Chairman's Statement 2005

To the Members
(69th Annual General Meeting of The Associated Cement Companies Limited at Birla Matushri Sabhagar, 19 Sir Vithaldas Thackersey Marg, Mumbai 400 020, Wednesday, July 13, 2005 at 3.30 p.m.)

Ladies and Gentlemen,
I wish you a warm welcome to the 69th Annual General meeting of your company. But I need to begin on a solemn note.

2. Tsunami
Disaster came to us in an altogether unfamiliar form last December. The tsunami that hit India’s eastern coast and the Andaman and Nicobar islands along with other countries in this part of Asia will remain forever etched in our minds as an unforgettable nightmare. It was among the worst calamities we have had to face as a free nation. A few days after the enormity of the tragedy became known, your Company donated an amount of Rs 1 crore to the Prime Minister’s National Relief Fund to aid victims. We are even now finalizing other schemes to help in long term rehabilitation of those affected.

Substantial reconstruction work is still needed to rehabilitate the tsunami affected regions of India. Since the costs involved are high, it is important that society and industry come together to strengthen government’s hand in this daunting task. Cement industry is well placed to cater to this requirement. Government, companies and NGO’s must come up with imaginative schemes and initiatives to make the reconstruction task more cost effective and swift. I would like the administration to plan to build new landmarks of excellence in these places with world class features. For instance, Nagapattinam should be able to boast of a new ultra-modern port and the airport in Port Blair in the Andamans could well be made state-of-the-art. In addition, these places should be provided with the best in civic amenities, disaster-proof houses, shelters, food and water storage facilities.

Please join me in a moment of prayer to pay homage to all the hapless victims and to pledge our sincere support to all those who survived.

3. Financial Results for 2004-05
And now for news that brought cheer. Your Company ended the year with good financial results, as reflected in its income and profits. Consolidated sales turnover for the year 2004-05 grew by 19 per cent to a level of Rs. 4227.22 crores. This growth was made possible mainly on account of higher sales volumes at improved price realizations. Profit after tax for the year 2004-05 was Rs 402.52 crores, which represents an increase of 83 per cent as compared to the preceding year.

While depreciation was higher at Rs.225.70 crores as compared to Rs.198.95 crores in the previous year on account of acquisition of the 75 MW Power Generating Capacity at Wadi from Tata Power Company Limited, net interest costs could be contained and, in fact, reduced by 6 per cent as a result of effective financial and working capital management.

You are aware that a large share of our production costs is made up from the cost of coal, power, gypsum, diesel, railway freight and royalties on limestone. The government administers the prices of all these essential inputs. During the year under review, these costs increased by around 10 per cent, but the impact on our total production costs could be neutralised partly through improved operating efficiencies and cost reduction schemes.

4. Cement Business
The performance of our Cement business was satisfactory. Cement despatches and sales for ACC as a group crossed the 16 million tonne mark for the first time. At 16.60 million tonnes, sales volume during the year showed a growth of 8 per cent as compared to the previous year. This was despite constraints by way of railway wagon shortages and road transport strikes that affected a few of our plants. Cement production for the group was 16.61 million tonnes, registering growth of 8.2 per cent. Our market share during the year was stable at 13.2 per cent. Capacity utilization for both cement and clinker production was stable.

Our cement plants continued to seek ways of increasing efficiency and productivity and cutting costs. The share of eco-friendly blended cement went up by more than 3 per cent over the previous year. Efforts at energy conservation were fruitful with a reduction of over 4.4 per cent in power consumption and 3 per cent in fuel consumption. The conservation of precious energy will continue to command prime focus. Your Company will always endeavour to seek more energy efficient and economic processes.

5. Projects and investments
The modernisation project at our Chaibasa Cement Works is nearing completion. The 15 MW captive power plant which forms part of this project has already been completed and successfully commissioned. We note with pride that Chaibasa was India’s first wholly indigenous cement plant designed and built by engineers of your company. It was inaugurated in the year of our independence. It was also the first in the country to manufacture blended cements. When this project is commissioned, Chaibasa will be among the most modern cement plants in India. This will enhance our stature in the eastern region. Similarly the project for augmenting of grinding capacity at our Gagal Cement Works in Himachal Pradesh is also progressing on schedule.

