Calls of costs & consolidation

Calls of costs & consolidation

A L Kapur, former managing director, Ambuja Cements had stated, "Cement is nothing but a logistic business. If you have a perfect transportation model, you are the best cement producer." Cement makers opted for sea-routes to transport cement from Gujarat to southern markets and changed the cost metrics. The sea-route then drastically reduced the transportation cost which was Re 1 per tonne per km by rail and Rs 1.5 per tonne per km by road to 50-70 paise per tonne per km.

Gujarat Ambuja Cement (GACL) instituted various initiatives in cost efficiency by streamlining logistics. GACL was one of the first cement producers of the country to introduce an Integrated Logistics System (ILS). This involved an Order Processing system, Inventory Management, Innovation in packaging, Warehousing, and also revolutionised the market by setting up chains of retailers catering to customers.

Our cover story deals with the logistics area and covers the recommendations of the Working Group set up by the planning commission. Although the planning commission's plan of helping the railways achieve 60% share in cement logistics did not materialise due to poor rail efficiencies, they are making smart corrections based on recommendations of the working group.

Both inbound, when receiving raw materials, and outbound, reaching out to several thousands of retailers spread all across the country, logistics is the key. Cement is mostly sold through the dealer network and hardly 2% gets sold directly hence the need to have a very accurate system in stock management and inventory control.

Jaiprakash Associates, cement unit which has been in the play for some time has terminated talks with Ireland-based building materials group CRH Plc. Soon thereafter, the Aditya Birla Group has revived negotiations and made an offer of up to $130 per tonne for acquiring the cement assets with a total capacity of 9.8 million tonnes as per reports. Adhunik Cement, with a capacity of 1.5 million tonnes, was sold to Dalmia Cement for Rs 1085 crores resulting in an enterprise value per tonne of $131 making Dalmia Cement one of the largest manufacturers in North East India. Since return on capital employed has dipped and there is pressure on the economy, experts believe deals are fair at an enterprise valuation of $140-$160 a tonne currently.

Consolidation seems to be in favour and rightly so as the call of urbanisation is likely to witness great migration to cities and in the next 18 years by 2030, number of cities with more than 1 million population will jump from current 53 to 87. Further, 70% of all new jobs will be created in urban India. Currently 30% of the population stays in urban India and by 2030, 40% would stay in urban India, raising the current urban population of 340 million to 590 million.

Best wishes for a happy and prosperous Diwali!

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