15th February 2010

AMBUJA
CEMENT
A REPORT ON VERTICAL INTEGRATION OPTIONS

Submitted to
Prof. Sameer K Srivastava

Submitted By
Group - 6
Maneesha PGP24075
Sridevi PGP24136
Kiran PGP24147
Tulika PGP24169
Vikas PGP24173
Table of Contents
1. Introduction .................................................................................................................................... 3
2. The Indian Cement Industry................................................................................................................ 4
2.1 Introduction ............................................................................................................................... 4
2.2 Cost elements ............................................................................................................................ 4
2.3 Demand dynamics ..................................................................................................................... 5
2.4 Value Chain of Cement Industry .............................................................................................. 6
3. Value creating strategies of diversification......................................................................................... 7
4. Gujarat AMBUJA CEMENTS limited..................................................................................................... 8
4.1 Company Introduction .............................................................................................................. 8
4.2 Internal Analysis ........................................................................................................................ 9
4.3 Value chain analysis ................................................................................................................ 10
4.4 Comparisons between upstream and downstream activities ................................................ 13
5. Assessment of vertical Integration Options ..................................................................................... 14
Option1: Owning a block of limestone quarry .................................................................................. 14
Option2: Owning a power plant (captive)......................................................................................... 15
Option3: Owning an RMC plant ....................................................................................................... 16
Option4: Entering into Real Estates/ commercial and industrial complexes ................................ 24
Option5: Entering into infrastructure Sector.................................................................................. 24
6. Recommendations ............................................................................................................................ 25
7. References .................................................................................................................................... 26
8. Exhibits .......................................................................................................................................... 27
 1. INTRODUCTION

Vertical integration is a potential source of value and differentiation for a firm. It happens
when a firm enters into either upstream (backward integration) or downstream (forward
integration) of the value chain. Cement industry has numerous options for vertical
integration due to high cost of input materials and uses of cement in several sectors.

Indian cement industry is in mature state now with more than 130 cements plant and installed
capacity of 198.62 million tonnes. There are four major costs associated with the production
of cement: power and fuel costs, raw material costs, selling expenses, and other expenses.
The value chain of cement industry starts with raw materials and inputs such as limestone and
power and ends with the end consumers in terms of infrastructure, real estate etc.

Ambuja Cements has been able to maintain its market leadership through continued focus on
its core competence, i.e. to manufacture and market cement and clinker for both domestic and
export markets. It is one of the lowest costs of producer of cement due to its internal
capabilities and various measures.

Ambuja cements covers the part of supply chain inbound logistics to cement production to
the distribution. It has several downstream and upstream activities where it can vertically
integrate: 1) owning a limestone quarry, 2) owning a captive power plant, 3) entering into
RMC production, 4) entering into real estate/commercial complexes, and 5) entering into
infrastructure. All these options are evaluated for various parameters viz. technology,
regulations, future potentials, financials etc. Based on, this analysis RMC is recommended
the best option for vertical integration in present scenario.
 2. THE INDIAN CEMENT INDUSTRY

2.1 Introduction

The Indian cement industry comprises 130 large cement plants with an installed capacity of
198.62 million tonnes as on March 2008 and more than 365 mini cement plants constituting 6
million tonnes of effective capacity.

The industry can be broadly classified into three categories:

The first category consists of players having a pan India presence - Holcim-controlled ACC
and Ambuja (36.8 million tonnes) and Aditya Birla-controlled Grasim, Century Textile and
UltraTech (38.4 million tonnes).
The second category comprises players whose presence is confined to one region and have a
firm hold in their respective markets. This segment includes players such as Lafarge (East),
India Cement (South), Jaypee Group (North and Central), Shree Cement (North), Birla Corp,
Binani, Dalmia and Madras Cement amongst others. This segment's capacity is 63.9 million
tonnes, which is approximately 36.4 per cent of the industry size.
The third category consists of stand-alone players, which constitutes a combined capacity of
36.6 million tonnes. Players such as CCI, J&K Cement and Panyam Cements fall into this
category. These players are local players who run the risk of getting marginalised.

2.2 Cost elements

There are four major costs associated with the production of cement:
• Power and fuel costs
• Raw material costs
• Selling expenses
• Other expenses

2.2.1 Power and fuel

The cement industry is power-intensive with power and fuel costs constituting approximately
30 per cent of the cost of sale of cement, and hence has a major impact on the company's
operating expenditure. While a large portion of the power requirement is met through state
electricity boards, increasingly companies are opting for captive power plants to reduce costs
and dependence on state electricity boards where power cuts are frequent. The Indian cement
industry primarily uses coal, pet coke and lignite for its fuel requirement. Apart from
depending on the receipts against linked quota, the cement industry has to rely on the open
market as the allocation is not sufficient to meet its coal requirement. The primary allocation
of coal in India is to the power and steel sectors with the cement industry receiving only 3.5
per cent of the total production.

2.2.2 Raw material

The second major component in the production of cement is raw material costs, which
primarily constitutes limestone cost. Raw material accounts for 30-40 per cent of cost of
sales. Cement plants are generally located near limestone quarries, as limestone cannot be
transported over long distances. Apart from limestone, other raw materials used by the
cement industry are fly ash, slag and gypsum.

