Final Sm Cement Report

Analysis of Cement Industry (Ultra Tech)

OBJECTIVES OF THE PROJECT

PRIMARY OBJECTIVES:

To study any particular industry and to study different analysis of the industry like pest analysis, OT analysis, Key success forces and factors that driving the industry etc.

To study industry’s current position in the market.

SECONDARY OBJECTIVES

To study the performance of any particular player in cement industry in different markets in India.

To find out the various services & promotions tools offered by general the company existing in the market.

To find out the various roles play by the surrounding people in the decision of purchasing of different products provided by that company in the market.

To collect all the information about one particular company and analyze that data in our project and that data is kink of financial data, statistical data, production data etc.

NSVKMS MBA COLLEGE, VISNAGAR Page No :- 1


RESEARCH PLAN

*Data Source:

Secondary Data: Promotional documents of different products, which includes services, Premiums, claiming systems and promotional tools companies are using, different websites of the companies and other cement industry’s magazines and also information available on internet about cement industry and Ultra Tech websites.

Research Approach: Observation of cement industry and also of Different strategies applied by the company.

Research Instrument: Secondary Data.



LIMITATIONS OF THE PROJECT

Secondary data that we have collected from different magazines and web sites it may be older one and also can’t give the actual picture of particular industry or company

We have tried to collect as much as data we can, but due to specific time period within which we have to submit the report we might have not included all the information about industry and company.

Also due to lack of time and as we have been instructed, we have done our project report on only one company belonging to the cement industry.



I INTRODUCTION

Cement, any material that hardens and becomes strongly adhesive after application. The term “cement” is often used interchangeably with “glue” and “adhesive“; in engineering and building construction the term usually refers to a finely powdered, manufactured substance consisting of gypsum plaster, or Portland cement, that hardens and adheres after being mixed with water.

Cements are used for various purposes, such as binding sand and gravel together with Portland cement to form concrete, for uniting the surfaces of various materials, or for coating surfaces to protect them from chemical attack. Cements are made in many compositions for a wide variety of uses. They may be named after the principal constituents, such as calcareous cement, which contains silicon oxide, and epoxy cement, which contains epoxy resins; after the materials they join, such as glass or vinyl cement; after the object to which they are applied, such as boiler cement; or after their characteristic property, such as hydraulic cement, which hardens under water, acid-resisting cement, or quick-setting cement. Cements used in construction are sometimes named after their commonly reported place of origin, such as Roman cement, or for their resemblance to other materials, such as Portland cement, which produces a concrete resembling the Portland stone used for building in Britain. Cements that resist high temperatures are called refractory cements.

Cements can set, or harden, by one of several mechanisms: the evaporation of the plasticizing liquid such as water, alcohol, or oil; internal chemical change; hydration; the growth of interlacing sets of crystals; or reaction with oxygen or carbon dioxide in the atmosphere.

II PORTLAND CEMENT

Typical Portland cements are mixtures of tricalcium silicate (3CaO · SiO2), tricalcium aluminate (3CaO · Al2O3), and dicalcium silicate (2CaO · SiO2), in varying proportions, together with small amounts of magnesium and iron compounds. Gypsum is often added to slow the hardening process.

These active compounds in cement are unstable, and when water is added they rearrange their structure. The initial hardening of the cement is caused by the hydration of tricalcium silicate, which forms jelly-like hydrated silica and calcium hydroxide. These substances ultimately crystallize and bind together the particles of sand or stone, which are always included in a mortar or concrete mixture, into a hard mass. Tricalcium aluminate acts in the same way to produce the initial setting, but does not contribute to the ultimate hardening of the mixture. The hydration of dicalcium silicate proceeds similarly but far more slowly, hardening gradually over a period of years. The process of



hydration and setting of a cement mixture is known as curing; during this period heat is evolved.

Portland cement is manufactured from lime-bearing materials, usually limestone, together with clays, shales, or blast-furnace slag containing aluminium oxide and silicon oxide, in the approximate proportions of 60 per cent lime, 19 per cent silicon oxide, 8 per cent aluminium oxide, 5 per cent iron, 5 per cent magnesium oxide, and 3 per cent sulphur trioxide. Some rocks, called cement rocks, are naturally composed of these elements in approximately suitable proportions and can be made into cement without the use of large quantities of other raw materials. In general, however, cement plants rely on mixed materials.

In the manufacture of cement the raw materials are ground together, the mixture is heated until it fuses into a clinker, and the clinker is ground into a fine powder. The heating is usually accomplished in rotary kilns more than 150 m (500 ft) long and 3.7 m (12 ft) or more in diameter. The kilns are slightly tilted from the horizontal, and the raw material is introduced at the upper end, either in the form of a dry rock powder or as a wet paste composed of ground-up rock and water. As the charge progresses down through the kiln, it is dried and heated by the hot gases from a flame at the lower end. As it comes nearer the flame, carbon dioxide is driven off, and in the area of the flame itself the charge is fused at temperatures between 1540° and 1600° C (2800° and 2900° F). The material takes approximately six hours to pass from one end of the kiln to the other. After it leaves the kiln, the clinker is cooled quickly and ground, and then conveyed by a blower to packing machinery or storage silos. The amount thus produced is so fine in texture that 90 per cent or more of its particles will pass through a sieve with 6,200 openings per sq cm (40,000 per sq in).

In a modern kiln, 45 kg (about 100 lb) of raw material will make 27 to 30 kg (about 59 to 66 lb) of cement. The weight lost is largely carbon dioxide and water. Kilns usually burn coal in the form of powder and consume about 450 g (1 lb) of coal for about every 900 g (2 lb) of cement produced. Oil and gas are also used.

A number of tests are used to check the quality of the cement. A common one is to use a mortar specimen of 1 part cement and 3 parts of sand and measure its tensile strength after a week in air and under water. A good cement will show a tensile strength of 19.4 kg per sq cm (275 lb per sq in) under these conditions.

III SPECIAL CEMENTS

By varying the percentage of its normal components or adding others, Portland cement can be given various desirable characteristics, such as rapid hardening, low production of heat during hydration, and resistance to alkalis. Rapid-hardening cements, sometimes called high-early-strength cements, are made by increasing the proportion of tricalcium silicate or by finer grinding, so that up to 99.5 per cent will pass through a screen with 16,370 openings per sq cm (105,625 per sq in). Some of these cements will



harden as much in a day as ordinary cement does in a month. They produce much heat during hydration, however, which makes them unsuitable for large structures where such heat may cause cracks. Special low-heat cements, which usually have a large proportion of dicalcium silicate, are generally used for massive pourings. Where concrete work must be exposed to alkaline conditions, which attack concretes made with ordinary Portland cement, resistant cements with a low aluminium content are generally employed. Cements for use under salt water may contain as much as 5 per cent iron oxide, and those with as much as 40 per cent aluminium oxide are used to resist the action of sulphate-bearing waters.

IV HISTORY

Although various types of mineral-based hydraulic cement are of ancient origin, hydraulic cements have been used only since the middle of the 18th century. The term “Portland cement” was first used in 1824 by Joseph Aspdin, a British cement-maker, because of the resemblance between concrete made from his cement and Portland stone, which was commonly used in building in Britain. The first modern Portland cement, made from lime and clay or shale materials heated until they formed cinders (or clinkers) and then ground, was produced in Britain in 1845. At that time cements were usually made in upright kilns where the raw materials were spread between layers of coke, which was then burnt. The first rotary kilns were introduced about 1880. Portland cement is now almost universally used for structural concrete.



CEMENT INDUSTRY

Introduction

Cement is a key infrastructure industry. It has been decontrolled from price and distribution on 1st March, 1989 and delicensed on 25th July, 1991. However, the performance of the industry and prices of cement are monitored regularly. The constraints faced by the industry are reviewed in the Infrastructure Coordination Committee meetings held in the Cabinet Secretariat under the Chairmanship of Secretary (Coordination). Its performance is also reviewed by the Cabinet Committee on Infrastructure.

Capacity and Production

The cement industry comprises of 125 large cement plants with an installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum. The Cement Corporation of India, which is a Central Public Sector Undertaking, has 10 units. There are 10 large cement plants owned by various State Governments. The total installed capacity in the country as a whole is 159.38 million tonnes. Actual cement production in 2002-03 was 116.35 million tonnes as against a production of 106.90 million tonnes in 2001-02, registering a growth rate of 8.84%.

Keeping in view the trend of growth of the industry in previous years, a production target of 126 million tonnes has been fixed for the year 2003-04. During the period April-June 2003, a production (provisional) was 31.30 million tonnes. The industry has achieved a growth rate of 4.86 per cent during this period.

Exports

Apart from meeting the entire domestic demand, the industry is also exporting cement and clinker. The export of cement during 2001-02 and 2003-04 was 5.14 million tonnes and 6.92 million tonnes respectively. Export during April-May, 2003 was 1.35 million tonnes. Major exporters were Gujarat Ambuja Cements Ltd. and L&T Ltd.



Recommendations on Cement Industry

For the development of the cement industry ‘Working Group on Cement Industry’ was constituted by the Planning Commission for the formulation of X Five Year Plan. The Working Group has projected a growth rate of 10% for the cement industry during the plan period and has projected creation of additional capacity of 40-62 million tonnes mainly through expansion of existing plants. The Working Group has identified following thrust areas for improving demand for cement;

(i) Further push to housing development programmes;

(ii) Promotion of concrete Highways and roads; and

(iii) Use of ready-mix concrete in large infrastructure projects.

Further, in order to improve global competitiveness of the Indian Cement Industry, the Department of Industrial Policy & Promotion commissioned a study on the global competitiveness of the Indian Industry through an organization of international repute, viz. KPMG Consultancy Pvt. Ltd. The report submitted by the organization has made several recommendations for making the Indian Cement Industry more competitive in the international market. The recommendations are under consideration.

Technological change

Cement industry has made tremendous strides in technological upgradation and assimilation of latest technology. At present ninety three per cent of the total capacity in the industry is based on modern and environment-friendly dry process technology and only seven per cent of the capacity is based on old wet and semi-dry process technology. There is tremendous scope for waste heat recovery in cement plants and thereby reduction in emission level. One project for co-generation of power utilizing waste heat in an Indian cement plant is being implemented with Japanese assistance under Green Aid Plan. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially. India is also producing different varieties of cement 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, White Cement etc. Production of these varieties of cement conform to the BIS Specifications. It is worth mentioning that some cement plants have set up dedicated jetties for promoting bulk transportation and export.



Consolidation in the Indian Cement Industry

Introduction

With an installed capacity of approximately 150 million tonnes in 2005, India is the second largest producer of cement in the world accounting for approximately 6% of the global production (Refer Exhibit I for cement production in India and other countries in 2003). In 2004, the Rs 300 billion cement industry in India operated at 80% of capacity. The industry has also shown perceptible improvements in 2004 as compared to 2003 (Refer Exhibit II for the financial highlights of cement industry in 2003 and 2004). In 2003-04, compared to the world average consumption of approximately 270 kg per capita, cement consumption per capita in India was only about 100 kg. This compares with per capita consumption of 450, 447 and 631 kg in China, France and Japan, respectively

INDUSTRY BACKGROUND (history)

It was in 1914 that the first cement manufacturing unit in India was set up by India Cement Company at Porbandar, Gujarat, with a capacity of 1000 tonnes. The following decades saw increase in production and in the 1950s capacity expanded at a rate of 12% per annum with capacity utilisation at 85%. In the next two decades there was a decline in capacity growth rates. In 1980-81, capacity of the cement industry in India was 27 million tonnes (MT) and production was 18.1 MT. The low capacity utilization (67%) could be attributed to government controls on production, pricing and distribution. The industry was decontrolled in 1989. This led to an increase in production. In 1991-92, manufacturing capacity stood at 65 million tonnes with capacity utilization of 82%. But post-1995, demand did not grow fast enough, and plants worked at a capacity utilisation of 80 % (Refer Exhibit IV for production and despatch details of cement between 1996-97 and 2003-04). Though growth plateaued from 1996-1998, the year 1999 saw cement consumption surging 15% to 93 MT, up from 81 MT in 1998. The increased consumption in 1999 came from a 21% demand increase in the northern market, 13.4% demand increase in the southern market and a 22.5% demand increase in the eastern market (Refer Exhibit V, VI, VII for details about cement production and consumption based on region and cement varieties).....



IMPACT OF BUDGET ON CEMENT INDUSTRY AND PRESENT SCENARIO

In the Budget 2004-05, the government did not reduce the expected Rs 250 per metric tonne (MT) in central excise duty (CED) (12.5 per bag). This may have an impact on the cement sector in two ways: it is expected that cement demand will grow in future but the rate is likely to taper off from 13 percent to single digit, or the manufacturers may raise cement prices, which may negatively affect the prospects of cement demand in future. Domestic manufactures were hoping to retain a portion of the incentives justifying the high cost of coal for next year (up 100 percent YoY, US$70 per tonne from US$35 per tonne). But, with higher coal prices, now either manufacturers absorb the hit; negative for YoY bottom line growth, or they will face reduction in demand.

With the resurgence in demand, improvement at the retention level, coal conversion and debt restructuring, cement industry has entered the era of improving profitability. With growth of the economy being linked to infrastructure development, special emphasis was being paid to the construction sector. The prospects of economic growth and construction sector are being linked to each other.

During the fiscal year ending June 30, 2003 the industry had suffered a loss of Rs88 million and it operated only at 66 percent of the installed capacity. In comparison, it earned a net profit of Rs 2,000 million during six months of the current fiscal year i.e. July-December2003.

