Case Study Gujarat Ambuja Cements Ltd.

(GACL)

By:
Rishabh Podar

Discussions on the Questions

Question 1.
Study the evolution of GACL from a small start-up to cement major over the years. How far do you think the company's success can be attributed to its project location, design and implementation decisions?

Ans
Production and Monetary Growth of GACL 1. GACL was started by Narotam Satyanarayan Sekhsaria a businessman, who started as a cotton trader and later entered into production of cement now which is now throwing a revenue of 1.7 Billion Usd(as on 2010). 2. It was publicly listed on 1983 3. The first plant of GACL was is Gujarat before the public issue which was made by the help of GIIC as GACL was given heavy subsidies. 4. After the public issue, GACLs second plant had been setup in Gujarat known as Ambuja cements in Ambuja Nagar (Capacity 1 mtpa). 5. The third plant was in Himachal Pradesh (Capacity 1.5 mtpa) 6. A Wholly-Owned-Subsidy was floated by GACL in Mauritius 7. Later in Sri Lanka Ceylon Ambula Cements (P) Ltd. was bought into existence 8. In 1996, GACL set up its third plant at Ambuja Nagar, named Guj Line II (Capacity 1 mtpa). 9. Grinding and packaging units was setup in Punjab and Maharashtra. 10. Modi Cements a sick cement company was acquired by GACL and then bought it in par with GACL existing plants(Capicity 1.4 mtpa) 11. Limestone mines in Nadikudi and Cuddaph was acquired in Andra Pradesh 12. As and well there as a real growth in GACL, it acquired 51% stake in DLF Cements which made GACL the third largest Cement Manufacturer after ACC and L&T after the buyout. 13. As this happened, GACL bought 7.2% stake in ACC too. As we can see above GACL has captured almost all the four zones of India that is North, East, West and South. By this it has reduced its operation cost as its factories are situated diversely. This helps in easy and systematic delivery of goods to its customers, as well is it is benefited by all kinds of subsidies as all its plants are either situated in Sales-Tax-Haven places or FreeTrade-Zone places. As we have seen that after the equations of Modi Cements, GACL updated that unit to fight against its current units in terms of costing. This shows that it always kept an eye on the technological advancement of its units, which further leads to a high savings on cost which increases the profits of a particular company. In the Himachal Pradesh project, it gave authority to its staff to go on for the construction of its project as the cost was increasing, and it had to take fast measures to reduce it. This shows that GACL doesnt even stay back in providing its engineers rights to take big decisions.

Question 2.
'GACL's cost management focus was the biggest factor responsible for its success.' Critically comment on the above statement and examine the company's approach to cost reduction and productivity enhancement. How did this approach help it gain a competitive advantage and emerge a leader in the commoditised industry?

Ans
For GACL, its cost of management was its highest focus. We know that profit can only be earned by two ways, one by charging more if there is less competition, second by reducing cost. It was the second method that GACL selected to earn margins as there are as many as 7 large manufactures and tens of small cement manufacturers. Charging more to customers is not atoll a good ethics as it will move our customers to other sellers if they know that they are being overcharged, and there are high chances for them to know as in B2B business, no cost is unknown to customers as all tend to do their homework. GACLs cost of management was its biggest factor as it used to send its engineers to different places to learn technology Eg: It sent its engineers to Japan to learn time reduction, cost reduction, cooling reduction, which overall leads to cost efficient production. It even sent its engineers to Australia to study the extraction of metals, which finally led to easy extraction of metals, reduced noise during extraction and even improved the extraction of metals. They tend to use conveyor bests in its Himachal Pradeshs unit to reduce cost of transportation between mountains. It used to take less amount of time in construction of its plants which used to reduce its interest cost, inflection cost which was estimated about 10%. GACL made power plants to reduce its cost of power consumption which is one of the most expensive input in a Cement factory. Later as it achieved full utilization, it even started selling excess power to the local government, which even tend to earn more profit.
In 2010 it created a 200 mega watt plant. The Punjabs 30 Watt power plant of GACL is one of the most cost efficient plants as it uses agricultural waist for power generation.

As Fuel was expensive and not of good quality in India, it even started importing fuel which indirectly reduced its cost. Later Groundnut husk was used instead of coal to even further reduce cost of production. In-spite of using local rail or roadways, they even used to ship to places like Mumbai to reduce its transportation cost as Mumbai uses almost 18% of the entire cement manufactured in India. As we know reducing manufacturing cost even leads to high profit, and looking to now a days competition. GACL did the right thing for increasing its profit, by this way; it was a step above its compatriots.

Question 3.
Do you think that GACL's efforts were more driven by market compulsions than a strategic cost focus? Will GACL be able to sustain its superior performance in the years to come? Give reasons to support your stand.

Ans
GACL is one of those companies who aim at low cost of production. One can say that its more off a Cost Savings driven company, but saying market driven cant even be wrong as from the 1990is till 2000ns, the construction industry also grew up on an average 9% Y.o.Y, and the sale in the cement company also grew quiet well. GACL has almost 21 regional offices in India and having tie-ups with many international companies Due to less growth in the domestic market, GACL now even holds a good name in the international market as it even started exporting to international markets. It exports almost 28% of its current production to International countries. Some of the Tax-Haven countries in which GACL exported cements are United Arab Emirates Sri Lanka Nepal GACL now holds the Second position in the Indian market since 2009 after Ultratech slipped to the third position with 13,707 productions (because L&T was selling its cement business, so it wasnt into growing the business from the past 1 year because of the buyout), while GACL is 15,094 productions as on year ended 2009 In case of production it is the second largest, but when it comes the profit booking, it is positioned as 5th, this is even because all other companies has diversified in many other fields, where as GACL is only in the Cement industry, which is one of the negative points in its company. GACL has even started selling cement in retail, which has increased its sales as it has a good network of distributors in the market. This has even helped more to increase margins in sales as normally retail sales earn high margins. GACL even provide technical help for rural infrastructure since 2007 because of which it has made a good presence in the rural areas too. To increase its presence more, it even made Ambuja Knowledge Center in Ahmadabad and Jaipur, where people learnt about the international growth of cement and concrete business. As we see can see the way GACL is creating its presence national as well as international, it has to do good in the future.