Your Company acquired the 75 MW power plant at Wadi from Tata Power Company Limited at a cost of Rs.235.45 crores in January 2005. This assures uninterrupted quality power supply to Wadi Works and helps to make it more cost-competitive.

We have embarked on a project of modernizing our Lakheri Cement Works in Rajasthan which will also result in expansion of its capacity from the existing 0.6 million tonnes to 1.5 million tonnes per annum. The project, which also includes setting up a coal-based captive power plant of 25 MW, is scheduled to be completed in the first quarter of the next financial year.

During the year we announced our plans to disinvest our Mancherial Cement Works in Andhra Pradesh, which was established nearly fifty years ago. This plant, with a relatively small installed capacity of just 3.31 lakh tonnes per annum, was based on the old semi-dry process which made it high cost, fuel inefficient and loss-making. It was not possible to effect a turnaround of this Unit and make it viable. The Board of Directors had therefore obtained your approval for the sale of this Unit. The disinvestment of this unit will not result in any loss in our market share.

6. Merger of Cement Subsidiaries
The Board of Directors of your Company have approved in principle a proposal to merge two of the Company’s Subsidiaries, Bargarh Cement Ltd. (BCL) and Damodhar Cement and Slag Ltd. (DCSL) with the Company with effect from April 1, 2005, subject of course to receipt of all the necessary approvals from shareholders and other requisite bodies. While BCL has a plant in Orissa with a capacity of 9.60 lakh tonnes, DCSL is a grinding unit based in West Bengal with grinding capacity of 5.25 lakh tonnes. We believe this merger will serve to usher in better operating efficiencies, productivity and economies of scale that will help reinforce your Company’s presence in Eastern India.

After this merger and the completion of ongoing projects at Chaibasa, Gagal and Lakheri, the total installed capacity of your Company will stand increased to 20.6 million tonnes per annum.

7. Ready Mixed Concrete
The sales revenue of your Company’s Ready Mixed Concrete (RMX) business registered an overall growth of 42 per cent last year, maintaining the upward trend of the last two years. We added two new RMX plants last year. The demand for RMX continues to grow rapidly in the metropolitan regions of Bangalore, Delhi, Mumbai and Kolkata. Other centres of consumption are also picking up. We plan to add seven new RMX units in the current year, three of which are scheduled to come on stream in the first quarter itself. These will serve to consolidate our position in the markets in which we are operating and allow us some promising new markets. I see ample scope for RMX business to grow countrywide in the coming years.

However the RMX industry does face certain constraints such as availability of land, inconsistencies in the supply of suitable aggregates and hindrances in the speedy movement of transit mixers on increasingly congested city roads and delays and difficulties in getting road permits and approvals. We hope all these issues will be dealt with by the appropriate authorities to enable the industry to take its legitimate place of importance in the construction map of India.

8. Refractories Business
The Refractories Business of the Company continued to perform well taking full advantage of the booming economy particularly in steel and cement sectors. Sales volume showed a healthy growth of 34 per cent while sales income registered an increase of 36 per cent. Exports of refractory products and services continued to remain a focus area registering satisfactory growth.

9. Overseas Business
Your Company continues in its endeavour to build an image of being a provider of world-class expertise in project and operations management consultancy. Yanbu Cement Company, a cherished client, whose cement plant in Saudi Arabia we have been operating and managing for the last 25 years, has again reposed trust in our services and renewed our contract for a further period of three years.

Our other prestigious Engineering Consultancy assignment with M/s Dangote Industries Limited of Nigeria for their greenfield 2 x 7000 TPD cement plants and the rehabilitation and modernization of two existing lines at Benue is progressing satisfactorily. We already have an Operations and Management agreement with this group for three years which will come into force soon after the stabilisation of the plants.