2.2.3 Selling expenses

In the cement sector, the manufacturing facilities and end-user markets are at considerable
distances from each other. And since cement is a low-value, high-volume commodity,
transporting it to the end-user accounts for a significant portion of the cost for cement
manufacturers - it constitutes more than 10 per cent of cost of sale of cement. There are three
key modes of transportation used by the cement industry i.e. road, rail and sea, with road and
rail contributing more than 90 per cent of the despatches. The sea route is the cheapest mode
of transportation, but only coastal players can take advantage of this mode as they can
transport clinker and cement more economically within the country as well as to other
regions. In order to control freight costs, companies strategically locate the clinker units
closer to limestone reserves whereas the grinding units are set up closer to consumption
centres, primarily because transporting clinker is cheaper than transporting cement, and
blending material like fly ash or slag may not be available near the limestone reserve.

2.2.4 Other expenses

Other expenses include employee costs, administration expenses, and repair and maintenance
charges amongst others. These account for 15-20 per cent of the cost of sales.

2.3 Demand dynamics

Cement demand is closely linked to the growth of the construction sector. (A regression
analysis of cement demand and investments in the construction sector shows a high
correlation of 0.99 and moderate elasticity of 0.55.)1. Consequently, cement demand has
posted a healthy growth rate of around 8.34 per cent since 1996-97 till 2007-08, propelled by
the increased focus on infrastructure development, and higher demand from the housing
sector and industrial projects. Cement demand is primarily derived from housing (60-65 per
cent), infrastructure (20-25 per cent), commercial construction (10-15 per cent) and industrial
segments (5-10 per cent). Demand has grown at a healthy pace of over 8.5 per cent (CAGR)
during the last 5 years on the back of strong demand registered in its end-user segments.

2.4 Value Chain of Cement Industry

Upstream
Activities
Ambuja Cement’s share in value
chain
Downstream Activities
 3. VALUE CREATING STRATEGIES OF DIVERSIFICATION

Reasons for Diversification-Value-Creating Diversification

1. Economies of scope (related diversification)
2. Sharing activities
3. Transferring core competencies
4. Market power (related diversification)
5. Blocking competitors through multipoint competition
6. Vertical integration
7. Financial economies (unrelated diversification)
8. Efficient internal capital allocation
9. Business restructuring
 4. GUJARAT AMBUJA CEMENTS LIMITED

4.1 Company Introduction

The Joint Venture between the public sector Gujarat Industrial Investment Corporation
(GIIC) and Narottam Sekhsaria & Associates was the reason for confinement of the
company. The company was incorporated in the year 1981 as Ambuja Cements Pvt Ltd and it
was rehabilitated into a public limited company on 19th March 1983 as Gujarat Ambuja
Cements Ltd, cement production is the role of the company in nature and a cost efficient
cement manufacturer in the country. It is a National Quality ISO 9002 certified company, the
only cement company have this so. It's also the first to receive the same and also have ISO
14000 Certification for environmental systems. It is also having three Bulk Cement Terminals
at Surat with a storage capacity of 15,000 tonnes has bulk cement unloading facility, Panvel
with a storage capacity of 17,500 tonnes has a bulk cement unloading facility and in Galle
120 kms from Colombo, Sri Lanka. It handles million tonnes of cement annually. The port
terminal of the company Muldwarka Gujarat, all weather port, 8 kms from Ambuja Nagar
plant, handles ships with 40,000 DWT. Is also equipped to export clinker and cement and
import coal and furnace oil. A fleet of seven ships with a capacity of 20500 DWT ferry bulk
cement to the packaging units.
Plant Capacity (mn tons)
Gujarat 5.00
Himachal Pradesh/ Punjab 6.00
Rajasthan 2.00
Chhattisgarh/ West Bengal 3.00
Maharashtra 2.50
Total 18.50

The company has awarded for its credit, the National Award for commitment to quality by
the Prime Minister of India, National Award for outstanding pollution control by the Prime
Minister of India, Best Award for highest exports by CAPEXIL and Economic Times -
Harvard Business School Association Award for corporate excellence in different years. The
company was adjudged as the top Indian company in the cement sector for the Dun and
Bradstreet - American Express Corporate Awards 2007. The company developed a unique
homespun channel management model called Channel Excellence Programme (CEP) for
marketing their product. Over 7000 dealerships and 20,000 retailers across India are covered
under this model. The company name was changed from Gujarat Ambuja Cements Limited to
Ambuja Cements Limited on April, 2007, the word Gujarat was dropped to reflect the true
geographical presence of the company.
In the last decade the company has grown tenfold. The first company in India introduced the
concept of bulk cement movement by the sea transport.