For a Third World country like Pakistan in the process of development, cement is a very important commodity. The number of cement plants and their production volume gives an indication of the stage of the development in a country.

The cement industry in Pakistan, with a fixed investment of over 60 billion rupees has started recovering at an increased pace after waging a long struggle to survive. Domestic demand for cement, which was 66 percent of capacity last year, was expected to reach to over 92-95 percent by the end of current financial year. But it surpassed the expectations and is already utilising above 92 percent capacity due to unprecedented increase in demand for cement. These phenomena generated optimism about the future prospects of cement industry in the country.

Cement sales during the period July 2003-March 2004 were to the tune of 9.790 million tonnes (as compared to 8.674 million tonnes for the same period of 2002-03), when the industry operated at 78 percent of the installed capacity.

The government is now quite comfortable in revenue collection; therefore, allocations for development projects have increased. The Budget for Annual Development Plan (2004-05) has been enhanced by about 20 percent-from Rs160 billion to Rs202 billion.



The government plays a pivotal role in the development of infrastructure; it is important for steering the economy towards accelerated growth. The economy is now poised to take off, in the backdrop of all positive indicators. The government is also trying its utmost to bring local and foreign investments in different sectors of the economy. In order to attract new investment for industrialisation, substantial fiscal incentives have been offered by the government to improve infrastructure, which would need huge quantities of cement.

Present scenario

Out of a total of 24 cement plants, currently 22 units are operative, 17 companies being listed on the Karachi Stock Exchange.

The country, at present, has an installed capacity of producing 17.55 million tonnes of cement per annum, mainly Portland cement. It is envisaged to increase installed capacity (also by expansion) to 28.21 million tonnes per annum by 2008. In two to three years six new projects with a 7.3 million tonne capacity, which are at different stages of completion, will come up in 2007.

The demand in 2004, expected to be at 13.5 to 14 million tonnes from 11.4 million tonnes in 2002, shows an increase of 18 percent. However, if we assume that in the future demand will grow at the rate of 14 percent per annum, it would reach 22 million tonnes in 2008, leaving a gap of 6 million tonnes (as compared to projected targets) with utilisation capacity of 92 percent. This surplus supply is expected to be exported to Afghanistan or elsewhere. The changing situation is encouraging to the cement manufacturers to expand their existing production capacities. The sector has the potential to export cement worth $1 billion per year to Saudi Arabia, Central Asian States and other Middle Eastern countries.

Pakistan is fortunately rich in the deposits of limestone, clay and gypsum, which constitute basic raw materials for manufacturing of cement. In spite of having abundant raw materials and rising growth in demand of cement, only five cement factories were established during the initial thirty years of independence, with aggregate capacity of 3.2 million tonnes. Consequently, Pakistan had to import cement for a long period, which reached to a level of 1.3 million tonnes in the year 1981-82. Import of cement continued from 1971 to 1985. Its scarcity also hampered the development process in the country.

One of the major constraints was lack of local engineering capabilities, which is the prerequisite for the establishment of cement projects. As a result, the entrepreneurs had to rely on imported machinery. This also required huge investment of over Rs 500 million in foreign exchange besides long project establishment duration of about four to five years.



Table-1: Number of units & Production

Year No. (000 MT)

1999-00 23 9,314

2000-01 22 9,674

2001-02 22 9,935

2002-03 22 11,020

2003-04 22 13,500

Source: SP, FBS

At the time of independence in 1947, only one or two units were producing grey cement in the country. During the decade of 1948-58, the number of cement units increased to six. During the Ayub era the economy started to grow and the construction activities underwent a boom. To meet the growing demand of cement new units were set up. During the decade of 1958-68, the number of cement units increased from 6 to 9. During the following period of Zulfiqar Ali Bhutto all the industrial units, including cement industry, were nationalised, therefore, no new unit was set up during 1971-77. During the period of General Zia-ul-Haq, 1977-88, denationalisation of industrial units boosted the investments. Housing and construction industries picked up and the demand for cement increased. Thus, the number of cement units increased from 9 to 23 and finally 24.

Table - 2: Percentage growth of Cement Industry

Year Percentage

1990-91 3.66

1999-00 - 3.33

2000-01 1.40

2001-02 1.61

2002-03 12.11

2003-04 15.00

Source: Economic Survey, SBP



Presently, a number of factors are attributed to this tremendous growth represented by various indicators. Cement exports, mainly to Afghanistan doubled during the three-quarter period of the current year, attaining a level of 0.78 million tonnes, but that accounts for only 8 percent of the total production.

Cement is one of the basic ingredients for development of a country. Its per capita consumption is an indicator of economic activity in the country. Unfortunately, Pakistan is trailing behind all other developing countries in the region with lowest per capita consumption of cement as shown in table-3. The per capita consumption of cement in Pakistan was as low as 43 kg per head per annum in year 1977-78, as compared to world average of 245 kg.

Table-3: Per Capita

Consumption of Cement (Kgs)

Japan 603

Thailand 600

China 450

Egypt 334

USA 261

Philippine 202

Indonesia 140

India 99

Pakistan 76



The reason of this low per capita consumption is that construction sector has remained neglected. Therefore, consumption of cement in Pakistan has naturally been one of the lowest. However, it rose to 120 kg per annum in 2003, which is still low. Realising the importance of construction and housing sector, the government has announced a Construction/Housing Policy, 2001.

This sector holds tremendous potential to reinvigorate sick industries of Pakistan and can kick start the economy by reviving forty allied industries engaged in the production of construction materials and other manufactured goods used in the construction of building and housing. Besides, it was providing jobs to about 7 percent of the total employed labour force (2.5 million persons), during 1999-2000.

Housing sector: The main consumer of cement industry is the housing sector, consuming about sixty percent of the total cement production. The housing sector is now booming as a part of the remittances are being used for construction of houses, which has helped in increasing cement demand in the country. Commercial banks, which are currently loaded with liquidity, are finding housing sector to be a potential area for lending, after successful experiment in their Car Financing Schemes.

Types of Cement: The industry is producing ordinary Portland cement, Slag Cement, Super Sulphate Resisting Cement, Sulphate Resistant Cement and White Cement.

Manufacturing process: There are three conventional processes used in Pakistan to manufacture cement:

(1) Wet process: In view of the constraints of kiln dimension and large water requirements and extremely poor heat efficiency, wet process has become obsolete.

(2) Semi-wet process: The process is suited for materials with sufficiently high plasticity. This process has also become outdated due to high fuel/energy consumption.

(3) Dry process: The dry process was formerly used where water and the raw materials were scarce. But now it is the most popular process in the cement industry. The advantages are: (1) the fuel requirement is about 800 Kcal per kg of clinker (which is about 40 percent less as compared to the wet process). This process enables the processing of a water range of raw and the maintenance is easier. The raw material is preheated and partially calcined resulting in higher kiln efficiency. The kiln being shorter in length requires less space in erection and easier to maintain.



Raw material

The raw materials used for the manufacturing of Portland cement are mainly limestone (calcareous material) and clay/ shale (argillaceous material). The most common variety Portland cement is a mixture of calcimined calcareous and argillaceous materials, forming a complex composition consisting of tri-calcium illuminate, tetra-calcium alumna ferrite, decaliun sillicate and tetra calcium ortho-silicate. The proportion of the last two constituents in the Portland cement varies from 70-78 percent. While the proportion of first constituent, tri-calcium aluminates is about 10 percent, the balance being the second constituent.

Prospect of cement export to Afghanistan

Export of cement to Afghanistan is another reason for the overall increase in exports. Due to this the proportion of exports in cement sales has now increased to 8 percent from the previous 4 percent. This proportion is expected to improve further up to 17.5 percent by FY08. It is believed that cement exports will touch to 3 million tonnes per annum. The reasons for this estimation are increasing construction activity in Afghanistan and lower competition from Iran.

Table-4: Cement Exports

(Value in 000 US$) 2000-01 2001-02 2002-03

Cement White 0 14 0

Cement Clinkers 0 0 0

Cement Portland 777 3180 10737

Others 2 0 0

TOTAL 779 3194 10737

Donors had pledged grants to Afghanistan in excess of US$ 3 billion. Early estimates had put the figure of annual investment in Afghanistan at US$1 billion with 15 percent (US$ 15 million) share committed for cement consumption. This represents very bright prospects for construction activity in Afghanistan and the results are evident from the demand for exports materialising from Afghanistan.

Iran is the major competitor of Pakistani cement in Afghanistan. Due to the cheaper cement, the market share of Iranian cement was much higher than Pakistani cement.



Previously, Iraniani cement prices were much lower, i.e., US $32 per tonne as compared to Pakistani price of US $70 per tonne. However, Pakistani exporters have now become more competitive and are exporting better quality cement at US $30 per tonne. Moreover, Iran was initially exporting 10 percent of its production to Afghanistan, but with an increase in its domestic demand, Iran is now concentrating on its domestic market. This is likely to improve the market share of the Pakistani cement.

In addition to Afghanistan, Sri Lanka, Bangladesh and Vietnam are being explored as new destinations for cement exports. Industry sources indicate that there is a potential to export 2 to 3 million tonnes per annum of cement to these countries.



GLOBAL SCENARIO

Cement: Transition progress After witnessing a strong sign of consolidation in the recent past, the cement sector is back on the investor’s radar. While the Indian cement industry is still heavily fragmented, consolidation is a reality and it is likely to pick up speed going forward. Post the Grasim-L&T deal, three players now control nearly 45% of the total domestic cement capacity. In this article we take a look at the global scenario and India’s position in the same.

Globally India stands 2nd (next only to China) among the largest cement producers in the world. However, there is significant difference in the consumption appetite between India and other countries of the world. Per capita cement consumption in India is just 100 Kgs compared to 300 Kgs in Western Europe and 280 Kgs in US. Even Asian neighbours like China (420 Kg) and Japan (600 Kgs) have much higher consumption rates. Apart from this, the level of fragmentation is another distinction between India and other developed, or more mature markets.

Country Industry share of Top 10 Co.’s

Major players Prices (US$)

US 80% Holderbank, Lafarge, Ciments Francais, Scancem and Blue Circle

65-70

Canada 90% Lafarge, Holderbank, Ciments Francais and CBR

135-150

Mexico 90% Cemex 110-120

India 66% Grasim, ACC, Gujarat Ambuja 50-60

In developed countries like the US (80% held by top 10 producers), UK and Germany there is significant consolidation of cement capacities. Having said that, we would also like to point out that while the level of consolidation is lower in India, it is fast catching up to global standards. The recent L&T-Grasim deal underlines that. From the pie charts below we get a fair idea about the extent to which Indian markets have consolidated in the last few years.



Consolidation brings about its own benefits for any industry and so is the case with the cement industry. Consolidation has brought about better understanding on pricing issues between the major players in the countries where it has succeeded. For example in US, cement prices rule at between US$ 65-70 per tonne. Compare this with the prices prevalent in the country and the difference is significant. In India cement price per tonne works out to an average of US$ 55 (FY03) per tonne. Clearly one can see the benefits of consolidation. In the Indian context, consolidation plays an even bigger role, as cement demand is growing at a healthy pace. Under these circumstances cement companies can benefit immensely from consolidation.

While there is still some time before the Indian cement industry catches up with its peers in more developed countries, it is slowly coming of age. With the industry set to grow between 8%-10% in the next 2-3 years we are likely to witness better times for the cement industry both in terms of demand as well as pricing. Changes are not just being seen in the domestic market. Indian cement companies are slowly gaining market share in international markets too. This is seen from the growing quantum of cement exports from the country.

As the Indian cement industry matures and consolidates, companies will become more profitable due to improved pricing scenario. Also, as India is still a long way away from its more developed counterparts in term of consumption, the long-term indications are positive. However, invest only in companies that are financially strong and those who have the wherewithal to tide through bad times.



Cement Industry

Total Production

The cement industry comprises of 125 large cement plants with an installed capacity of 148.28 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum. The Cement Corporation of India, which is a Central Public Sector Undertaking, has 10 units. There are 10 large cement plants owned by various State Governments. The total installed capacity in the country as a whole is 159.38 million tonnes. Actual cement production in 2002-03 was 116.35 million tonnes as against a production of 106.90 million tonnes in 2001-02, registering a growth rate of 8.84%. Major players in cement production are Ambuja cement, Aditya Cement, JKCement and L&T cement Apart from meeting the entire domestic demand, the industry is also exporting cement and clinker. The export of cement during 2001-02 and 2003-04 was 5.14 million tonnes and 6.92 million tonnes respectively. Export during April-May, 2003 was 1.35 million tonnes. Major exporters were Gujarat Ambuja CementsLtd.AndL&TltdThe Planning Commission for the formulation of X Five Year Plan constituted a 'Working Group on Cement Industry' for the development of cement industry. The Working Group has identified following thrust areas for improving demand for cement;

i. Further push to housing development programmes; ii. Promotion of concrete Highways and roads; and

iii. Use of ready-mix concrete in large infrastructure projects.

Further, in order to improve global competitiveness of the Indian Cement Industry, the Department of Industrial Policy & Promotion commissioned a study on the global competitiveness of the Indian Industry through an organization of international repute, viz. KPMG Consultancy Pvt. Ltd. The report submitted by the organization has made several recommendations for making the Indian Cement Industry more competitive in the international market. The recommendations are under consideration.

Cement industry has been decontrolled from price and distribution on 1st March 1989 and de-licensed on 25th July 1991. However, the performance of the industry and prices of cement are monitored regularly. Being a key infrastructure industry, the constraints faced by the industry are reviewed in the Infrastructure Coordination Committee meetings held in the Cabinet Secretariat under the Chairmanship of Secretary (Coordination). The Committee on Infrastructure also reviews its performance.