ACC secured a contract for Project Consultancy from Longulf Trading of the U.K. for their proposed 3450 TPD greenfield cement plant in Yemen. More recently, ACC has been rendering technical support to Ishikawajima Harima Heavy Industries Co. Ltd. (IHI), a leading Japanese Company, for providing engineering consultancy services for their cement projects across the world.

10. Cement Industry - salient trends
Cement production and despatches grew at a rate of around 8 per cent in the year 2004-05. The Indian cement industry now has an installed capacity of 152.09 million tonnes from 128 plants, other than mini cement units. The housing construction sector saw increased activity as a result of which there was further improvement in the domestic demand for cement. With no significant additional cement capacity in the pipeline, the gap between demand and supply has narrowed down appreciably. We expect this trend to continue in the coming year.

The year saw Indian cement becoming more competitive in the export market. Exports of cement and clinker from India rose to 10.06 million tonnes, representing a growth of 12 per cent. Much of this was from cement plants on our Western coast to countries around the Indian Ocean. The increase in exports also helped ease the market pressure in Gujarat. I see good potential for further growth in exports provided inland freights and port handling charges are made competitive and bulk handling infrastructure is improved. Despite being the second largest cement industry in the world, we have not ranked anywhere on the export front. With a world-class product and a large production base, India is strategically located to be a major exporter of cement – especially to countries of the SAARC region, those around the Indian Ocean, in the Middle East and Africa. But we have not been able to tap these advantages. Exports account for barely 3.2 per cent of our total cement production, although considerable strides have been made during the last two years. Even after considering the recent improvement in world prices, we are not competitive enough in the international export market. This is mainly because of our high cost structure.

There is one other critical area that is a cause for concern for the cement industry as a whole. Cement continues to be one of the highest taxed commodities in India with imposition of various levies such as excise, sales tax, royalties and cesses. A large share of manufacturing and distribution costs is dependent on Government administered inputs, such as power, diesel, rail freight and coal. The overall tax burden on cement represents 30 to 35 per cent of the end price paid by the consumer which is quite disproportionate as compared to selling prices of other building materials and commodities. This heavy burden undermines the industry’s competitiveness and growth.

11. Value Added Taxes
The long awaited regime of Value Added Taxes (VAT) is finally here, though not in full measure. In my statement to you in 2003, I described this system in detail so I will not repeat all that here. Your Company has studied the implications of the State Level VAT on our financial, marketing, procurement and commercial processes. We have found that the new regime will require some changes in these processes. We are geared to implement and fulfill the requirements of the new system. We must note that VAT is not a new concept – Brazil adopted it forty years ago. More than a hundred nations in the world practice it successfully. Even the state of Haryana which adopted it a few years ago is none the worse for it.

It is unfortunate that various factors stand in the way of letting this taxation system cover the entire country. VAT works best in a unified market with a uniform sales tax structure. A US Navy Admiral once noted that “Good ideas are not adopted automatically. They must be driven into practice with courageous patience.” So also must we bide patiently till all the twists and turns in the implementation of VAT are ironed out one by one. Government should have undertaken a proper campaign to educate traders and customers about the way the system works, particularly because of the fact that it relies on self-assessment. This would have helped allay some fears and suspicions. No less a person than Albert Einstein is quoted as having said “The hardest thing in the world to understand is the income tax.” To many, value added taxes fall in the same genre.

I am confident that VAT will stabilize within a few years when state governments, political groups, industry and traders begin to appreciate that VAT brings with it better administration that is transparent and with visible benefits to the Indian consumer. Then we may well admit that the introduction of VAT was a historic milestone for the Indian economy – one that will be seen as among the most significant reforms of our domestic commercial tax system.

12. Outlook
I see a good year ahead for ACC. The foundations for all its management processes – production, marketing and financial – continue to grow stronger. The internal environment of the Company is progressive and creative – one that fosters a climate to innovate and excel. The external environment is also likely to be favourable.

