnes in FY12 by when the demand is projected to be 235-240 million tonnes, leaving an oversupply of 60 million tonnes. The current overcapacity is in the range of 30 million tonnes. Thus the industry is fighting with higher capacity and sluggish demand, leading to erosion in pricing power. The cement industry was expecting abatement on MRP, so that there can be effective reduction in excise duties. Instead, the government has moved to ad valorem rates which are almost equal or slightly higher than the current rates, depending on cement prices. We find that the change towards ad valorem rates are marginally negative for large plants at higher prices and turns beneficial at lower prices, and generally positive for mini cement plants. Even this marginally negative impact is partly compensated by likely fall in the cost of domestic pet coke prices, in line with the cut in customs duty on pet coke. On an overall basis, the Union Budget 2011-12 is largely neutral for large plants and marginally positive for mini cement plants. The cement industry is witnessing over capacity, which can lead to fall in realizations. There are possibilities of citing higher excise duties, and the cement players may be able to hike the prices in the current busy season, much higher than the actual effective increase in excise incidence. To this extent, the Union Budget 2011-12 has become a blessing in disguise for players to hike prices. In the current busy construction season, the industry may be able to pass on the hike in excise duties, but as the monsoon season sets in June 2011, then the ability of the players to hold on to prices will be feeble, leading to significant fall in profitability in the light of higher input costs, fall in capacity utilization and effective fall in realizations.

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BIBLIOGRAPHY

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Sources of On-line Journals and Write ups: 1. Prowess database 2. www.capitaline.com 3. www.economywatch.com 4. www.moneycontrol.com 5. www.ibef.org 6. www.rbi.org.in 7. www.researchandmarkets.com The following reports were referred to L. G. Burange and Shruti Yamini (2008), Performance of Indian cement industry: The competitive landscape, University of Mumbai, Department of Economics. Anupam Rastogi (2007) ,The Infrastructure Sector In India. Economic Advisory Council, Review of the Economy 2010/11

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