TechnologicalchangeContinuous technological upgrading and assimilation of latest technology has been going on in the cement industry. Presently 93 per cent of the total capacity in the industry is based on modern and environment-friendly dry process technology and only 7 per cent of the capacity is based on old wet and semi-dry process technology. There is tremendous scope for waste heat recovery in cement plants and thereby reduction in emission level. One project for co-generation of power utilizing waste heat in an Indian cement plant is being implemented with Japanese assistance under Green Aid Plan. The induction of advanced technology has helped the industry immensely to conserve energy and fuel and to save materials substantially. India is also producing different varieties of cement 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, White Cement etc. Production of these varieties of cement conform to the BIS Specifications. Also, some cement plants have set up dedicated jetties for promoting bulk transportation and export.

CEMENT INDUSTRY



Cement is one of the key infrastructure industries. Price and distribution controls were lifted on 1st March 1989 and licensing was dispensed with since 25th July 1991. However, the performance of the industry and prices of cement are monitored on a regular basis. The industry is subject to quality control order issued on 17.2.2003 to ensure quality standards. Capacity, Production and Exports The cement industry comprises 128 large cement plants with an installed capacity of 151.69 million tonnes and more than 300 mini cement plants with an estimated capacity of 11.10 million tonnes per annum resulting in total installed capacity of 163 million tonnes. Actual cement production in 2003-04 was 123.50 million tonnes as against a production of 116.35 million tonnes in 2002-03, which is an increase of 6.15% over 2002-03. Cement production during the year 2004-05 (April-January, 2004-05) was 108.06 million tonnes (provisional), registering a growth of 7.10%. The Cement Corporation of India, which is a central public sector undertaking, has 10 units. Besides, there are 10 large cement plants owned by various state governments. Keeping in view the past trends, a production target of 133 million tonnes has been set for the year 2004-05. During the Tenth Plan, the industry is expected to grow at the rate of 10% per annum and is expected to add capacity of 40-52 million tonnes, mainly through expansion of existing plants and use of more flyash in the production of cement. Apart from meeting the domestic demand, the cement industry also contributes towards exports. The export of cement and clinker during the last three years is as under: -

Table - 7.1

Export of Cement

(in million tonnes)Year Cement Clinker Total2001-02 3.38 1.76 5.142002-03 3.47 3.45 6.922003-04 3.36 5.64 9.002004-05(Apr-Jan)

3.31 4.82 8.13

Overview of the performance of the Cement Sector



The Indian cement Industry not only ranks second in the production of cement in the world but also produces quality cement, which meets global standards. However, the industry faces a number of constraints in terms of high cost of power, high railway tariff; high incidence of state and central levies and duties; lack of private and public investment in infrastructure projects; poor quality coal and inadequate growth of related infrastructure like sea and rail transport, ports and bulk terminals. In order to utilize excess capacity available with the cement industry, the government has identified the following thrust areas for increasing demand for cement: (i) Housing development programmes; (ii) Promotion of concrete highways and roads;(iii) Use of ready-mix concrete in large infrastructure projects; and(iv) Construction of concrete roads in rural areas under Prime Ministers Gram Sadak Yojana. Technological advancements Indian cement industry is modern and uses latest technology. Only a small segment of industry is using old technology based on wet and semi-dry process. Efforts are being made to recover waste heat and success in this area has been significant. India is also producing different varieties of cement 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, White Cement, etc. Production of these varieties of cement conforms to the BIS Specifications. It is worth mentioning that some cement plants have set up dedicated jetties for promoting bulk transportation and export.

ACC Cement The Associated Cement Companies Limited is India's No.1 Cement Company, Pioneer in Cement and Ready Mix Concrete.

Associated Cement Companies Ltd. It is the largest cement company in India, with a turn over of over US $600 million. It has ten cement plants spread over the country, producing about 9 million tons of cement including speciality cement.

Birla Corporation Birla Corporation Limited is one of the leading manufacturing company of multi-products, like Jute, cement, PVC floor covering carbide and more.

Birla White Birla White, a unit of Grasim Industries Ltd.,is part of the Aditya Birla Group. An organisation that builds dreams. And gives concrete form to the design ideas of architects, designers and home makers countrywide.

Cement India Cement India is India's first online cement portal, A system of generating enquires


http://www.cementindia.net/

http://www.birlawhite.com/

http://www.birlacorporation.com/

http://www.accambg.com/

http://www.acclimited.com/


online The buyer posts enquiry with all techno commercial conditions and seller responds.

Dalmia Cement Dalmia Cement is focussed on creating special cements for special applications and upgrades technologies to manufacture cements that suit one's special needs.

Dhandapani Cements Dhandapani Cements Pvt.Ltd, is operating a mini-cement plant near Trichy in Tamilnadu. It is manufacturing portland cement. The plant is in need of clinker for grinding it to cement.

Gujarat Ambuja Cements Gujarat Ambuja Cements is the last decade the company has grown tenfold. With the commencement of commercial production at its 2mn tonne plant in Chandrapur, Maharashtra, Ambuja will become India’s 3rd largest cement company.

JK White Cement JK White Cement is a perfect white cement with no colour impurities. Stronger than Grey Cement grade-53 - with exclusive features of rapid hardening.

Lafarge-India Lafarge cement is famous all over the world for its premium quality and has been used to build many landmark buildings globally. Lafarge cement is available, through a large dealer network, throughout eastern India- in the states of West Bengal, Jharkhand, Bihar, North-East States and Chattisgarh.

Orient Cement The mission of Orient Cement is to be amongst leading manufacturers of quality cement & related value added products at low delivered cost, using world class technology and creating preferred brand image in selected regions.

Sanghi Super Cement manufacturer and exporter of portland cement, cement, clinker, construction, building material also in investments, collaboration from Sanghi - India's largest single stream, fully automated, export oriented cement project with captive jetty.

Shakti Minerals available upto 2 micron such as Barytes, Calcite, China Clay, Dolomite, Kaolin, Steatite, Silica, Soap Stone, Talc, Mica, Whitting and many more in Ordinary & Super Snow White Grades

Span Cements Span Cements caters to requirements of various Cement Products. The products they store are the finest in the market and are of genuine Quality.

Tamilnadu Cement Corporation Ltd., Tamilnadu Cements Corporation Ltd., (TANCEM), a wholly owned Government of Tamilnadu undertaking, started business from 1st April 1976 with an authorized share capital of Rs. 18 crores taking over cement plant at Alangulam and setting up another plant at Ariyalur in the year 1979.

Zuari Cement Zuari Cement has within a short time-span made its presence felt in the cement industry. It has done so by making top quality cement.


http://zuaricements.com/

http://www.tancem.com/

http://www.spancements.com/

http://www.mineral4u.com/

http://sanghi-cement.com/

http://www.orientcement.com/

http://lafarge-india.com/

http://www.jk-white.com/

http://www.gujaratambuja.com/

http://www.webindia.com/dhandapani/

http://www.dalmiacement.com/


Cement: On weak foundations, set for consolidation

The fortunes of the cement industry do not look as bright as they did, say, a year ago.

A combination of factors, such as slow demand growth and sluggish price trends, points to at least one more year of flat/low earnings growth. This could mean continued lower stock valuations. But vis-a-vis acquisition-led consolidation process, it could turn out to be one more active year, says S. Vaidya Nathan.

THIS TIME last year, stocks of the cement industry were on a roll. The numbers for April 1999 showed volume year-on-year growth of over 20 per cent. Such growth, it was expected, would improve the demand-supply balance as also the producer pricing power over a period. With a sudden renewal of market fancy for stocks from the economically-sensitive sectors, the cement scrips came to the fore. But just 12 months later, the story appears to have changed considerably. As the accompanying graph shows, cement stocks have declined precipitously.

A far cry from the highs of late 1999. In the last week of December 1999, the Business Line Cement Index (Gujarat Ambuja, ACC, India Cements, Madras Cements and Birla Corp) touched a high of 2,380 points. This was a 220 per cent rise since the last week of April 1999 when the bull phase started. But since then, as cement earnings did not match expectations, there has been a sharp decline in the scrip prices. The cement index lost 66 per cent from the highs, and since February 2000 also underperformed the market after being an òutperformer' for close to six months.

The bull phase was tripped by the absence of profit growth to match the sales growth especially in volume terms (See accompanying story: Price trends, the culprit).

So, is the cement story over for the moment? On fundamentals, that would seem so, though some stocks would keep ticking on the prospect of acquisition. The consolidation process may gather apace even as cement stocks look largely set for a rather poor 2000-2001.

Big players in consolidation mode

The process of acquisition-led consolidation, that started with small units two years ago, has now entered a stage where even control over some big names seems in serious doubt. One trend the last three months is of more MNCs, that had shied away a few years ago, showing interest in the Indian market. The acquisition activity would be the key determinant of the emerging structure as also of the likely survivors and long-term winners in the profitability game.

Lafarge, the first MNC entrant, is on the prowl for capacities. Notable is the kind of prices it has been willing to pay for these capacities. After forking out Rs. 550 crores for



the Tata Steel capacities in 1998-99, it has now signed up to pick up Raymond's capacities for Rs. 760 crores. The per tonne price paid by Lafarge has been amongst the highest.

As a global player with deep pockets, higher entry costs seem to no problem for Lafarge. There is the possibility of its buying up a few more plants to match the capacities of the extant majors -- India Cements, Larsen and Toubro, Gujarat Ambuja Cements and Grasim Industries. Whether this would fetch attractive enough returns over the long term is another matter altogether. Especially, as it has had to pay àbove-average' prices for the acquisitions. Equally, the leading players, especially Gujarat Ambuja Cements, are keen on preserving their turf.

Since it has consistently had better cash flows and operating efficiencies, in a battle among Indian players, there is little doubt that Gujarat Ambuja would have emerged No. 1 on all key areas, including capacities over a three-five-year period.

But with the coming in of Lafarge and the possible entry of Cemex, Ciments Francais, the Italcementi Group and Blue Circle Victor, which have better access to resources and the staying power, the industry scene has changed. The moves of Zuari Industries and Jaiprakash Industries should give some of the newer entrants a sizeable capacity and established market presence.

To ensure that it retains its dominant position, and also as a strategic move to stall the MNCs walking away with ACC, Gujarat Ambuja paid a hefty price of Rs. 370 per share to acquire the promoters stake (that of the Tatas) of around 14.2 per cent. Though the issue of ownership control of ACC is by no means settled, if Gujarat Ambuja can hold on to its most recent buy, it may as a group (with operations in the industry shared with Ambuja Cement India) control around 25 per cent of the market in a couple of years' time. This would ensure that it can take on the likes of Lafarge and other big players without being handicapped on the capacity front.

More consolidation ahead

The consolidation phase is by no means over as yet. If this fiscal turns out to be difficult for the industry, especially on the profitability front, quite a few cement units, with capacities of one-two million tonnes, are sure to go on the chopping block. This happened in 1997-98 when major cement stocks languished on floundering fundamentals and small cement company stocks had a good time on the prospect of takeovers.

A similar price pattern for the rest of 2000-2001 can be expected with select small cement company stocks moving out of line with fundamentals in anticipation of a takeover. In the earlier phase, quite a few, such as Narmada Cement, Shree Digvijay Cements, Dharani Cements, Modi Cements, Sri Vishnu Cements and Raasi Cements, were acquired by bigger players. More recently, Zuari Industries and Raymond have also divested the whole or part of their businesses.



Changes at top

Clearly, the capacities that are changing hands are gradually increasing. Barring a few select players, it is difficult to see units with less than three million tonnes surviving and making good profits over a period. With the slowdown in demand across the board and low prices in the drought-hit Andhra Pradesh, Gujarat, Madhya Pradesh and Rajasthan, smaller units may find the going tough.

These States account for bulk of the cement capacities and in all these markets, at least one, if not more, of the bigger players has a presence. If the latter go for market share and as they have no need to be in informal arrangements with the smaller players, quite a few units from the key cement-producing States may go the takeover way.

This process would also be driven by the fact that just four companies -- India Cements, Gujarat Ambuja Cements, Grasim Industries and L&T -- control over 52 per cent of the industry capacity. This percentage shot up dramatically in the last two-three years because of acquisitions and the commissioning of greenfield units by these companies. Just three years ago, the top five units accounted for around 20 per cent of the capacities. Such a dramatic change in the industry structure cannot be without implications for other players.

If these four with Lafarge and Madras Cements gain a bigger share, the pressure could build on the smaller units even without any industry-level negatives. In this backdrop, it is clear that over a two-three-year period, the industry may well be dominated by ten players -- one or two MNCs and some domestic players.

There may be no room for the smaller players, by way of catering to niches, given the industry's characteristics. Some niche segments tried out by companies such as Nihon Nirman and Indian Rayon (white cement) have ended in the red, and businesses of this kind are either down and out or part of other cement majors. This high level of consolidation has serious implications for investments, both long and short term (see story on investment outlook), in the industry's stocks.

MACRO ANALYSIS



Porter’s Five Force Model

The implications of Porter’s Five Force Model on the Cement Industry are as follows:Competitive Rivalry: In India the competition among the industry units is very keen.

Major Player’s as well small plants both have the same domestic market to cater. Due to



the increasing number of big players the small plants have either closed down or are

suffering from losses and also there is stiff competition between them.

The demand for cement is increasing day by day and to cater this emerging market not

only domestic companies but also foreign concerns are competing strongly with each

other.

