About the Cement Industry

India is the world's second largest manufacturers of cement with annual capacity of 219 million
tonnes (MT) at the end of FY 2009, according to the Cement Manufactures Association.
Dispatches during the year 2009-10 were 159.43 million tones (MT) increasing by 12 per cent
over 142.23 in 2008-09.

Cement production during 2009-10 was 160.31MT an increase of 12.37 per cent over 142.65MT
in 2008-09. According to ACC the governments continued thrust on infrastructure will help an
annual growth of 9-10 per cent in 2010.

As per the current years Union Budget a throbbing US$ 37.4 billion has been provided for
infrastructure development.

Company Profile

ACC Limited is one of India’s leading manufacturers of cement and ready concrete mix. I has 14
manufacturing units and 20 sales units spread throughout India. It is the only cement company
that features in the list of Consumer Super Brands of India.

Acc offers specialized project engineering consultancy in cement and other process industries in
India and abroad. It has another unique thing which is that it has an in-house research
development centre that does the entire R&D for new developments and product cost
minimization. ACC has been a pioneer and trend setter in cement and concrete technology.

ACC has also extended its services overseas to Middle East, South America and Africa. This is
an ISO 9002 and ISO 14001 certified company.

Recently HOLCIM which is the largest cement manufacturing company in the world operating
in 72 countries has acquired a stake in ACC.

ACC has an installed capacity of 22.63 MTPA and has a market share of around 11 % in India. It
has a net turnover of Rs. 8027 crores while its Profit after Tax (PAT) is Rs. 1607 crores. Its EPS
is gone a high as Rs. 85.60.

Products

The main two types of cement it supplies are:

 Ordinary Portland Cement (OPC)

 Pozzolana Portland Cement (PPC)

Both of these types of cement are used by different industries and construction requirements.

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The types of Revenue expenses at ACC limited are as under:

 Raw Materials

 Purchase of Ready Mix Concrete

 Labour Expenses Sub-Contracted

 Depreciation

 Stores and Spare Parts

 Outbound Freight Charges

 Pumping and Conveying Charges

 Power & Fuel

 Selling & Distribution Expenses

Out of the above costs we can see that Depreciation to Building, Depreciation to Machinery,
Depreciation to Others, Labour and Employee related expenses and few power related expenses
are all Fixed in nature.

Rest all other costs are Variable in nature like raw materials, spares, freight, selling &
distribution expenses, etc.

We generally refer to most of the fixed expenses as Overheads. They are:

 Rent

 Rate & Taxes

 Insurance

 Depreciation

 Repairs & Maintenance

 Salary & Wages

 Power

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 The overhead cost pools refer to all the overhead costs that the company incurs in a particular
year.

By Department

1. Accounts & Administrative

2. Raw Material Purchase & Allocation

3. Production Department

4. Stores Department

5. Quality Department

6. Stock & Dispatch

7. Personnel

By Activity

1. Procurement

2. Manufacturing

3. Human Resource

4. Marketing

5. Sales

6. Collection

7. Accounting

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When we identify the costs with cost objectives, also known as cost apportionment/ cost
assignment/ cost distribution/ cost reapportionment they are used to identify the overheads so
that they can be applied to the final goods and services.
There are basically three 3 C’s of cost allocation bases:

A. Choosing the object of costing. Examples are products, processes, jobs, works or
departments.
B. Choosing and accumulating the costs that relate to the object of costing. Examples are
manufacturing expenses, selling and administrative expenses, joint costs, common costs,
service department costs, and fixed costs.
C. Choosing a method of identifying A with B. Examples are cost allocation base for
allocating manufacturing costs would typically be labor-hours, machine-hours, or
production units.

So we see that ACC uses machine hours to identify its manufacturing costs while the selling
expenses depend on the demand of the market in numerical terms.

Then joint costs refer to the physical-units method that requires a common physical unit for
measuring the output of each product. The joint costs are allocated based on each product’s
percentage of the total physical units produced.

Yes, the company does look into the contribution and break even point while ascertaining its
sales forecasts.

From the above diagram we can understand the break even point calculation

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Break even provides clear picture of cost, sales, profit and their relationship. 