4.2 Internal Analysis

Ambuja Cements has been able to maintain its market leadership through continued focus on
its core competence, i.e. to manufacture and market cement and clinker for both domestic and
export markets. The group has clinker manufacturing facilities at Himachal Pradesh, Gujarat,
Maharashtra, Chhattisgarh, Punjab and Rajasthan.
In the last quarter, most leading cement manufacturers have reported a mixed performance in
Jul 2009. Companies such as UltraTech, Grasim and Ambuja have reported a decline in their
dispatches. However, the company has reported an overall healthy growth.
The Business Model followed by Ambuja Cements has following key features:
• Owned Infrastructure
• Logistic Management
• Premium Brand - Only selling in Retail Markets
• Environment Friendly operations
• Social Corporate Citizen
• Low Cost Cement Producer
The key capabilities and resources of Ambuja Cements can be identified through an
examination of its value chain Strength and Weaknesses.

STRENGTHS WEAKNESS
• High quality cement • Need of more market expansion.
• Good packaging • Need of international marketing
• Strong distribution network • Not able to use foreign technologies in full swing.
• Advanced technologies • Effect of global recession on Real Estate and
• Eco friendly. Infrastructure.
• Low cost of production • Increasing Cost of Production
Factors responsible for success
Ambuja is consistently maintaining its Focus Areas:
1. Best quality cement
2. Good packaging
3. Strong distribution network
4. Customer service
5. Freight: The most successful of GACL’s innovative strategies of cost cutting was idea
of sea transportation.
6. Fuel: Fuel strategy was also cost cutting factor
7. Power: They established their own captive power plant
8. Plant locations: In backward and rural areas - To take advantage of substantial sales
tax and income tax, incentives.
9. Partnership with Holcim
10. Access to Holcim’s best practices in areas such as waste heat recovery, use of
alternative fuels, human resources and Information technology
11. Opening of new cement trading opportunities in Middle East and Indian Ocean

4.3 Value chain analysis

Firm infrastructure
• Expansion of projects/ geographical presence

• Commencement of 1 million tonne grinding facility at Surat terminal

 • Recently established plant in Farakka, in northern West Bengal,
• Two major clinkerisation expansion projects, at Bhatapara in Chattisgarh, and
Rauri in Himachal Pradesh – will add approximately 4.4 million tonnes of clinker
• Increase in grinding capacity by 5.5 million tonnes
• Bulk cement terminal at Kochi
Reliance on shipping though sea route; own ships
• Access to the fast growing southern market via cost effective sea transportation.
• Expansion of fleet of ships which plies the Ambujanagar - Mumbai - Surat routes
• Three new vessels in the pipeline, for delivery in 2009-2010.
Power
• Captive power - Reliable & cheap generation
• Sources around 80% of its power requirements from captive power generation,
• One new 18.7 MW power plant commissioned at the Rabriyawas plant.
• Additional captive power projects in progress at Ambujanagar, Bhatapara, and
• Maratha; will add approximately another 90 MW, taking total capacity to more
than 400 MW.
HR Development
• Good industrial relations
• Launch of ‘People Power’ at Ambujanagar plant: "Healthy People and Healthy
Plants"; enhance managerial and innovation skills
• A process-driven approach to induction of fresh talent; ensure a continuous and
consistent talent pipeline for future business growth.
• Projects like SAP implementation to encourage an inter-disciplinary approach to
business challenges.
Technology development
• Captive power plants
• Use of alternative sources of fuel
Procurement
• Mines
• Adequate limestone supplies ensured by purchase of mines inside and outside
India
• Coal procurement – high volatility of prices
o Acquisition of coal blocks for captive mining; and
 o Increased use of AFR (Alternative Fuels & Raw materials) to reduce
dependence on coal.
• Location of plant
o Closer to mines, grinding units and power supply – ensure easier inbound
and outbound material flow, at cheaper power. E.g. H.P. Plant
o In smaller, rural regions to avail tax benefits. E.g. Chandrapur Plant - sales
tax benefit & close to coal mines.
Inbound logistics
• Own shipping fleet
• Fly-ash sourced from thermal power plants situated nearby
• 3 Cement receiving terminals
Operations
• Hub and spoke network of clinkerisation plants and grinding units
• Strong distribution network
• Innovative logistics solutions like bulk cement movement by sea.
• Computerized process control system
• Increased capacity utilization –started weekly checking for faults
• Run plant continuously for 40 days against industry average of five.
Outbound logistics
• Dedicated port, landing terminals at Surat, Panvel and Cochin
• Plant locations provide easy access to key markets
• Ports provide access to international markets / imported fuel
• Own Ships for transporting Cement by Sea
• 30% Cement transport by sea - Cheapest Mode
• Largest Exporter of Cement - 15% of Production
Marketing and Sales
• FMCG approach- create a wide retail network of small "mom and pop" shops,
right down to the village level.
• Large sales force works alongside these small dealers to help them promote and
sell the brand to the right consumer at the right price.
• Customer support and development
o Expert civil engineers work closely with small contractors and local
communities to demonstrate better construction practices and materials,
 build economical and durable structures – housing and also rural
infrastructure, like check dams, schools and roads.
o Training of local people in masonry skills.