Threats of new entrance: the domestic cement sector is growing and it has become a

profitable business segment so, many rivals may enter in the industry.

New rivals with latest technologies can win the market share from the domestic units.

Rather after Quota phase will come to an end and many new companies will enter in the

Indian market and the survival of domestic industry might be in jeopardy.

One more reason for entering the industry might be that small units can better adjust

themselves with the changing demand and preference of the market and a small

manufacturing concern doesn’t call for more investment.

But the barriers t entry are: cost of capital in India is high compared to other countries,

high price of raw cotton, unionization etc.

Threat of substitute: There is no substitute for cement industry as cement is the unique

element in the construction. As it is utilized in the construction there is no any other thing

that can be used in that.

Bargaining power of suppliers: The raw material for the cement are limestone, concrete,

gypsum etc. and they are easily available in our country so producers of cement don’t

have need to import these raw material from out side countries. Due to this reason the

outside suppliers have less bargaining power.



Bargaining power of buyers: Due to large no of countries able to fulfill the needs of the

importing countries and as the Indian cement industry is the world’s second largest

industry, there will be a stiff competition in post quota situation, which will lead to higher

bargaining power of the importing countries.

OT ANALYSIS

OT analysis of the industry shows opportunities and threat the industry is likely to face.

OT analysis of industry shows the comparative strength and weakness of Indian life

insurance industry with rest of the world and also major opportunities and threats the

Indian life insurance industry is facing.

The foundation of a stable Indian cement industry was laid inn 1914 when the Indian

Cement Company Ltd. Manufactured cement at Porbundar in Gunrat. There are 20 large

cement units and 365 mini-cement plants with a total installed capacity of 140 million

tones and actual production of nearly 107 million tones (for the year 2001-2002). Over

two lakh persons are employed in the industry. India I sthe seventh largest cement

producer in the worldm the first six being Russia, Japan, USA, Italy, West Germany and

France. The per capita consumption whole world-68 kgs. Per capita in India (in 1994-95)

as compared to 700 kgs. In Japan, 650 kgs. In West Germany, 600 kgs. In France, 120

kgs, in China and 98 kgs. In Pakistan.

The cement industry has recorded continuous growth since planning started. The average

annual growth rate of production of cement has fluctuated violently due to unimaginative

Government policy on control and distribution of cement. But the industry has

maintained an upward trend throughout. In the 90’s the annual rate of growth has been

over 90 per cent.



Opportunity

(1) Centralization of Ownership

In no other industry of India is there greater centralization of ownership

and control than in the cement industry. The public sector, the A.C.C. the

Dalmia Jain and he Birlas control buld of the cement units. The

centralization of ownership and control has inevitably led to the financial

and administrative integration of different cement factories, thus exterting

profound influence on the size of individual units.

In recent years, mergers and acquisitions have been quite significant in the

cement industry. The leaders in the industry have found it economical to

acquire an existing under-utilised/ill-managed company rather than float

new company.

(2) Diversified over the country.

The industry is well diversified over all the States of India. Since the

manufacture of cement requires weight losing materials like limestone or

chalk, clay and gypsumn the industry has a tendency to be attracted at the

point of minimum transportational costs in relations to raw materials.

Limestone of excellent quality exists in abundance in many parts of the

country, and in close proximity of railway lines so that the industry shows

a tendency of regional dispersal of productive activity. Bus as late as 1980,

cement factories were largely concentrated in the southern and western

regions of the country. For example, the northern and eastern regions

produce about 21 per cent of the total output but consume 44 per cent of

the total output. On the other hand southern and western regions produce

79 per cent of the output and consume only 57 per cent of the total output.

Threats



(1) Inadequate production.

The main factors responsible for shortfall in production are

1. drastic power cuts ranging from 20 to 75 per cent in various

cement producing states

2. shortage of coal

3. inadequate availability of wagons

4. limited availability of furnace oil resulting in partial or

complete closure of many units.

This explains why capacity utilization which was as high as 93 per cent at

once time came down steadily to 67 per cent in 1980-81; in recent years, it

has been 76 per cent.

The demand for cement has been growing at the rate of 8 to 10 per cent

per annum. To meet this demand, the Government intended to set up mini-

plants on the one hand and giant plants on the other. A mini-plant has a

capacity of up to 200 tones per day. There are two advantages of mini-

plants: Firstly, capital cost of such plants per tones of output is low; and

sencodly, they can be located in remote and inaccessible areas. There are

365 mini-cement plants with a total capacity of 11 million tones. The

share of these plants in total production works out to be about 5 per cent.

The mini plants, however, have not played a significant role in

augmenting cement production in the country as was originally expected.

In fact only 132 mini plants out of a total by 365 plant are in operation.

In addition the cement plants with a capacity ranging from 1200 to 3000

tones are also being installed. The government is adopting a very liberal

policy in the regard.

(2) Cost escalation and rigid prices.

As in the case of all other industries, there was rise in the cost of

production of cement. Bu the special point in the case of cement industy

was that some of the major cost rises were due to government policies-as,



for example, price and freight on coal, power, and wages covered by wage

awards. The shortfall in coal received by the cement industry against the

qota sactioned had ranged between 17 per cent and 43 per cent in recent

years. The shortage of wagon for the movement of cement was always a

serious problem. On a average, the cement industry was getting 1 lakh

wagons less than the indented quota.. the allowing the cement factories to

purchase and own wagons. Finally, the cement industry has been a victim

of power shortages of varying degrees in different states. In order to solve

this perpetual problem, the cement industry has been setting up captive

diesel generating sets.

When, as a result of all these factors, costs escalaed and the Cement

Manufacturers Association (CMA) approached the Government for a

suitable rise in costs, the Government did not grant any increase, and if it

did, it granted only a partial increase and that too after a long delay. It was

common knowledge that in the case of levy cement, the price the

consumer paid did not cover the cost of production. It was estimated that

only 37 per cent of the levy price of cement went to the manufacturers,

and the balance 63 per cent was mopped up by

the Government in the form of excise duty, railway freight, sales tax, etc.

(3) Partial control and Dual pricing.

Another problem of the ement industry related to the system of price

control. The ostensible benefits envisaged from the price control system in

the cement industry were



1. fair price to producer

2. availability of cement to consumers at fair price throughout the

country ( and the Government was the single biggest consumer of

cement in the country)

3. Self-sufficiency within the shortest possible time.

4. reduction of regional imbalances.

5. review of freight pooling system (with particular reference to cost

to the consumer and burden o transport system).

These were no doubt laudable objectives and if these benefits had actually

materialized, no one would grudge the system. Price regulation was based

on the assumption of 85% capacity utilization. Despite all-out efforts of

industry, there was a declining trent due to efforts of industry, there was a

declining trend due to infrastructural bottlenecks of power, coal and rail

movement. The capacity utilization which was 90 per cent in 1978 came

down rapidly to 67 per cent in 1981. it rose to 79 per cent in 1986-87 and

is around 72 to 75 per cent since then. The industry could not be balanced

for this in as much as it was entirely due to factors controlled by the

government agencies (such as shortage of coal, load shedding and

transport bottlenecks). Price control of cement resulted in unnecessary loss

of about Rs. 15 per tones. Any amount of representation by the industry

could not move the Government to change its price control policy. The

Government was the greatest beneficiary of price control of cement.

(4) Unrealistic distribution policies.

Another problem related to unrealistic regulating of distribution of cement.

The Government introduced a permit system of distribution which never

worked properly. From October 1978, as many as 14 States and Union



Territories had introduced schemes for direct control over public

distribution of cement so as to ensure fair supplies to priority sectors,

discourage consumption of cement for non-priority and essential purposes,

facilitate availability to small users and eliminate black-marketing. As a

result there were artificial shortages, extensive blackmarketing and

rampant corruption in the civil supplies departments of the Government.

Impact Analysis – Cement



Infrastructure development and housing to drive future demand growth

In April-December 2004-05, cement demand increased by 6.7 per cent over that in the corresponding period of the previous year. CRIS INFAC expects cement demand to grow by 8 per cent over the next 2 years. While the housing sector will continue to be the key growth driver on the back of housing sops, infrastructure spending (particularly roads, urban infrastructure, ports and airports), will provide further impetus to the growth. This apart, industrial projects that are expected to pick up after 2005 will further aid demand growth in the domestic market.

Industry to witness firming up of prices and higher consolidation

The first 9 months witnessed price increases across all regions (barring the East), on account of higher operating rates and increased consolidation. In 2005-06, prices will increase steeply in the South on the back of strong demand, followed by the North, West and East, owing to robust growth in cement demand and high operating rates.

Given the limited greenfield capacity additions expected over the next 2-3 years and the strong growth in cement consumption, operating rates will continue to improve and thereby translate into firm prices. Also, the acquisition of smaller players will result in greater consolidation in the industry over the next 5 years.

Prices and Duties

Focus on infrastructure and reduction in customs duty on pet coke - positive for cement industry



Impact factors

A. The customs duty on pet coke has been slashed to 10 per cent from 20 per cent. This will encourage the use of alternative fuels. Among the cement players, Shree Cements and Gujarat Ambuja have a headstart in the use of pet coke and will benefit the most.

B. The excise duty on clinker has been increased to Rs 350 per tonne from Rs 250 per tonne. As mini-cement plants pay an excise duty of Rs 250 per tonne of cement, they will not be able to avail of cenvat credit for the rise in the excise duty. Larger cement players, on the other hand, pay an excise duty of Rs 400 per tonne of cement. Therefore, they will be able to avail of cenvat credit for the rise in the excise duty on clinker and hence, will not be affected.

C. The budget provides significant fillip to the infrastructure sector. While the allocation for irrigation has been stepped up, the outlay for national highway development has been increased from Rs 65 billion in 2004-05 to Rs 93 billion in 2005-06. This apart, an outlay of Rs 55 billion has been provided for, under the National Urban Renewal Mission, which includes projects such as Mumbai Western Expressway sea-link, etc. The above initiatives will provide a fillip to cement consumption.

D. The customs duty on cement has been reduced from 20 per cent to 15 per cent, in line with the cut in the peak customs duty. However, despite the reduction, the landed cost of cement will be much higher than the domestic price. Thus, imports will pose a minimal threat and domestic players will not be affected by the cut in the customs duty.

E. The proposal to allow deduction of up to Rs 1 lakh on the repayment of principal amount of housing loan (u/s 80 C of the Income Tax Act), will boost housing demand and thereby cement consumption.

Cement Sector Review – On the concrete path

The cement industry picked up the pace on the back of infrastructure development and housing boom, which has resulted in continuous rise in the demand for cement. The



Government’s National Highway development programme, construction of the Golden Quadrilateral and the North-South and the East-West corridor projects are expected to maintain this upward trend in the demand in future. The industry witnessed a healthy 8% yoy growth in Q1FY06 which is likely to sustain due to the ongoing boom. Though, increasing input costs, fuel costs and logistics cost maintained pressure on operating margins, net profits of the companies increased by 45.4% yoy.

Our coverage universe: ACC, Century Textiles, Grasim, Gujarat Ambuja, India Cements, JK Corporation, Madras Cements, Shree Cements and Ultratech Cements.

Robust demand push despatches

The production and despatches witnessed a spurt in growth as the former went up by 12.3% yoy and latter by 12.6% yoy during Q1FY06. The southern region operated on 108.2% capacity utilization, highest among the five regions while the over all industry capacity utilization for Q1FY06 stood at 91.5%

Graph: Region wise production



Graph: Region wise dispatches

Higher volumes boost revenues

The topline on the back of higher volumes grew by a healthy 14.3% yoy during Q1FY06. Infrastructure and housing development programmes promoted by the Government increased the consumption of cement and is expected to keep up the demand in the future too. The major cement companies like Grasim, Ultratech, ACC, Gujarat Ambuja etc outperformed the industry average of 85% by operating at more than 90% capacity utilization. Amongst the companies in our coverage universe Grasim led the pack posting revenues to the tune of Rs15bn followed by ACC and Ultratech in Q1FY06. On the growth fronts, India Cements was the top gainer with robust 44.8% yoy growth in revenues due to higher demand in Southern India where demand shot up by 22% yoy during the quarter.

Higher spend on transportation, fuel pressurized OPM

The operating profit margins of most of the companies witnessed pressure due to increase in input, transportation and fuel costs. Input costs were higher on account on increased limestone royalties.



Graph: Operating margins

Rise in logistics, fuel cost – key concern

The continuous rise in logistics cost due to inadequate availability of railway wagons and increased used of roadways for transportation of cement adversely affected the cement companies. The hike in diesel prices proved to be uneconomical for transportation of cement to far lying areas. Again, the increase in price of coal and oil pushed up the fuel cost but companies like Grasim, ACC were able to save on cost by generation of captive power at their facilities. India Cement recorded the highest expenditure growth by 74.5% yoy on freight costs while ACC’s saving on its fuel consumptions can be attributed to modernization of its plants. The increasing expenditure on transportation and fuel has been of the major concerns for the industry.

Graph: Freight costs



Graph: Fuel costs

Robust earnings result of better realizations

Net profit of Century Textiles, riding on the good performance of the cement business of the company, witnessed a three-fold growth during the quarter. India Cement got into black after a span of three years with net profit of Rs52mn as against loss of Rs181bn in the corresponding quarter of previous year. Higher realization from domestic sales was the driving factor behind the robust earnings of Grasim Industries and Ultratech and improved by 4% yoy and 14% yoy respectively. Three fold increase in other income pushed up the net profits of ACC by a robust 71.6% yoy. Net profit of JK Corp on account decline in interest outflows due to reduction in debt of the company jumped up by 24% yoy in Q1FY06.