The outlook for overall growth of the cement industy in the current year is positive. I expect that cement industry will see good times in the years ahead. Demand for cement is likely to grow at a healthy rate with greater focus on building the country’s infrastructure and the continued upward trend in housing. With no significant addition to capacity, the industry is likely to enjoy stable prices. Energy prices will continue to pose a challenge. I foresee no improvement on the coal front. But while the Indian cement industry has been largely self-sufficient and capable of meeting its own challenges, I sincerely hope that government will address some of its genuine problems and external constraints.

The outlook for India and the national economy is positive. India’s stature will continue to rise as a nation with qualities of global leadership and excellence.

13. Shareholding and Management - Holcim
Now let me give you a perspective of developments concerning the open offer made by Holdcem Cement Private Limited along with Ambuja Cements India Limited (ACIL). In January 2005, Holcim announced its plans to enter into a long-term strategic alliance with the Ambuja Group by acquiring a majority stake in ACIL, which at the time held 13.8 per cent of the total equity shares in ACC. Holcim simultaneously announced its bid to make an open offer to ACC shareholders, through Holdcem Cement Private Limited and ACIL, to acquire a majority shareholding in ACC. Pursuant to the open offer, the shareholding of ACIL is 34.71 per cent of the Equity share capital of your Company. Consequently, ACIL has filed declarations with your Company indicating their shareholding and declaring itself as a Promoter of the Company.

Holcim is the world leader in cement as well as being large suppliers of concrete, aggregates and certain construction-related services. It is also a respected name in information technology and research and development. The group has its headquarters in Switzerland and has worldwide operations spanning more than 70 countries. Considering the formidable global presence of Holcim in our core business of cement as well as its excellent reputation, we believe this association will greatly strengthen your Company.

I would also like to add here a few words on the Ambuja Group. You are aware that your Company had benefited significantly from the strategic alliance we have had with this Group in the last few years. I am pleased to add that in this new arrangement we will continue to have the same valuable support from the Ambuja Group especially in their areas of expertise.

14. Directorate
My colleagues and I are pleased to welcome Mr Markus Akermann, Chief Executive Officer, Holcim Limited and Mr Paul Hugentobler, Member of Executive Committee, Holcim Limited who joined us as Directors on the Board of your Company from May 6, 2005.

Mr Akermann who is well-known in the global cement industry, was appointed CEO of Holcim Limited in 2002 and as a Member of the Holcim’s Board of Directors. He has a distinguished curriculum vitae with degrees in Business Economics from the University of St. Gallen, Switzerland after which he studied Economics and Social Sciences at the University of Sheffield, U.K. He joined Holcim in 1978 and has worked in a number of roles including a stint as Area Manager for Latin America.

Mr Paul Hugentobler has a degree in Civil Engineering from ETH, Zurich, a premier institute of technology. He has also acquired a degree in Economic Science from the University of St. Gallen. Mr Hugentobler joined the Holcim group in 1980 and has had rich experience in the Asia Pacific region including a stint as CEO of Siam City Cement (Public) Co. Ltd. in Bangkok. He has been a member of Holcim’s Executive Committee from 2002 with the responsibility of overseeing South Asia and northern ASEAN.

I look forward to our interactions with these two gentlemen considering the wealth of rich experience and knowledge they bring with them in the area of cement and concrete. Please join me in extending a very warm and cordial welcome to these two gentlemen to the Board of ACC and to the ACC Parivar.

15. Human Resources
The climate of industrial relations in your Company continued to be cordial and one that fostered cooperation and self-motivation. The excellent results you saw in the year were due to the commendable efforts of its employees. I run out of words to describe this wonderful group of people who have all the good qualities of an army, a bevy of zealous missionaries, an industrious workforce and a winning team brimming with that healthy competitive spirit all blended into one single entity – truly an envious asset that assures.

16. Conclusion
I thank each of the shareholders of this Company for their unwavering faith. You are responsible for the reputation enjoyed by ACC. I am inspired by the trust you have imposed in our management and in the employees. You fill us with immense satisfaction and motivate us in a way that demands outstanding performance of the best quality.

Thank you.

May 24, 2005                                 Chairman