Ambuja Cement Foundation- part of initiative to train tribal people
in rural areas;

Customer Support Group - mason training as part of a Skill and
Entrepreneurship Development Institute initiative
• Developed some special products for key accounts in Mumbai and Kolkata, for
added customer value.
All this has resulted in the company consolidating its position in the 13 states / Union
territories which form its core markets.
Service
• Could ensure increase in sales in slowdown period – by increasing service
offerings to key accounts and through introduction of high strength cement
Upstream value chain
• The company’s investments in mines and power plants – cheaper source of
resources
Downstream / customer value chain
• Reduced growth in major export market: opportunity to divert the cement to RMC

4.4 Comparisons between upstream and downstream activities

Upstream Activities
Products Standardized outputs such as
limestone and power
Processes Capital –intensive, long
gestation period
Economics Less sensitive to economic
cycle
Downstream Activities
Customized output such as
Ready mix concrete etc.
Labour intensive as output is
customized
Highly sensitive to market
 5. ASSESSMENT OF VERTICAL INTEGRATION OPTIONS

OPTION1: OWNING A BLOCK OF LIMESTONE QUARRY

1
Competition The allocation is based on auction by the state government.
Customer Reliable source of supply, low cost and consistent quality focus
Requirements
Technology Semi-manual, specialized equipments for surface mining
Dynamics
Regulation Highly regulated, main source of risk to the industry is due change in
regulation, Environmental norms are also very strict
Internal strategy Self sufficiency and low cost production
Organizational High capabilities as Ambuja owns 5% of total country’s production of
capabilities limestone
Financing Needs Capital intensive because of heavy machinery and quarry block purchase
Quality Quality management is in practice, certified with ISO 9002
Availability Availability of limestone will shorten the lead time
Innovativeness It will not facilitate the new services but only facilitate the expansion
activities

Overview
Limestone is an important raw material in the cement manufacture. It constitutes --% in value
of the total cement cost. The uninterrupted supply of this is very important in cement
production. Also the cost of production can be reduced significantly if the raw material
supply is managed well.
Limestone is widely produced in India. Limestone retained its leading Position by
contributing 70% of the total value of non-metallic minerals in 2007-08.

Demand-supply gap calculations

There is a gap of 14.985-9.4 = 5.585 million tones of limestone to be filled.
The production of limestone at 188 million tonnes in 2007-08 in India
Gujarat Ambuja cements contributes 5% of the total production of limestone
188*5% = 9.4 million tones
The total cement capacity of the company is 18.5 million tonnes (MT)
The limestone required by the company is 18.5*0.9*0.9 = 14.985 million tonnes for its
cement production

1
http://mines.gov.in/model.pdf
 *assuming 90% utilization of capacity and limestone constitutes 90% of the final
product
Considering the expansion plans of the company as the demand in the northern region
exceeds supply where Ambuja is one of the top players, the need gap rises further. This gap
can be filled by
• acquiring new leasing rights to the limestone quarry
• importing the required quality and quantity of limestone, or
• buying from the local companies

Government Policies on leasing

The owning of limestone quarry involves obtaining lease rights through auctions carried out
by the state government. ML (Mining Lease) is granted for undertaking operations for
winning any mineral. A ML for any mineral or prescribed group of associated minerals is
granted for a minimum period of 20 years and a maximum period of 30 years. A ML can be
renewed for periods not exceeding 20 years each. In a State, a person can be granted a
maximum area of 10 sq. kms in one or more MLs, but if the Central Government is of the
opinion that in the interest of development of any mineral it is necessary to do so, the
maximum area limit can be relaxed.
The costs involved in leasing
• Auction costs – placing the tender
• Lease payment
• Royalty payment 2
• The other costs involved are equipment for excavation

OPTION2: OWNING A POWER PLANT (CAPTIVE)

Competition The states where the plants are there. The state electricity boards supply
power (Gujarat, Himachal). The rates are high
Customer It will suffice to the needs of the cement plant. Efficient, reliable,
Requirements economical and easily available power supply for the cement plant.
Technology The captive power plants are generally coal fired.
Dynamics
Regulation There are norms regarding effluents, emissions, water and soil
contamination.
Internal strategy To avail uninterrupted supply of power. 40% of the cost of production of
cement is power.

2
http://mines.gov.in/royalty/rdssch.html
Organizational In terms of financial resources (healthy balancesheet). Can go for a
capabilities turnkey project. Involve a contractor for erection and installation.
Maintainence can be outsourced. Few employees can be trained to
operate the plant and attend the minor faults.
Financing Needs Four crores for 1 MW of electricity produced for a coal fired plant.
Quality Quality management practices are in place.
Availability The reliability of production process will increase. This will result in
Ambuja cement becoming self sufficient in power.
Innovativeness They can go for alternate and green methods of producing energy like
solar but it is still not economically viable. Use of fuel oil for furnaces,
Hydrogen cells or through biomass. But other options require high
investments and technology is yet under development stage.

Overview
Over 40% of the production cost of cement is power. The power costs are to be kept
minimum, so efforts in improving efficiency at the kilns to get more output for less power. A
captive power plant at a substantially lower cost than the national grid was set up. Sourcing
of cheaper and higher quality coal from South Africa and better furnace oil from the Middle
East is done in order to keep the costs low. The excess power is sold to the local state
government.