Infrastructure, housing boom depict positive outlook



The ongoing infrastructure and housing boom coupled by likely 8% growth in the manufacturing industry render a positive picture of the cement industry in coming years. Cement industry is unlikely to witness any greenfield expansion in next two years but the capex planned by the companies for brownfield expansion and debottlenecking at its existing plants would relax the pressure of increasing demand to some extent. Grasim has a planned capex of Rs20bn of which Rs9bn is for cement business and additional capex of Rs10bn for subsidiary Ultratech cement during 2005-07. ACC has also undertaken the modernization of its Chaibasa facility, which would increase the capacity of the plant to 1.2 MT.

The consumption of cement is likely to increase due to reconstruction activities in the states of Gujarat and Maharashtra where rain and flood brought about heavy destruction of infrastructure and in the current scenario where the gap between demand and supply is getting narrowed down the outlook for the industry looks positive.

General information about Indian industry



India Cements Ltd

We recommend a trading BUY on India Cements Ltd. as we think the stock will move up in the near term on the news of a restructuring package that targets reducing of debt on its balance sheet. This will involve selling some of its cement units to prospective buyers.

Positives

1. Industry is growing at a rate of around 8%2. Infrastructure spending and projects like Golden Quadrilateral likely to boost

the cement industry3. Has about 7% of the industry’s capacity4. Sale of cement units will help the company to cut debt by about 40%5. Institutions have now agreed to a plan of phased payments that would run its

course in 2012.6. Improvement in operations expected as restructuring package involves

restructuring of operations including Voluntary Retirement Scheme, sale of assets, restructuring of working capital facilities

7. Company is planning to hive off shipping division into a separate company in order to focus on cement.

8. Recent improvement in cement prices may make the profitability levels look better.

India Cements Ltd



Major markets are Kerala and Tamilnadu which is witnessing a construction boomConcerns

As the company focuses on the restructuring package, it can miss out on growth due to construction boom

The company has been unable to replace debt with equity after acquiring plants like Raasi Cement and three years back

The company’s bargaining power as a seller reduced due to its debt burden



ULTRATECH CEMENT LIMITED

ADITYA BIRLA GROUP

Introduction

UltraTech Cement Limited ( formerly L&T Cement) is India’s largest cement manufacturing organization and is now an Aditya Birla Group Company.

The Aditya Birla Group is India's first truly multinational corporation. Global in vision, rooted in Indian values, the Group is driven by a performance ethic pegged on value creation for its multiple stakeholders.

A US$ 6.5 billion conglomerate, with a market capitalisation of US$ 7 billion, it is anchored by an extraordinary force of 72,000 employees belonging to over 20 different nationalities. Its 66 state-of-the-art manufacturing units and sectoral services span India, Thailand, Indonesia, Malaysia, Philippines, Egypt, Canada, Australia and China.

Responsibilities:

Desired candidate should have atleast 5+ years of experience as Project Manager in Thermal Power Plant (various fuels) and managed huge projects. Size of the project ranges from 10MW to 50MW. Operational experience in CFBC boilers would be an advantage.

Requirements:

Candidate must possess at least a Diploma or Degree Course in Power Plant Engineering. At least 5 year(s) of working experience in the related field is required for this position.

Applicants must be willing to work in Raipur /Awarpur/ Kovaya. Applicants should be Indian citizens or hold relevan residence status. Preferably managers specializing in TPP. Full-Time positions available.

t



Driving the growth of the Aditya Birla Group are 72,000 committed employees, spread over 20 countries across the globe. The diversity of location, language and culture blends seamlessly into a common work ethos, which hinges on fostering excellence, recognising and rewarding entrepreneurship.

We believe in empowerment, delegation and calculated risk taking. Our ongoing endeavour is to create an organisational ambience where talent can bloom. To do so, we strive to make the workplace a source of creativity, innovation and one that makes work meaningful.

We ensure that all of our policies, forward-looking initiatives and goals are fully communicated to all employees and that they understand and relate to these. Our commitment to our people is reflected in the sense of belonging and pride every employee feels towards the Group and the passion and commitment they bring to their work.

Our human resource policies have won recognition and the Group has been nominated among the best employers in India, in two separate surveys conducted by Business World and Business Today in 2003.

The roots of the Aditya Birla Group date back to the 19th century in the picturesque town of Pilani, set amidst the Rajasthan desert. It was here that Seth Shiv Narayan Birla started trading in cotton, laying the foundation for the House of Birlas.

Through India's arduous times of the 1850s, the Birla business expanded rapidly. In the early part of the 20th century, our Group's founding father, Ghanshyamdas Birla, set up industries in critical sectors such as textiles and fibre, aluminium, cement and chemicals. As a close confidante of Mahatma Gandhi, he played an active role in the Indian freedom struggle. He represented India at the first and second round-table conference in London, along with Gandhiji. It was at "Birla House" in Delhi that the luminaries of the Indian freedom struggle often met to plot the downfall of the British Raj.

Ghanshyamdas Birla found no contradiction in pursuing business goals with the dedication of a saint, emerging as one of the foremost industrialists of pre-independence



India. The principles by which he lived were soaked up by his grandson, Aditya Vikram Birla, our Group's legendary leader.

Aditya Vikram Birla: putting India on the world map

A formidable force in Indian industry, Mr. Aditya Birla dared to dream of setting up a global business empire at the age of 24. He was the first to put Indian business on the world map, as far back as 1969, long before globalisation became a buzzword in India.

In the then vibrant and free market South East Asian countries, he ventured to set up world-class production bases. He had foreseen the winds of change and staked the future of his business on a competitive, free market driven economy order. He put Indian business on the globe, 22 years before economic liberalisation was formally introduced by the former Prime Minister, Mr. Narasimha Rao and the former Union Finance Minister, Dr. Manmohan Singh. He set up 19 companies outside India, in Thailand, Malaysia, Indonesia, the Philippines and Egypt.

Interestingly, for Mr. Aditya Birla, globalisation meant more than just geographic reach. He believed that a business could be global even whilst being based in India. Therefore, back in his home-territory, he drove single-mindedly to put together the building blocks to make our Indian business a global force.

Under his stewardship, his companies rose to be the world's largest producer of viscose staple fibre, the largest refiner of palm oil, the third largest producer of insulators and the sixth largest producer of carbon black. In India, they attained the status of the largest single producer of viscose filament yarn, apart from being a producer of cement, grey cement and rayon grade pulp. The Group is also the largest producer of aluminium in the private sector, the lowest first cost producers in the world and the only producer of linen in the textile industry in India.

At the time of his untimely demise, the Group's revenues crossed Rs.15,000 crore globally, with assets of over Rs.16,000 crore, comprising of 55 benchmark quality plants, an employee strength of 75,000 and a shareholder community of 600,000.

Most importantly, his companies earned respect and admiration of the people, as one of India's finest business houses, and the first Indian International Group globally. Through this outstanding record of enterprise, he helped create enormous wealth for the nation, and respect for Indian entrepreneurship in South East Asia. In his time, his success was unmatched by any other industrialist in India.

That India attains respectable rank among the developed nations, was a dream he forever cherished. He was proud of India and took equal pride in being an Indian.

Under the leadership of our Chairman, Mr. Kumar Mangalam Birla, the Group has sustained and established a leadership position in its key businesses through continuous value-creation. Spearheaded by Grasim, Hindalco, Indian Rayon, Indo Gulf Fertilisers



and companies in Thailand, Malaysia, Indonesia, the Philippines and Egypt, the Aditya Birla Group is a leader in a swathe of products — viscose staple fibre, aluminium, cement, copper, carbon black, palm oil, insulators, garments. And with successful forays into financial services, telecom, software and BPO, the Group is today one of Asia's most diversified business groups.

The name "Aditya Birla" evokes all that is positive in business and in life. It typifies integrity, quality, performance, perfection, and above all, character. Our corporate logo, 'The Rising Sun', symbolises these traits. ('Aditya' is the Sanskrit word for sun).

The logo consists of an inner circle, symbolising the internal universe of the Aditya Birla Group, an outer circle, symbolising the external universe, and a dynamic meeting of rays converging and diverging between the two..

Dramatic, sweeping and far-reaching changes have taken place over the past three years, not just in India but across countries. Three years back, it would have been hard to believe that such a metamorphosis would take place in the economic scenario of the country — which is leading to changes, not just in business and industry, but in our very psyche, in our attitudes, in our way of thinking and even in our daily lives.

Let me take you through this changing economic scenario, to give you a feel of the extent of the transformation, its magnitude, its sweep and the depth of the reforms, and how Indian industry is globalising, in terms of size, ownership, trade and attitudes.

Size

Let us first talk about size. Globalisation and size are almost inextricably linked. As all of you know, Indian industry, for far too long, has lived under a draconian regime of controlled and officially prescribed capacities, guided by politics and not economics, which has resulted in fragmented and sub-optimal capacities that are uneconomic.

Amazingly, in the past, producing more was a crime. I was once almost served a notice of prosecution for producing more! Such madness could exist only in India of the not too distant past.

It is sometimes difficult to comprehend the quantum leap that has taken place in plant sizes. From fragmented and small plants, today, we have reached a position where we can take pride in having world-scale plants in several industries.

Let me give you some examples, from our own Group, because, that is what I know best. Today, our Group is the world's largest producer of viscose staple fibre. We operate, the



world's largest palm oil refinery, of a staggering 3500 tones per day capacity. Our Group is the world's third largest producer of insulators and the sixth largest producer of carbon black.

This is when we are only three years into the liberalization process. Imagine, what our achievements in globalization will be, ten years down the line, if we continue on today's virtuous road of liberalization. Indian industry has a key role to play in the prosperity of our country. Its full potential needs to be unleashed, if the business of India is to be in business.

OwnershipMoving on from size, I now come to the aspect of global ownership of Indian equities. Less than five years ago, in 1990-91, Indian companies mobilized Rs. 9700 crores from the primary market in India at that time, the funds raised from foreign institutional investors — by the way of GDRs, or Euro Bond or investment in secondary markets —- were all a dismal, resounding zero.

Globalization has opened the floodgates for the Indian industry of the vast reservoir of international capital. From being closeted in a shell, we are now becoming global in ownership.

Trade and exports

Now I come to another essential dimension of globalisation — trade. Industry and trade, go hand in hand. Indian industry cannot globalise without global trade.

Not too long ago, India was an anachronism. In an open world — an inward looking, restricted, protected, insulated and a dead market, almost a non-entity. We could not have mattered less. The world hardly took notice of this large and talented country.

But now Indian industry is coming of age and our competitors, can take us lightly, only at their own peril. In our Group, we are competing effectively in the international markets, in several product areas. We are meeting competition head on, without any government support, without any subsidies standing on our own feet.

Psyche and planning globally

Globalization is not just a change of numbers. It means also a profound change in our psyche and in our planning. The change in attitude is reflected in the fact, that whilst, in the past, we put up plants with sub-optimal capacities, today we put up industries, which have a minimum world economic size. We consider, not just the Indian market, but we consider the world as our market. From an inward attitude, we have also started looking outward.



We now calculate the profitability of new projects not on the basis of current customs duty, but the expected lower duties in the times to come. Earlier, we used to just seek protection, at home, through tariff barriers, because the home market was all that we knew.

Today, we are aggressive, not so much, about protecting tariff barriers at home, but also in seeking, to demolish trade barriers, in developed countries, so that we can have greater access to their markets. My firm conviction is, that India will be a global economic force to reckon with, in the not too distant future.

Sometimes, some of our friends are apprehensive, about the slow pace of reforms and industrialisation. I tell them: it takes nine months for a baby to be born. Be patient. Three years of reforms, is just the beginning of the fireworks. We will together see, in the coming decade, India, emerge as one of the great economic success stories.

Establishing industries in India by multinationals for local market and exportsLet us now look at another significant fallout of the globalisation of industry. Multinational corporations are migrating and flocking into India, and creating a platform for local as well as export markets. There are some uncomfortable fallouts to this invasion. As is true of any change, the rose comes with the thorns attached. One of the negative fallouts has been, that in several branded consumer goods, Indian manufacturers have virtually called it a day. This has already happened in products such as soft drinks, toiletries and others, and is likely to happen in other areas also. In consumer electronics like TV, as also in several other industries, foreign multinationals are taking and securing a stranglehold over equity ownership, thus subjugating the role of the Indian entrepreneur.

Whilst the consumers stand to gain, entrepreneurship, which also is a rare trait, around the world, but which India is fortunate to have in abundance, will certainly lose its vibrant character. Whether these shifts are good or bad, time alone will tell. But cataclysmic changes are certainly under way.

Everything cannot be hunky dory. We have to learn to live with the changes and to struggle and fight. No doubt, some Indian companies will fall. Some will regain lost ground and many will thrive and emerge as world-beaters.

India not an exception, reforms a worldwide phenomenon

Whilst we laud India's economic reforms, let me also frame India's move towards globalisation, in its broader, correct balanced perspective.India's reform efforts, whilst noteworthy, are driven by global compulsion. It is not something remarkable or extraordinary.

It had to be done. There were no options. It was a Hobson's choice. Without it, India would have been totally marginalised. As an economist remarked, "There is no force as powerful as an idea whose time has come."



We should not delude ourselves, that we have been pioneers. The fact is, we have been swept up by the force of the wave and now we have no choice but to ride it, if we are not to take a splashing. That said, it is certainly to the credit of our Prime Minister and Finance Minister, to have perceived the dominant currents, decisively made a break with the past and steered the country towards the global mainstream.