Contribution = Sales – Variable Cost

Break Even Point = Fixed Cost / Contribution *100

One of the major benefits of analysis of break even point is that we can calculate exact amount of
profit that the business has earned and whether they are over or below the sale than the break
even point. Without finding the break even point, we cannot find margin of safety.

Margin of safety = (Current output - Break even output)

Margin of safety% = (Current output - Break even output)/Current output x 100

Cost volume profit analysis (CVP analysis) is one of the most important and powerful tools
that managers have at their disposal. It helps them to understand the interrelationship between
cost, volume, and profit in an organization by focusing on interactions among the following five
elements: 

1. Prices of products

2. Volume or level of activity

3. Per unit variable cost

4. Total fixed cost

5. Mix of product sold

These decisions that the managers take include what products to manufacture or sell, what
pricing policy to follow, what marketing strategy to employ and what type of productive
facilities to acquire.

CVP analysis is used to find the most profitable combination of variable costs, fixed costs,
selling price and sales volume. Profits can sometimes be improved by reducing the contribution
margin if fixed costs can be reduced by a greater amount.

It simply helps to find the right combination of each of the costs and revenue elements in the
company. ACC often uses this tool to identify the level of costs, sales price and in turn profit as
the market environment is ever changing.

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The Budgeting process that ACC uses has 6 basic steps to it. They are:

a) Process Planning

b) Process Communication to the concerned people

c) Goal Setting Policy

d) Information Compilation

e) Review and Approvals

f) Implementation

At ACC we see at top to bottom budgeting process in which higher-level tasks are used to set
limits on the costs of lower-level tasks. Money is funneling down from higher level tasks down
to the lower level tasks until all tasks that are necessary for a project are given funding. The
budgeting process begins with overall project managers. The estimate for a project or for a larger
budget depends upon the experience and the judgment of the manager or the managers who are
in charge of coming up with an overall budget.

Most of the budget is based on the time period of one financial year.

There are different kinds of budgets decided upon which can be cash related, sales related as
referred to as the budgeted sales as per the management for each geographic region and even
production oriented budgets covering production related aspects.

The master budget refers to the overall operational and financial plans of a company during a
given period of time as in this case it is the financial year.

Cash budget is the expected inflows and outflows of cash at ACC. So as it is a working capital
intensive type of production the role of the cash budget is even more important and critical when
it comes to ACC.

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Working capital means the part of the total assets of the business that change from one form to
another form in the ordinary course of business operations.

Two different concepts of working capital:-

a) Balance sheet or Traditional

b) Operating cycle concept.

SIGNIFICANCE OF WORKING CAPITAL:-

 Increase Debt Capacity

 Increase in fixed assets

 Increase efficiency

 Easy loan from banks

 Payment to suppliers

 Dividend distribution

Simply working capital is Current Assets – Current Liabilities.

The Cement industry in specific which is quite working capital-intensive may not show high
levels of ROCEs on account of high capital costs. But some of these cement companies have
started to show a negative/downward trend in working capital. A solution to this pressing
problem is a better credit management system will help these companies generate higher ROCEs
in the long run.

We see that through time how due to changing circumstances and changes due to market forces
we see a drastic change in the way cement companies like ACC has altered its working capital
management policies. We can see few of those in the diagram below:

Piling of the cement stocks in the warehouses of the cement companies is no longer a
phenomenon. When the cement dispatches from the warehouses are growing at more than 20-
30%, Indian cement companies are able to move cement from factories in less than a day.

Due to this reason the top cement companies such as ACC and its competitors Gujarat Ambuja,
UltraTech Cement and Madras Cement have negative working capital. These same companies
have given high returns to their shareholders in terms of dividends, bonuses as well as capital
gains.

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Reflections

Any project of this type is very informative as the meet with industry person gave me a totally
different outlook which is very practical and real in nature.

ACC is a very reputed and big company with unique methodologies with regards to its expenses,
budgets, sales, working capital ascertainment, etc.

The learning curve was very high for me and if I were given the opportunity to do it again I will
like to do it for a panel of executives from within the same industry so that I can get a more wide
and varying perspectives with regards to finance in a particular company and industry.