Annual Capacity
Plant Capacity (mn tons)
Gujarat 5.00
Himachal Pradesh/ Punjab 6.00
Rajasthan 2.00
Chhattisgarh/ West Bengal 3.00
Maharashtra 2.50
Total 18.50

OPTION3: OWNING AN RMC PLANT

Competition The cement majors such as ACC, Grasim , Lafarge

Customer For the infrastructure and housing sectors the key requirements are
Requirements i) Ability to manufacture various grades of RMC,
ii) RMC availability during peak and non-peak hours,
iii) Ability to provide discounts for large volumes,
iv) Ability to fulfil large orders at short notice and
 v) Ability to provide material in congested areas
Technology Technology Acquisition strategy
Dynamics Technology acquisition can be done through Research and
Development and Technology Transfer. technology transfer is chosen
over R&D because
1. There are specialist firms to set up RMC plants and help with the
manufacturing processes and functions.
2. There is relatively lower capital investment.
3. RMC is a specialized product but it has been in the market for
about 10 years; hence technology transfer seems a more economical
option than R&D.
Regulation Regulations favouring growth of RMC use in major cities such as
Mumbai where it is mandatory to use RMC in construction of
flyovers. Mumbai has also banned the usage of site-mixed concrete in
city limits. Similar measures by other agencies can result in
accelerated growth of the industry.
Internal strategy The Business Model followed by Ambuja Cements has following key
features:
• Owned Infrastructure
• Logistic Management
• Premium Brand - Only selling in Retail Markets
• Environment Friendly operations
• Social Corporate Citizen
• Low Cost Cement Producer
Organizational • Best quality cement manufacturing
capabilities • Strong distribution network
• Freight: The most successful of GACL’s innovative strategies of
cost cutting was idea of sea transportation.
• Plant locations: In backward and rural areas - To take advantage of
substantial sales tax and income tax, incentives.
• Partnership with Holcim
Holcim has the expertise in RMC manufacturing
Financing Needs The plant can be financed internally by the company
Cost Rs 360 crores per million tonnes of production
Quality RMC is prepared in various grades (Regular grade, High grade and
low temperature RMC) as per specific engineering standards and
intended application. Depending on the strength of the structure,
appropriate grades of RMC can be provided to the customer.

Availability As per the plant set up strategy (mini plants nearer to the huge
infrastructure projects or Bigger plants located near the metro cities)

Innovativeness Many players are already in this field. They can go for greater
customization through the innovative use of additives during the
mixing to meet customer requirements.
Overview3
Ready mix concrete industry in India is still in its infancy but it is an emerging sector. Ready-
mix concrete (RMC) is a ready-to-use material, with predetermined mixture of cement, sand,
aggregates and water. RMC is a type of concrete manufactured in a factory according to a set
recipe or as per specifications of the customer, at a centrally located batching plant.
It is delivered to a worksite, often in truck mixers capable of mixing the ingredients of the
concrete en route or just before delivery of the batch. This results in a precise mixture,
allowing specialty concrete mixtures to be developed and implemented on construction sites.

The second option available is to mix the concrete at the batching plant and deliver the mixed
concrete to the site in an agitator truck, which keeps the mixed concrete in correct form. In
the case of the centrally mixed type, the drum carrying the concrete revolves slowly so as to
prevent the mixed concrete from "segregation" and prevent its stiffening due to initial set.
However, in the case of the truck-mixed concrete, the batched materials (sand, gravel and
cement) are carried and water is added just at the time of mixing. In this case the cement
remains in contact with the wet or moist material and this phase cannot exceed the
permissible period, which is normally 90 minutes.

The use of the RMC is facilitated through a truck-mounted 'boom placer' that can pump the
product for ready use at multi-storeyed construction sites. A boom placer can pump the
concrete up 80 metres.
RMC is preferred to on-site concrete mixing because
• Of the precision of the mixture and reduced worksite confusion
• It facilitates speedy construction through programmed delivery at site and
mechanised operation with consequent economy
• It also decreases labour, site supervising cost and project time, resulting in savings
• Proper control and economy in use of raw material results in saving of natural
resources
• It assures consistent quality through accurate computerised control of aggregates
and water as per mix designs

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http://www.topnews.in/lafarge-buys-l-t-s-ready-mix-concrete-business-rs-1480-crore-241965
 • It minimises cement wastage due to bulk handling and there is no dust problem and
therefore, pollution-free

However there are some disadvantages of RMC to, like double handling, which results in
additional cost and losses in weight, requirement of godowns for storage of cement and large
area at site for storage of raw materials. Aggregates get mixed and impurities creep in
because of wind, weather and mishandling at site. Improper mixing at site, as there is
ineffective control and intangible cost associated with unorganised preparation at site are
other drawbacks of RMC. There are always possibilities of manipulation; manual error and
mischief as concreting are done at the mercy of gangs, who manipulate the concrete mixes
and water cement ratio.

The Ready mix concrete business in India is in its infancy. There are several reasons for this.
In early 70s both pricing and distribution of cement was controlled due to shortage of supply.
Ready mix concrete technology could not be implemented as investors felt that Ready mix
concrete plant will starve due to non-availability of cement. The levy of additional taxes and
duties on RMC, entry tax, excise duty also contributed to the slow development of the
concept.