The wheels of commerce

What we are seeing is the shrinking of the globe, as the wheels of commerce make their inexorable rounds. The basic tenets of economics, suddenly, are reasserting themselves and overriding narrow and misguided political considerations, world over and at the same time industries are now being located, and relocated where they are most cost effective. This realignment is going on worldwide. It is up to India to take advantage.

This gives, developing countries a chance, to industrialise on a global scale. Let me cite my own experience. Thailand used to import Carbon Black from Japan. Today, our plant in Thailand, whose size is 2nd only to the largest Japanese plant, exports Carbon Black to Japan —- a breakthrough. Thailand used to import, Epoxy Resin from Japan. Today, our plant in Thailand exports Epoxy Resins, to our own collaborator in Japan —- a total reversal. Japan was a large exporter, of viscose fibre to the world. Today, our plants have captured a large segment of the ASEAN market, forcing the Japanese, to scrap 30% of their country's viscose fibre capacity.

In this changing kaleidoscope of world business, it is for India, to capitalise on those emerging opportunities, for industrialisation in the global context.

Indian companies look outward

I have talked, so far, of multinationals' entry into India. But this subject will not be complete, if we do not take note of the exciting and challenging opportunities, that present themselves to us — to Indian groups, to become truly multinational, by venturing out.

Without sounding immodest, I would mention, that today, our own Group, has more than 20 highly successful ventures outside India, encompassing a global spread of countries, including Egypt, Thailand, Indonesia, Philippines and Malaysia — with a combined turnover exceeding Rs. 3,500 crores. We have now targeted for Vietnam, Romania, Poland and Russia.



Hurdles to globalization

I would also like to point out, that the road to globalisation is strewn with hurdles. I will mention three major ones:

:: The spectra of protectionism in developed countries

:: The drag exerted by the public sector

:: The noose of a dilapidated infrastructure

Protectionism in developed countries

I have maintained, that "We are not afraid of competition - let competition be afraid of us". However, a new and real stumbling block for Indian industry is the fact that even as more than 20 developing countries reduced their tariff barriers, 12 developed countries, have gone the opposite way, and raised tariffs. Apart from tariff barriers, there are unfair anti-dumping duties, and we also face, quantitative barriers, such as quotas. To make matters worse, anti-dumping laws are framed, unfairly and blatantly, in favour of developed countries. These measures hamper globalisation of Indian industry.

At a discussion with the President of the World Bank, I respectfully mentioned to him, that we had reduced our tariff barriers, in response to sermons of the World Bank.

Whilst we were doing this, the developed countries were raising their tariff barriers. In anguish I said, "Why can't you tell them also, to reduce their tariff barriers?" After a prolonged argument, in which he defended the developed countries, the President finally gave in to reason and logic and said, "Well, Mr. Birla, the difference between your country and the developed ones are very simple — they are the lenders, and you are the borrowers. So we cannot sermonise them".

Therefore, friends, for further globalisation of industry, we need to fight, at every international forum, for open borders and much freer access to the developed markets.

Inefficient public sector undertakings

As far as the working of these undertakings is concerned, I would like to reiterate, what I have been pleading in Delhi - that if the industry is to become efficient, then the PSUs, which supply the inputs, such as petroleum products, coal, power, transportation, etc., have to become efficient, because these inputs, constitute a large part of our cost of production. To make public sector undertakings efficient, it is important, that the umbilical cord, between Delhi and the public sector be snapped, before both, the mother and the baby come to grief. If the public sector becomes efficient, we become efficient; if they are inefficient, we, perforce, become inefficient. Therefore, my first suggestion is: let the Central Government sell 51per cent of the shares of these public sector undertakings to the public.

A deficient and fractured Infrastructure



Having rolled out the red carpet for one and all, we should yet restrain our euphoria. Industry needs infrastructure. The deficient infrastructure, which is creaking and bursting at the seams, is today the major, immediate bottleneck - one, which can choke economic activity.

Power, is chronically short throughout the country. Unfortunately, there is yet no clear policy on power. The Government admits, to a case-by-case clearance of power projects. Liberalisation is yet to touch this sector, where there should be transparent guidelines. Further, the best and the most competent may not necessarily be the ones selected, in subjective assessments, as opposed to objective and transparent criteria.

I will give you an example of transparency, which ensures selection of the best. This could be a model for India. In Thailand, there were five parties who applied for putting up a Carbon Black plant, although there was need for only two plants. The Government was in a quandary and did not know how to tackle this situation, without giving the impression of favouring any one party. To solve this problem, they asked all the parties to give bank guarantees, which would be encashed for half the amount of the project, if the party failed to implement the project. Two parties gave bank guarantees — we, our Group and another Thai party, while the others just dropped out. This is transparency for you.

Tasks for Indian industry: footsteps towards the 21st century

I have talked enough about the broad currents of globalisation. Let me now mention, in brief, what I believe Indian industry needs to do to become vibrant, dynamic and outward looking, for entering the 21st century. I believe, there are certain basic precepts to be followed, and on these there can be no compromise:



UltraTech is India's largest exporter of cement and clinker. The company's production facilities are spread across five integrated plants, five grinding units, and three terminals - two in India and one in Sri Lanka. All the plants have ISO 9001 certification, and all but one have ISO 14001 certification. While two of the plants have already received OSHAS 18001 certification, the process is underway for the remaining three. The company exports over three million tonnes per annum to countries around the Indian Ocean, Africa, Europe, and the Middle East, accounting for about 47 per cent of India's total clinker and cement exports.Ultratech's products include Ordinary Portland cement, Portland Pozzolana cement and Portland blast furnace slag cement.

Ordinary Portland cement Portland blast furnace slag cement Portland Pozzolana cement Cement to European and Sri Lankan norms

Ordinary Portland cement

Ordinary portland cement is the most commonly used cement for a wide range of applications. These applications cover dry-lean mixes, general-purpose ready-mixes, and even high strength pre-cast and pre-stressed concrete.

Portland blast furnace slag cement

Portland blast-furnace slag cement contains up to 70 per cent of finely ground, granulated blast-furnace slag, a nonmetallic product consisting essentially of silicates and alumino-silicates of calcium. Slag brings with it the advantage of the energy invested in the slag making. Grinding slag for cement replacement takes only 25 per cent of the energy needed to manufacture portland cement. Using slag cement to replace a portion of portland cement in a concrete mixture is a useful method to make concrete better and more consistent. Portland blast-furnace slag cement has a lighter colour, better concrete workability, easier finishability, higher compressive and flexural strength, lower permeability, improved resistance to aggressive chemicals and more consistent plastic and hardened consistency.

Portland Pozzolana cement

Portland pozzolana cement is ordinary portland cement blended with pozzolanic materials (power-station fly ash, burnt clays, ash from burnt plant material or silicious earths), either together or separately. Portland clinker is ground with gypsum and pozzolanic materials which, though they do not have cementing properties in themselves, combine chemically with portland cement in the presence of water to form extra strong cementing material which resists wet cracking, thermal cracking and has a high degree of cohesion and workability in concrete and mortar.

About group


http://www.ultratechcement.com/products/index.htm#5




The Aditya Birla group is world’s 9th largest cement producer

Incorporated on 24 august 2000 as L&T Cement Limited

Our vision

"To actively contribute to the social and economic development of the communities in which we operate. In so doing, build a better, sustainable way of life for the weaker sections of society and raise the country's human development index."

— Mrs. Rajashree Birla, Chairperson, The Aditya Birla Centre for Community Initiatives and Rural Development

Making a difference

Before Corporate Social Responsibility found a place in corporate lexion, it was already textured into our Group's value systems. As early as the 1940s, our founding father Shri G.D Birla espoused the trusteeship concept of management. Simply stated, this entails that the wealth that one generates and holds is to be held as in a trust for our multiple stakeholders. With regard to CSR, this means investing part of our profits beyond business, for the larger good of society.

While carrying forward this philosophy, his grandson, Aditya Birla weaved in the concept of 'sustainable livelihood', which transcended cheque book philanthropy. In his view, it was unwise to keep on giving endlessly. Instead, he felt that channelising resources to ensure that people have the wherewithal to make both ends meet would be more productive. He would say, "Give a hungry man fish for a day, he will eat it and the next day, he would be hungry again. Instead if you taught him how to fish, he would be able to feed himself and his family for a lifetime."

Taking these practices forward, our chairman

Mr. Kumar Mangalam Birla institutionalised the concept of triple bottom line accountability represented by economic success, environmental responsibility and social commitment. In a holistic way thus, the interests of all the stakeholders have been textured into our Group's fabric.

The footprint of our social work today straddles over 3,700 villages, reaching out to more than 2 million people annually. Our community work is a way of telling the people among whom we operate that We Care.

Our strategy


http://www.adityabirla.com/social_projects/overview.htm#top


Our projects are carried out under the aegis of the "Aditya Birla Centre for Community Initiatives and Rural Development", led by Mrs. Rajashree Birla. The Centre provides the strategic direction, and the thrust areas for our work ensuring performance management as well.

Our focus is on the all-round development of the communities around our plants located mostly in distant rural areas and tribal belts. All our Group companies —- Grasim, Hindalco, Indian Rayon, Indo Gulf and UltraTech have Rural Development Cells which are the implementation bodies

Projects are planned after a participatory need assessment of the communities around the plants. Each project has a one-year and a three-year rolling plan, with milestones and measurable targets. The objective is to phase out our presence over a period of time and hand over the reins of further development to the people. This also enables us to widen our reach. Along with internal performance assessment mechanisms, our projects are audited by reputed external agencies, who measure it on qualitative and quantitative parameters, helping us gauge the effectiveness and providing excellent inputs.

Our partners in development are government bodies, district authorities, village panchayats and the end beneficiaries -- the villagers. The Government has, in their 5-year plans, special funds earmarked for human development and we recourse to many of these. At the same time, we network and collaborate with like-minded bilateral and unilateral agencies to share ideas, draw from each other's experiences, and ensure that efforts are not duplicated. At another level, this provides a platform for advocacy. Some of the agencies we have collaborated with are UNFPA, SIFSA, CARE India, Habitat for Humanity International, Unicef and the World Bank.

Our focus areas

Our rural development activities span five key areas and our single-minded goal here is to help build model villages that can stand on their own feet

Strong and sturdy

UltraTech Cement Limited, makers of premier cement, is a subsidiary of Grasim Industries Ltd., the flagship company of the Aditya Birla Group. The group is the ninth largest cement manufacturer in the world and number one in India. Its basket of products includes ordinary Portland cement, Portland blast furnace slag cement, Portland Pozzolana cement and Grey Portland cement.It also exports clinker and cement.

UltraTech has five integrated plants, five grinding units, and three terminals - two in India and one in Sri Lanka. All the plants have ISO 9001 certification. Most of the plants have also been certified for ISO 14001 and OSHAS 18001.


http://www.ultratechcement.com/about_us/making_its_mark.htm


UltraTech is the country's largest exporter of cement and clinker. The company exports over three million tonnes per annum, which is 47 per cent of the country's total exports. Cement and clinker is exported to countries around the Indian Ocean, Africa and the Middle East. The Middle East is a major market for UltraTech cement. Export is a thrust area in the company's strategy for growth.

The cement division of L&T was demerged in 2004 after Grasim made the 30 per cent open offer for equity shares, gaining control over the new company, christened UltraTech. Besides the long term strategic value in the wake of rising demand for cement, with the growth of housing and infrastructure sectors in the country, the acquisition brings significant synergy gains to the parent company

How the name become ultratech from L&T – a short history on that.

With the re-christening of L&T Cement as UltraTech Cement, the Aditya Birla Group is pulling out all the stops to establish itself as not only the best domestic player but also among the global leaders in cement.

On the surface it appears to be only an ornamental change. L&T Cement has been rechristened UltraTech Cement. While O.P. Puranmalka, Group Executive President, Grasim Industries, and Chief Marketing Officer, UltraTech Cement Ltd., also insists that nothing except the name has changed, the truth is that with the unveiling of this new brand, the US$ 6.5 billion Aditya Birla group is implementing one of the largest brand transition exercises in India.

L&T had earlier demerged its cement division to create UltraTech Cement Ltd. Grasim, part of the Aditya Birla group, acquired a majority stock in the company for around Rs. 2,200 crore. Subsequently, Grasim, which has cement brands Birla Plus and Birla Super, was allowed to use the L&T Cement brand till 31 March 2005. Explaining the strategy behind the new brand name, Mr. Puranmalka says: "UltraTech has been the outcome of an in-depth research across the country. We wanted to capture the gene code of L&T in the new brand name. So we commissioned a research on customer perception about the L&T Cement brand. Of course, we were very sure in our mind that L&T Cement epitomised engineering prowess, technology quality and modernity."

The research findings threw up the same qualities, but the name itself was not associated with anything because L&T was not by itself a meaningful word. Moreover, the group wanted a new brand image which portrayed the intrinsic premium value of the brand - on cue from the findings of the survey. The outcome was UltraTech Cement. Says Mr. Puranmalka: "The name UltraTech with the signature line 'the engineer's choice' admirably captures the premium nature of the brand and its salience."

According to Mr. Puranmalka, excellent product quality and customer care will remain the hallmark of UltraTech. So while the emphasis remains on the essential quality of the



established brand, the makeover is essentially to bring the Birla touch to the brand after its acquisition last year.

A strong bond

While some rivals would like to believe that this is only old wine in a new bottle, the brand transition is actually part of a large makeover keeping the quality unchanged. The Aditya Birla group is planning to invest Rs. 200 crore on enhancing the market through new capacities and bringing in higher volumes, adding 2.5 million tonnes largely by removing bottlenecks. The company has plans to maximise operational efficiencies and to sweat the assets and grow aggressively.

At the moment, the group has no plans of making changes in the existing production plants. While the cement plants at Kovaya and Jaffarabad in Gujarat, Awarpur in Maharashtra, Hirmi in Chattisgarh and Tadipatri in Andhra Pradesh provide unmatched quality, the grinding units at Durgapur, Jharsaguda, Arakkonam, Magdalla and Ratnagiri support them. Besides, there are packaging terminals set up at Mangalore, Mumbai and Sri Lanka. These facilities are managed by the same team of excellent and resourceful technocrats and backed up by the same marketing team, explains Mr. Puranmalka.

With the acquisition of L&T's cement division, the Aditya Birla group had made its intention of growing the cement business very clear. UltraTech Cement enjoys the position of a market leader in all the regions where it is present. Over 42 per cent of its domestic sales arise from the western region. Moreover, its plants and markets complement those of Grasim. With these two brands, the group's cement capacity is in excess of 31 million tonnes per annum (tpa) -- of which 17 million tpa comes from UltraTech -- cementing its position as the ninth largest player in the world. Today, the group has 11 composite plants, seven split-grinding units, four bulk terminals, including one in Sri Lanka, and eight ready-mix concrete plants.

The Aditya Birla Group has initiated measures to bring about operational synergies between Grasim's cement business and UltraTech Cement. Initiating the process, the group has started joint procurement of raw materials. "We are eyeing synergies between the group's cement businesses. This will help us save costs," says Saurabh Misra, Chief Executive Officer, UltraTech Cement. The group is exploring the option of extending the joint efforts to other areas like logistics once the brand transition exercise is complete.

Besides, the company is looking at the option of achieving full capacity utilisation in Narmada Cements, a fully owned subsidiary.



Export initiatives

UltraTech Cement recently bagged an award for being the highest exporter of the year from CAPEXIL for the eighth time in a row for its sterling performance during 2003-2004. A leading cement exporter, its plants have also received various awards for environment protection, social awareness, safety and management of better industrial relations.

The company has been credited with boosting its exports of cement and clinker last year by 25 per cent to 3.5 million tonnes from 2.8 million tonnes in 2002-2003. According to a company official, stringent quality control and testing in the best laboratories ensure that cement and clinker produced from its plants conform to and surpass international standards. The laboratory is equipped to test cement as per ASTM, British and Euro standards. All the plants are ISO 9001 certified for the latest production process and 14001 certified for environmental management. The cement plant in Gujarat has an additional OHSAS 18001 certification as well for occupation hazards and safety parameters.

The company has a captive jetty at the Gujarat plant. The jetty length of 337 metres and width of 23 metres is capable of handling ships of 45,000 DWT with 11 metres draft. Loading of cement and clinker onto the ship is carried out by a shiploader, which is fed by a four km long conveyor belt that connects the plant to the jetty. UltraTech Cement is the first and only Indian cement company to obtain an EC certification for this plant. The accreditation, given by Bureau Veritas, is a pre-requisite to supply cement to EC member countries. UltraTech is one of the few Asian cement companies to receive this recognition.

The Hirmi Cement Works in Chattisgarh and the Jharsuguda Cement Works in Orissa make them ideal locations for export of cement and clinker to Nepal and Bangladesh. With captive railway sidings to facilitate loading of railway rakes and a high-tech production facility for cement and clinker, UltraTech Cement has found wide acceptance in these neighbouring countries.

Elaborating his growth strategy, Mr. Puranmalka says: "We will leverage synergies and further strengthen our ability to compete in the Indian and the overseas markets. We expect UltraTech to grow faster than the market and to improve the market shares. At the same time, developing beachheads overseas through a profitable exports business is a priority for all of us."



Details of UltraTech's production capacities

Plant / Unit Kiln capacity (TPD) Capacity (mil MT)

A Composite intergrated plants

Andhra Pradesh Cement Works 8000 2.3

Awarpur Cement Works 9500 3.3

Gujarat Cement Works 15000 5.3

Hirmi Cement Works 8050 1.6

B Grinding units

Arakkonam Cement Works 1.2

Jharsuguda Cement Works 0.8

West Bengal Cement Works 1.0

C Narmada Cement Company Limited

Jaffrabad / Ratnagiri / Magdalla 4350 1.5

Total 17.0



A national research

As part of the eighth biggest cement manufacturer in the world, UltraTech Cement has five integrated plants, five grinding units as well as three terminals of its own (one overseas, in Colombo, Sri Lanka). These facilities gradually came up over the years, as indicated below:

2004Completion of the implementation process to demerge the cement business of L&T and completion of open offer by Grasim, with the latter acquiring controlling stake in the newly formed company UltraTech

2003The board of Larsen & Toubro Ltd (L&T) decides to demerge its cement business into a separate cement company (CemCo). Grasim decides to acquire an 8.5 per cent equity stake from L&T and then make an open offer for 30 per cent of the equity of CemCo, to acquire management control of the company

2002The Grasim Board approves an open offer for purchase of up to 20 per cent of the equity shares of Larsen & Toubro Ltd (L&T), in accordance with the provisions and guidelines issued by the Securities & Exchange Board of India (SEBI) Regulations, 1997.

2001Grasim acquires 10 per cent stake in L&T. Subsequently increases stake to 15.3 per cent by October 2002Durgapur grinding unit

1998-2000Bulk cement terminals at Mangalore, Navi Mumbai and Colombo

1999Narmada Cement Company Limited acquiredRatnagiri Cement Works

1998Gujarat Cement Works Plant IIAndhra Pradesh Cement Works

1996Gujarat Cement Works Plant I

1994



Hirmi Cement Works

1993Jharsuguda grinding unit

1987Awarpur Cement Works Plant II

1983Awarpur Cement Works Plant I



UltraTech Cement Ltd., a Grasim subsidiary, has an annual capacity of 17 million tpa. It manufactures and markets ordinary portland cement, portland blast furnace slag cement, portland pozzolana cement and grey portland cement.

UltraTech Cement has five integrated plants, five grinding units, and four terminals — three in India and one in Sri Lanka.

Integrated plants

LocationCapacity (million tpa)

Gujarat Cement Works (Pipara) 5.3

Andhra Pradesh Cement Works, Andhra Pradesh (Tadpatri) 2.3

Hirmi Cement Works, Chhattisgarh 1.6

Awarpur Cement Works, Maharashtra 3.3

Jafrabad Cement Works, Gujarat 0.4

Grinding units

Jharsuguda Cement Works, Orissa 0.8

Arakonam Cement Works, Tamil Nadu 1.2

West Bengal Cement Works, West Bengal 1.0

Magdalla Cement Works, Gujarat 0.7

Ratnagiri Cement Works, Maharashtra 0.4

Total 17.0

ExportsUltraTech Cement is the country's largest exporter of cement and clinker. The Company exports over three million tones per annum, which is about 47 per cent of the country's total exports. Cement and clinker is exported to countries around the Indian Ocean, Africa, Europe and the Middle East. Europe and UAE are the major markets for UltraTech Cement.

Narmada Cement Company Ltd. is a subsidiary of the Company.



Ultra Tech company, key products and brands their capacities and country location.

company key products and brands capacities country

Grasim Industries Ltd.

white cement Birla White

400,000 tpa

India

grey cement Birla Plus, Birla Super

13.12 mn tpa

India

Shree Digvijay

grey cement Kamal 1.08 Mn tpa

India

UltraTech Cement Ltd.

ordinary portland cement, portland blast furnace slag cement, portland pozzolana cement and grey portland cement

17 mn tpa India

Contribution of sectors in India to group turns over


http://www.ultratechcement.com/




http://www.grasim.com/




Board of Directors

:: Dr. Kumar Mangalam Birla

:: Mrs Rajashree Birla

:: Mr. R C Bhargava

:: Mr. Y M Deosthalee

:: Mr. A R Gandhi

:: Mr. Y P Gupta

:: Dr. Santrupt Misra

:: Mr. V T Moorthy

:: Mr. J P Nayak

:: Mr. S Rajgopal

:: Mr. D D Rathi

Manager and Chief Executive Officer:: Mr. Saurabh Misra

Chief Financial Officer :: Mr. K C Birla

Chief Manufacturing Officer :: Mr. V M Muralidharan

Chief Marketing Officer:: Mr. O P Puranmalka

Executive Vice President — International Business:: Mr. Deepak Razdan

Company Secretary :: Mr. S K Chatterjee



Micro Analysis

Swot analysis of the company ultratech.

Opportunity

SHAREHOLDERS of Larsen and Toubro (L&T) can stay invested as the company appears close to hive-off its cement business.

The shareholders, who would be entitled to a stake in the cement company, can collect shares in this company and then evaluate their exposures to stocks in both the outfits.

For the quarter ending June 30, the company's performance was fairly impressive, thanks to the strong showing of the cement unit. This was achieved because of high price levels, though volumes continue to be flat. This is the second successive quarter that enhanced profitability of the cement business has provided a boost to the bottomline. Until six months ago, the cement business had been a drag on the earnings as L&T searched for an elusive break-even. What has turned things around is not so much a company-specific factor. It is the concerted action of all players in the industry to ramp up prices. As a result of this move, the prices in various markets have risen between 40 per cent and 75 per cent. The price levels in the corresponding quarter of 2000-01 were weak. This explains the sharp spurt in the earnings performance. To base a long-term valuation on this quarter's showing would be risky, as the sustainability of cement prices at such levels is a question mark. Also, the cement business is to be vested in a separate company. L&T would hold a 37.5 per cent stake, its shareholders 25 per cent and a foreign partner 37.5 per cent. The



company had earlier proposed just a 25 per cent stake to its foreign partner. But the big names did not bite this.

Threats

The biggest threat for the company is that they have changed the old name and the name is now become Ultra Tech cement company Limited. The threat fro this is, sometimes it has been seen that by changing the name of any particular product or even working group’s name, it affects overall market of that particular company. There might be possibilities of positive as well as negative company.As the Ultra Tech cement company belongs to Aditya Birla group which is word’s 9th largest cement group, Ultra Tech unit has to work hard to meet all the needs of the domestic as well as international market as they are entering in the market with new name, it might be very tough for the company to maintain their position in the market.Ultra Tech cement company Limited, after changing the name even it is second largest company in India after Ambuja Cement, so company would also receive stiff competition from no. 1 company, that is Ambuja Cement Company Limited, as its no. one company and other big groups are also there like J.K. Cement so company has to also compete with all that big groups.

Strength

India’s largest and lowest cost aluminum producer Largest producer of white cement in India Fastest-growing copper company in Asia World leader in viscose staple fiber Leading private sector mutual fund and insurance company Successful forays into software and BPO World’s largest single-location palm oil refinery World’s third largest producer of insulator

Now, Holderbank (Switzerland), Lafarge (France) and Cemex (Mexico) are in the reckoning. Whoever gets the stake would be able to create a dominant position (along with the Gujarat Ambuja group) in the industry. All three are big and have a war-chest that could used to bankroll a big presence in India. The fact that L&T has quickly lifted its capacity to 15 million tonnes is also bound to help. With the foreign strategic partner likely to play an active role, the cement business may be well-placed to battle on the volumes and efficiency fronts -- the two key and lasting success factors unlike the ramped-up prices of the last eight months or so.



It is in this context that shareholders should stay invested and take their due stakes in the cement unit. In its other main businesses of engineering and construction, L&T continues to be on a strong wicket. It is emerging as a major player in the fledgling road sector and plans to have a 10 per cent market share. The overall numbers bear out the strong showing: *Revenues have risen 10.1 per cent to Rs 1,830.97 crore (Rs 1,663.4 crore in the April-June quarter of 2000). *With a tight rein on expenses, which are up by just 6.5 per cent, operating profits have improved 46.7 per cent. *A liberal 40 per cent rise in òther income' and modest increases in interest charges and depreciation and provision for tax have pushed up post-tax earnings three-fold. *Post-tax earnings were Rs 65.1 crore (Rs 18.9 crore). *The operating profit margin improved from 8.8 per cent to 11.8 per cent. While the margin in the engineering and construction businesses has been stable, that in the cement business has jumped with high prices. This has helped raise the overall profitability levels. *The fully diluted earnings per share (EPS) is Rs 2.57. The present equity of Rs 248.7 crore is due for a marginal rise. *For 2000-01, L&T had revenues of Rs 7,825.4 crore, operating profits of Rs 819.8 crore, post-tax earnings of Rs 315.1 crore and an EPS of Rs 12.45. UltraTech's distribution network is very widely spread out in the country with over 5,500 dealers and 30,000 retailers. UltraTech enjoys a leadership position in all of the markets that it serves. Mr. Birla took great pride in the UltraTech team, who he said "are committed to preserving the brand's premium and its market share". The Company has enlisted the support of all of its business associates. This includes dealers, stockists, retailers, builders and engineers among others.

Financial data



Contd. from page no. 2



Acquired management control in UltraTech



It was a historic period strategically, as your Company completed the acquisition of a controlling stake in UltraTechCement Limited, the erstwhile cement business of Larsen & Toubro Ltd. (L&T).

As you are aware, your Company pursued the de-merger of the cement business of L&T through a Scheme ofArrangement, which was approved by the High Court of Bombay on 22nd April 2004. Consequently, the Board ofL&T made the Scheme effective from 14th May 2004 and your Company made an Offer for an additional 30% stake in UltraTech.