RMC is particularly useful when the building activity is located in congested sites where little
space is available to lay the mixer and for stock piling of aggregates. The use of RMC is also
advantageous when only small quantities of concrete are required or when concrete is to be
placed only at intervals. Even as the concept of ready-mix concrete (RMC) is still catching up
in the country, cement majors are keenly focussing on entering the new area in a big way.
The teething troubles has been overcome by the RMC Industry and at present there are over
37 RMC plants delivering over one lakh cubic metres (1 cubic meter is equivalent to 2.5
tonnes) of mixed concrete every month. RMC plants are working in Delhi area also.

Why foray into the RMC business

• As the competitors already entered it --- Anticipating huge potential for the
product, cement majors, including Associated Cement Companies, Grasim, L&T,
India Cements, Priyadarshini Cements, Chettinad Cement and Madras Cements,
are foraying into the RMC business. Envisaging higher demand, the 16.4-million
 tonne cement major , ACC is planning to beef up its existing RMC infrastructure
of 11 units with two new RMC units - one at Noida and the other in Mumbai,
during the current year. During the last fiscal, Madras Cements set up two RMC
plants near Chennai, with a capacity of approximately 9 lakh cubic metres, while
Chettinad Cements installed an RMC facility near Coimbatore. Grasim's RMC
business accounted for a turnover of Rs 116 crore during 2003-04, against a
turnover of Rs 59.8 crore during the previous year.

• Global industry standards ---- Globally, India has positioned itself as the largest
producer of cement (142 mn tonnes in FY06) after China (1060 mn tonnes in
CY05). Where as in developed countries, nearly 70 per cent of cement
consumption is in the form of ready mix concrete and 25 per cent in the form of
recast, in India, ready mix concrete accounts for less than 5 per cent and as much
as 82 per cent of cement consumption is in the form of site-mixed concrete. While
70% of cement produced in a developed country like Japan is used by Ready Mix
concrete business there, here in India, Ready Mix concrete business uses around
2% of total cement production. The share of RMC is expected to go up from
present levels of around 5 per cent of the total cement production to the global
average of 70 per cent, according to industry players. Industry is also focusing on
promoting value added products such as Ready Mix Concrete (RMC). 4In India,
market share of RMC is abysmally low at 4-5% as compared with developed
nations. CARE feels that this share would rise substantially to about 20-25% in the
medium term with expansion of RMC capacity by top players and impetus to RMC
use by policy makers.

• Global sectoral trends and opportunity to export--- Global demand to expand

2.9% annually through 2013 World construction aggregates demand is
forecast to expand 2.9 percent annually through 2013 to 28.0 billion metric tons.
The Asia/Pacific region will experience the most intense growth, as non-building,
residential building and non-residential building construction spending in the area
increases rapidly. A number of countries in the region are expected to post large
gains, including China, India and Indonesia. China alone will account for three-

4
http://www.allbusiness.com/services/business-services/4329307-1.html
 fifths of all new global product demand between 2008 and 2013. 5It is estimated
that by 2025 about 66 per cent of the world population will live in urban areas on 7
per cent of the land. That means that urbanization will be on a small portion of
land. This will need taller buildings and use of high strength concrete.
Also good infrastructure such as water supply, drainage, better quality roads
(concrete should be the obvious choice) etc. will be required. This will boost the
construction industry and that will boost cement production. The pace of
construction will be fast which will require high strength cement.
Concrete will have to be durable and of good quality, therefore, with high strength
cements, the materials like silica fume, processed fly ash and ground granulated
blast furnace slag will be used. Cement with chemical and mineral admixtures will
be used to produce concrete of desired strength, workability and durability.

• Government policy---- The growth of RMC is predominantly driven by demand

from the metro cities. In cities like Mumbai, the mandatory use of RMC is in
construction of flyovers provided the requisite impetus to growth, according to an
ICRA analysis.

• Residential construction to be fastest growing market--- The residential market

for construction aggregates is predicted to be the fastest growing end-use sector
between 2008 and 2013. In industrializing countries, rising population levels and
increased demand for urban housing will stimulate residential construction activity
and demand for aggregates.

• Environmental implications – Green development -- Because it is mass

produced at the mixing center the pollution by way of dust is reduced and there is
practically no dust pollution in the place where it is used. So comparatively it is
greener than mixing the concrete in the site.

• Internal capabilities: - In the last decade the company (Gujarat Ambuja Cements
Ltd. – GACL) has grown tenfold. It is the first company in India to introduce the
concept of bulk cement movement by the sea transport. The company's most

5
http://www.projectsmonitor.com/detailnews.asp?newsid=7743
 distinctive attribute, however, is its approach to the business. It follows a unique
homegrown philosophy for successful survival. It is the most profitable cement
company in India, and one of the lowest cost producers of cement in the world.
Thus can leverage the existing capabilities in organization, distribution and
networking for making this entry a success.