The open offer received excellent response from shareholders of UltraTech. The issue was oversubscribed by 1.64times. In line with the terms of the Offer, your Company accepted 3.73 crore shares (60.9% of the shares tendered).Together with 8.5% share purchased from L&T, its stake raised to 51% of paid-up equity capital in UltraTech. Oncompletion of the formalities, your Company acquired management control and reconstituted the Board of UltraTechon 6th July 2004. The entire acquisition is now completed. It has cost us Rs.2,200 crores, which was fully funded byinternal generations.

Your Company recognises the need to unlock value from UltraTech quickly. Towards this end, a two prongedstrategy has been put in place. It focuses on (i) realisation of potential synergies between UltraTech and Grasimand (ii) strengthening profitability through efficiency improvement and cost reduction at UltraTech.

We expect benefits of synergies to start flowing from the 4th quarter and more prominently FY06 onwards.



Financial Performance

Let me move on to the operational performance, starting with financial highlights.

(Rs. In Crores)

Highlights

Higher production and enhanced capacity utilisation in all key businesses.

Impressive rise in revenues, on the back of higher sales volumes and improved realisations across all business segments.

Helped by this and continued thrust on efficiencies and cost reduction, operating profits have grown even stronger by 40%, from Rs.622 crores to Rs.871 crores.This was despite a 50% YoY fall in other income, caused by reduced dividend flow, lower available surplus with the deployment of funds for UltraTech acquisition and lower market yield due to softer interest rates.

Interest and finance charges have gone down 12% YoY to Rs.70 crores, reflecting better working capital management, raising of cheaper funds and retirement of high cost debts.

Depreciation charges have been maintained at Rs.140 crores vis a vis Rs.135 crores of the comparative period last year.



Consequently, pre-tax profits have grown by an impressive 62% to Rs.661 crores.

Total tax charges are higher by 120% at Rs.227 crores due to higher profitability and reduction in tax exempt income.

Notwithstanding this, profit after tax but before exceptional items is higher at Rs.434 crores against Rs.305 crores in H1FY04, reflecting a growth of 42% YoY.

Business Review and Outlook

VISCOSE STAPLE FIBRE (VSF)

Performance Review

VSF business put up a stellar performance. Despite the steep increase in input costs, shut down of Harihar plant for over 40 days due to water shortages, your Company posted such an impressive performance is indeed laudable.

Aggregate production grew by 23% to 121,090 tonnes, with 96% of the enhanced capacity utilisation.

Improved demand from the domestic as well as deemed exports, helped your Company clock 18% higher sales at 121,394 tonnes in H1FY05. Aided by better market conditions, rising international prices and a favourable changein the competing fibre prices, average realisation moved up 9% to Rs.78,428/MT. Consequently, operating margins were maintained around 32%, despite a 10-15% rise in cost of key inputs viz., Pulp, Caustic Soda and Coal.

Outlook



The Company is expected to sustain its strong performance in VSF business, buoyed by stable market conditions and strategic initiatives that are yielding results now. However the volumes may get impacted in the short term dueto lower cotton prices and reduction in DEPB incentives on exports and deemed exports.

Your Company will strive to grow volumes through its emphasis on market enlargement, value added products and service quality. The successful development of new generation fibres like Modal and Excel should contributeSignificantly. With development of these specialty fibers, your Company is now poised to become the one stop source for meeting entire range of man made cellulosic fibres.

Your Company is pursuing a further expansion of its VSF capacity by around 54,750 tones, through brown field and de-bottlenecking at the existing plants.Capitalizing on benefits of stable current operations, better contribution from new generation fibres and low cost expansions, your Company expects to continue good performance from this largest contributing segment in the future.

CHEMICALS

Performance Review

The Chemical business, largely a backward integration for VSF, has reported satisfactory performance during the first half. Aggregate production grew by 11% from 69,665 tonnes to 77,083 tones. The plant operations during the last year suffered on account of water scarcity. Sales volumes grew from 69,916 tonnes to 77,148 tonnes in H1FY05 on higher captive demand from VSF segment.7Reflecting the rising trend in international caustic prices and strong demand from key user sectors, your Company registered 6% higher average ECU realization at Rs.17,078 per tonne. Margins decreased from 24% to 21% in H1FY05, due to interruptions faced on account of a breakdown at the captive power plant as well as higher power and raw materials costs.

Outlook



We are very positive about the chemical business. Volumes should grow further on the back of improved demand from the VSF and other end user sectors. The pricing environment should remain encouraging with strengthening caustic and chlorine prices in the international markets. Your Company is aiming at growing volumes and revenues as well as maintaining profitability.

CEMENT

Performance Review

The cement business has demonstrated significant improvement on the wings of higher volumes and better realization.

Coupled with benefits of production and market realignment efforts, your Company has been able to achieve better margins and returns.

The cement industry witnessed a slow start, with demand growth averaging only at 5% in H1FY05. This aberration seems to have been caused by the change of Government at the centre, slowdown in the infrastructure spending during the transition and adversities of drought-like conditions in the South and the West. Growth appears to be regaining momentum since demand growth averaged around 7% in Q2 as against only 2% in Q1.

Your Company registered good growth in the North and outperformed its peers in the South, but posted relatively lower growth in the West. In the East, it lagged peers due to breakdown of the slag mill and resultant supply interruptions. Reflecting mixed regional performances, sales grew by 5% from 5.8 million tonnes to 6.1 million tonnes in H1FY05.



Average realization moved up 15%, from Rs.1,653 per tonne to Rs.1,899 per tonne in H1FY05. Coupled with benefits of richer product and market mix, your Company improved margins from 16% to 22% in H1FY05 despite a steep rise in fuel cost.

The White Cement division performed satisfactorily. Aggregate production grew marginally from 136,523 tonnes to 142,734 tonnes, pushing average utilisation to 71% in H1FY05. Sales were marginally lower by 1% YoY at 139,091 tonnes. Your Company is the market leader and remains focused on developing new applications and new products towards expanding the market and ensuring ongoing profitable growth.

Cement Subsidiaries Performance

1. UltraTech Cement Ltd. (UTCL) – Consolidated Financial Performance



UTCL performance is below expectations and necessary steps are being taken to improve its operating performance following the acquisition of management control. For the first half, UTCL has reported an average utilisation of 87%, producing 5.9 million tonnes of cement and 1.5 million tonnes of clinker for sale. Aggregate sales have matched production. Sales grew stronger than the sector average in the North and East. However it was far behind in the West due to conscious realignment of markets. On the export front, UTCL has performed well with 28% higher clinker volumes at 14.8 lac tonnes, fuelled by improved demand from the Middle East. Margins at 15.3% highlights the significant upside potential.

2. Shree Digvijay Cement Company Ltd. (SDCCL) – Financial Performance



Shree Digvijay Cement Company Limited (SDCCL), another cement subsidiary of your Company, has been going through a difficult phase and efforts are on to revive its performance and profitability. The revival package is still under consideration with BIFR.

Pending approval of its result for the 12 months ended 30th September 2004, let me briefly update you on the overall performance. The Company has demonstrated improvement in performance, though it is still far from satisfactory levels of profitability. Operating profits for the first nine months of the year has increased from Rs.9.7 crores to Rs.16.0 crores on back of better realisations and tight control over costs. SDCCL benefited from the interest rate restructuring efforts, which helped it reduce interest costs by 38% to Rs.16.7 crores. Consequently, Loss before tax and exceptional items declined from Rs.23.7 crores to Rs.6.5 crores for the first 9 months ending 30th June 2004, as highlighted herein above.

Outlook for Grey Cement Business

The cement sector appears to be on a sustainable growth path, given the robust outlook for the housing sector and regaining momentum in infrastructure spending. We see an 8% average growth in the long run, though demand growth for the current year could settle in the region of 6-7%, reflecting the slow start in H1FY05. Against this backdrop, given forecast of slow growth in capacity additions, your Company expects to see a gradual demandsupply balance over the next two years. The North and the East would be balanced during CY2005 and equilibrium is likely in the West by CY2006. The South could take a bit more time, possibly beyond CY2006.

Prices have remained firm even during the traditionally weak monsoon periods. We expect full year’s average to be higher than that of the previous year.The encouraging business outlook is being further strengthened by a favourable outlook for exports, thanks to strong construction activity in the Middle East, likely to be



sustainable for a couple of years. Through its subsidiary, UltraTech & SDCCL, your Company will capitalise on the opportunity by taking advantage of its coastal location.

Your Company remains focussed on cost control to maintain its cost competitiveness. Towards this end, captive power plants are being planned at three locations with a combined capacity of 77 MW.

In an improving sector environment, your Company will focus on (i) improving utilisation and market share (ii) raising realisation through market and product mix rationalisation (iii) lowering costs through a rise in share of captive thermal power and use of alternative fuels and (iv) realising synergies with UltraTech. Improving profitability at UltraTech will be key to unlocking value from the significant investment made in recent years.

SPONGE IRON



Performance Review

The performance of the Sponge Iron business has been outstanding with record high revenues and profitability. A buoyant steel sector, firm scrap prices and enhanced asset utilization worked to our advantage.

Plant utilization rose from 67% to 84%, reaching a high of 90% during the 2nd quarter. This is commendable considering the constraints faced due to continued poor availability of Natural Gas, which was partially overcome through higher use of Naphtha and Propane.

Your Company was able to post 24% higher sales at 373,418 tonnes. Gaining from firm steel prices and renewed strength in global scrap prices, your Company’s realizations soared by an impressive 51% to Rs.12,161 per tonne. Operating margins enhanced from 36% to 39%, despite higher raw material costs and increased use of expensive feedstocks. ROCE increased from 30% to an impressive 73% in H1FY05.

Outlook

The outlook for the Sponge Iron business seems rewarding. The continuing strong growth in the Steel sector and stability in global scrap prices augur well for demand and prices. The Indian steel industry should benefit from continued emphasis on infrastructure development and housing.

At Grasim, our focus is on sweating assets optimally through relentless improvement in utilisation either by using alternative feedstocks or by securing alternative sources of gas, including Liquefied Natural Gas (LNG). Necessary steps to secure alternative sources of gas supplies are being taken already. A dialogue with LNG suppliers is making satisfactory progress. Your Company expects gas availability to improve by January 2006. This should help in betterplant utilisation and offset the impact of any cyclical downturn in the steel sector. We are confident of sustained profitability in this business.

Our business strategy has been to sweat assets, which has been proved successful. As you are aware, your Company has realised over Rs.543 crores of operating profit from this business during the last 2 ½ years.



TEXTILES

Performance Review

The textiles business has made marginal contribution, having turned around consequent to its restructuring efforts and a revival in the textile sector.Focused efforts to re-orient the product mix, reposition brands and focus on the profitable niche segments has aided in ensuring better realisation, which is up 3% to Rs.103 per meter, despite intense price competition. Business revenues have moved up 11% YoY to Rs.125 crores. Operating margins were maintained at 6% notwithstanding higher input costs. Consequent to these, business returns have turned positive, though only 1.2% in H1FY05.

Outlook

The textile industry is showing signs of improvement and should see export driven growth with the abolishment of quotas in 2005. The premium end of the domestic markets too is showing an upward trend, offering good scope for profitable growth for quality players. Your Company’s emphasis on quality and increasing market share in the premium end should yield in higher profitability.



Conclusion

Cement is a key factor in economic development. There has been huge increase in the demand for cement in house construction, road construction etc. there is great scope for increase in export of cement. The industry has tremendous potential for development as limestone of excellent quality is found almost throughout country.

The major problems faced by the cement industry in recent years, as indicated already, were inadequate and erratic supply of coal mainly due to poor availability of rail wagons, increase in coal prices following partial deregulation, poor quality of coal and frequent power cuts in major cement producing states like Rajasthan, Andhra Pradesh, Karnataka, Madhya Pradesh, Gujarat and Kerala.

We may also refer, in this connection, to the ambitious modernization/expansion programmes of the cement industry which include conversion of manufacturing process, enegy conservation measures, adoption of latest technologies sucs as pre-heaters and setting up of captive power units, etc. the government is also encouraging the setting up of coal washeries and captive power plants to solve the problems of poor quality of coal and power shortage.

In recent years, the Government of India has given both direct and indirect encouragement to the cement industry. The indirect benefits have been in the form of demand pus by given priority to infrastructure and housing sectors. Besides, imports of cement are made unviable by the Government and there is no fear of dumping of foreign cement in India.

A very interesting pilot project for transportation of buld cement is being set up at Kalamboli, New Bomnay in order to switch over gradually form the traditional movement of cement in bags to modern and efficient mode of transportation and distribution I bulk.

The Ninth Plan(1972-2002) projected a capacity of 135 million tones but the industry reacted installed capacity of 140.5 million tones in 2001-02. the Tenth Plan profects additional capacity of 62 million tones at a total investment of Rs. 17600.



BIBLIOGRAPHY

BOOKS

Indian Economy by Ruddar Dutt and K.P.M. Sundhram

Strategic Management by Thompson & Stickland

MAGAZINE

Facts for you, April-2005

Ultra Tech annual Report, 2004-05

Business World p.no.45-46

Websites

www.indianinfoline.comwww.ultratechcement.comwww.economywatch.comwww.indianmba.comwww.netmba.comwww.jobstreet.com


http://www.jobstreet.com/

http://www.netmba.com/

http://www.indianmba.com/

http://www.economywatch.com/


http://www.indianinfoline.com/

Documents

Final Sm Cement Report