• Organic growth coupled with mergers & acquisitions6 have paved the way for
players to grab a larger pie of cement market. Realising the growth potential, top
international cement companies like Lafarge (France), Holcim (Switzerland),
Italcementi (Italy) and Heidelberg (Germany) have entered the Indian market in a
big way. Due to the on-going mergers and acquisitions and ingress of global
players, domestic industry is witnessing a consolidation phase. This consolidation
has brought larger domestic players such as ACC & GACL (Gujarat Ambuja
cements Ltd.) under the fold of a global major Holcim.
Cost7
Although the currently proportion of RMC consumption in India is 15% of the total cement
consumption, RMC market is projected to grow at 30% annually. Based on this, we have
projected the total market demand for RMC in FY09-10 (million tonnes) as follows:
Zones (figures

The demand is calculated based on the focus in the north and west zones with the target
market share of 15% in these zones. 1 cu. meter is approximately 2.5 tonnes. The number of
plants is calculated using hourly production required and dividing it by 30 cu. metre per hour
(the utilization of 33.4% is also factored). We recommend setting up of 16 plants as shown in
the table above.

6
http://www.allbusiness.com/services/business-services/4329307-1.html
7
http://www.topnews.in/lafarge-buys-l-t-s-ready-mix-concrete-business-rs-1480-crore-241965
Technology Cost
RMC market has come out of the infancy stage and in India, we have specialists who do the
technology transfer and participate in setting up of plant for the client working as a turnkey.
The technology transfer costs are included in the set-up cost.
Product Development Cost
The basic requirements for a RMC plant are land, foundation, assembly cranes, water supply,
earthing arrangements, air-conditioning, plumbing and drainage work, fly Ash and electric
power supply. Total land requirement for the plant is around 500 Sq. m. Highly promising
advantage of RMC is utilization of fly ash, which is an environmental hazard and cheaply
available, in concrete. The total cost of construction of a 30 Cubic meter/hr capacity RMC
plant is around Rs.

1 cu. metre of RMC would require 330 kgs. of cement, 21 cu. ft. of manufactured sand, 33
cu. ft. of coarse aggregate and 2.5 kgs of additive. This would add up to Rs. 1800 per cu.
metre.

8
Ready-mix concrete production
The main phases of the ready-mix concrete cycle are as follows:
• Cement production
• Extraction and production of inerts and production of additives
• Transport of ready-mix concrete constituents
• Constituents storage
• Dosage into ready-mix concrete mixer
• Distribution of ready-mix concrete

8
http://www.environdec.com/reg/epd108e.pdf
OPTION4: ENTERING INTO REAL ESTATES/ COMMERCIAL AND INDUSTRIAL
COMPLEXES

Competition Highly competitive with major players like DLF, Ansal , Sahara, Emaar
MGF Land, Lodha Developers,and many small players
Customer House is a high involvement product- for some it’s a life time
Requirements investment. They want the houses to suit their needs which is dependent
on the location and the budget.
Technology There is no technology barrier to enter this sphere. Real estate
Dynamics development is labor and capital intensive.
Regulation Government norms with regards to the construction sites, environmental
concerns etc.
Internal strategy If the firm wants to go for the real estate then it will be an internal
customer for cement. Low-cost availability of cement.
Organizational Low. They are into cement manufacturing. For real estate you need to
capabilities have a team of architects, planners, contractors as well as internal
designers.
Financing Needs High- Initial investments in machinery and land
Quality Learning curve, project management expertise required so quality may
suffer.
Availability Since the manufacturing of cement is internal so it will be easily
available for the construction.
Innovativeness Many players are already in this field. They can go for green and eco
friendly solutions like developing colonies with low carbon footprint.

OPTION5: ENTERING INTO INFRASTRUCTURE SECTOR

Competition It is basically owned by the government. Elaborate procedures are there.

PPP projects are there like airports, highways (NHAI), flyovers. Strict
norms are there for the bids.
Customer The customer is the Government of India or the state governments.
Requirements
Technology They don’t have the technology for entering into infrastructure projects.
Dynamics
Regulation Every project is unique in terms of its social impacts. There may be
norms like proportion of local labor hire. Compensation in lieu of the
land that has been acquired
Internal strategy It involves risk. The projects are long term and may not be in-sync with
the strategy of the organization
Organizational Low. It has never done such kind of project.
capabilities
Financing Needs High investment needs. Generally supported by the govt. subsidies are
given. SPV is formed so a firm doesn’t have the sole responsibility.
 6. RECOMMENDATIONS

Ambuja cement should look for RMC as vertical integration opportunity in current scenario
because
1. Owning a quarry block would bring cost advantage to the firm and as well it will
decrease the lead time of production. But, the main issue with this option is strict
regulation and government control over the resources. Also, as regulations required
mandatory sale to other parties will obviate the economy of scale advanatge
2. Power constitutes a huge cost of cement production but Ambuja now has surplus
capacity of power generation so it is not a recommended option.
3. Entering into real estate / infrastructure is not a very lucrative option for Ambuja
because of lack of required expertise, low learning curve and very high initial
investments.
4. RMC is the related diversification and cements constitute very high proportion of
RMC manufacturing. Hence, Ambuja will enjoy low cost of manufacturing.
5. Ambuja has as tie-up with the Holcim as well as Holcim is the stakeholder in Ambuja
cement, the expert of RMC technology
6. Increasing demand of ready mix concrete in the infrastructure project as well as
increasing focus of government in infrastructure projects lead to very future demand
of RMC.
 7. REFERENCES

1. ACC Limited. (2010, February 8). ACC Limited. Retrieved February 8, 2010, from
ACC
1. Limited: http://www.acclimited.com/newsite/cement_services_rmc_en.asp
2. Capitaline. (2010, February 8). Capitaline. Retrieved February 9, 2010, from
Capitaline: http://www.capitaline.com/user/framepage.asp?id=1
3. Damodaran, A. (1994). Damodaran on Valuation. Wiley.
4. Dash, S., & Malhotra, N. K. (2007). Marketing Research and Applied Orientation.
India: Prentice Hall.
5. Fill, K. (2006). Business-to-Business Marketing: relationships, systems and
communications. New York: Prentice Hall.
6. Frost & Sullivan. (2010, February 6). Strategic Analysis of Cement Transportation
7. Market in India. Retrieved February 12, 2010, from www.frost.com:
8. http://www.frost.com/prod/servlet/report-brochure.pag?id=P2DE-01-00-00-00
9. Grasim Industries. (2010, February 1). Grasim Industries. Retrieved February 1, 2010
10. from Grasim Industries: http://www.grasim.com/products/cement.htm
11. Heidelberg Cement. (2010, February 1). Heidelberg Cement. Retrieved February 1,
2010 from Heidelberg Cement:
http://www.heidelbergcement.com/global/en/company/group_areas/asia_australia_afri
ca/india.htm
12. Kotler, P., Jha, M., Keller, K. L., & Abraham, K. (2009). Marketing Management.
New York: Prentice Hall.
 8. EXHIBITS

Royalty rate for limestone quarry

Serial No. Mineral extracted Royalty rate

1 Limestone
1a (a) L.D. Grade (less than one and
half per cent silica content)
1b (b) Others
2 Lime Kankar
3 Lime shell
Fifty five rupees per tonne.
Forty five rupees per tonne.
Forty five rupees per tonne.
Forty five rupees per tonne.
P&L statement of GACL9
Gujarat Ambuja Rs. In Crores
Cements Ltd.
Year Latest 2008 2007 2006 2005 2004
INCOME :
Sales Turnover / 9,517.80 7,106.00 6,411.82 8,313.12 3,856.82 2,826.73

Operating Income
Excise Duty 1,070.49 907.8 798.29 796.31 533.62 409.03

Net Sales 8,447.31 6,198.20 5,613.53 7,516.81 3,323.20 2,417.70

Other Income 520.5 499.55 1,009.22 158.78 101.03 156.08

Stock Adjustments 53.56 62.4 58.35 -10.92 5.78 17

Total Income 9,021.37 6,760.15 6,681.10 7,664.67 3,430.01 2,590.78

EXPENDITURE :
Raw Materials 653.23 591.73 446.48 372.44 184.26 150.27

Power & Fuel Cost 1,540.87 1,327.19 1,021.00 1,239.87 813.04 550.44

Other 918.49 742.47 584.26 724.45 491.67 333.92

Manufacturing
Expenses
Employee Cost 297.48 258.86 196.32 214.59 121.95 96.07

Selling and 1,557.39 1,311.88 1,204.39 1,387.75 710.05 551.01

Administration
Exp.
Miscellaneous 339.25 259.95 196.97 230.8 99.68 94

Expenses
Less: Pre-operative 0 0 0 0 0 0

Expenses
Capitalised
Total Expenditure 5,306.71 4,492.08 3,649.42 4,169.90 2,420.65 1,775.71

Operating Profit 3,714.66 2,268.07 3,031.68 3,494.77 1,009.36 815.07

Interest 94.33 36.68 79.89 123.32 103.78 130.56

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Gross Profit 3,620.33 2,231.39 2,951.79 3,371.45 905.58 684.51

Depreciation 327.76 261.4 238.04 326.14 236.23 198.78

Profit Before Tax 3,292.57 1,969.99 2,713.75 3,045.31 669.35 485.73

Tax 704.96 559.95 939 461.51 52.77 21.49

Fringe Benefit tax 5.81 5.22 5.18 5.28 1.34 0

Deferred Tax 52 2.37 0.71 3.16 59.92 48.27

Reported Net Profit 2,529.80 1,402.45 1,768.86 2,575.36 555.32 415.97

Extraordinary 228.04 228.32 586.43 42.38 9.22 3

Items
Adjusted Net Profit 2,301.76 1,174.13 1,182.43 2,532.98 546.1 412.97

Adjustment below 0.04 0 0.21 71.31 0 0

Net Profit
P & L Balance 26.73 341.97 266.07 151.38 123.53 44.17

brought forward
Statutory 0 0 0 0 0 0

Appropriations
Appropriations 2,471.80 1,391.89 1,693.17 2,525.99 446.22 336.61

P & L Balance 84.77 352.53 341.97 272.06 232.63 123.53

carried down
Equity Dividend 355.97 334.97 532.65 482.24 201.76 148.79

Preference 2.23 0 0 2.23 2 2.12

Dividend