Prism Cement began its operations with a time and cost overrun. What are the reasons for this?

Although our project was delayed by six months, there was no cost overrun. The original cost of the project was Rs 575 crore which was raised by Rs 40 crore to Rs 615 crore, since the scope of the project was enlarged. While putting up the project, we realised that despite its commitment, MPEB would not supply power and hence we decided to install three additional DG sets of 6 mw each at a cost of Rs 40 crore taking total capacity to 30 mw. At present, the captive power capacity is being hiked to 36 mw by installing one more DG set. It is noteworthy that the time lag between the trial run and commercial production was just 17 days. We are the only cement company in India to have FL Smidth of Denmark (cement and cement machinery major) as a joint venture partner. They have invested in other cement companies but not as a joint venture partner.

Despite being located at Satna, how did you manage an OPM of above 20 per cent for the last two quarters?

We have the most modern roller mill and this results in savings in power cost. We are totally reliant on captive power and we have no contract demand with grid. The grid power in the state costs about Rs 4.5 per unit and for 1998-99, the cost of captive power was just Rs 2.01 per unit. The railway sidings are right inside the plant and again, Prism is the only company in the cluster to have this facility. This helps us to save on freight cost-inward and outward. Not only does it lower the raw material cost but also a low cost of despatch. Another advantage of railway transport is that we get a 10 per cent volume discount and here our higher base of despatches through railways helps.

Isn't railway transport costlier than road transport?

That depends on the distance. For a distance of more than 250 km, railway transport is cheaper. For Prism, for example, rail transport works out to be 20 per cent cheaper.

What are the other factors contributing to the improved margins in the first quarter as compared to the last quarter of the previous year?

Sales in the last quarter of 1998-99 at 4,55,823 tonne accounted for 31.7 per cent of the sales for the year. The lower cost due to the factors explained above also helped. In the first quarter of the current year, capacity utilisation was 90 per cent and in July also it was at 90 per cent. This helps in spreading fixed costs over a larger base ad results in improved margins.

Any plans to make PPC?

We will start manufacturing PPC using fly ash in January 2000. Initially the PPC production will be 20 per cent and will eventually go up to 33 per cent. We source fly ash from power plants located in nearby areas. As regards pollution, we meet the norms of IFC Washington. Use of fly ash results in lower consumption of clinker thereby leading to lower cost per tonne of cement. For fly ash we only have to pay freight and power consumption will also come down by two to three units per tonne of cement produced. The other way to look at it is that the cement capacity goes up (depending on the fly ash content) with the same clinkering capacity.

The limestone cost per tonne for Prism works out to be Rs 106 compared to Rs 60 or lower for Gujarat-based units. With Satna being in the cement cluster, why is this so?

There are two reasons for this. One, the overburden ratio in our plant at 1:1 is higher than in Gujarat. Overburden ratio is the ratio of waste to material being mined. Two, a royalty of Rs 32 per tonne and a cess of Rs 0.50 per tonne has to be paid.

Which are the major markets for the Company?

Our major market is UP, which is the second largest cement consuming state after Maharashtra. In the first two months of the financial year, demand growth in UP was 50 per cent. The reason for higher demand is that farmers in the region were investing in NBFCs in the last two years and at least 80 per cent of these NBFCs have gone under. The investment has now shifted to housing. UP and Bihar also witnessed substantial rise in demand as the pending projects were being completed. We concentrate on the retail market, which accounts for 85 per cent of our dispatches. We sell about 55 per cent in UP, 20-22 per cent in MP and Delhi and 10 per cent in Bihar. In Bihar, the realisations are consistently better than in UP. The price differential between OPC and PPC is Rs 2-3 per bag.

With a net cement realisation (NCR) of Rs 1,202 (in the Q1of 1999-2000), how does a two-million tonne plant serve an equity of Rs 256.97 crore (not adjusted for accumulated loss)?

Servicing equity will be difficult and at least for two to three years we will not be able to declare dividend. But our NCR will improve and our costs will also come down for the reasons mentioned above from Rs 812 per tonne in 1998-99. Our freight cost which was Rs 278 per tonne in 1998-99 will reduce further as railway wagon loading will be faster because no labour will be involved. Our power and fuel cost (Rs 406.5 per tonne in 1998-99) will also reduce. The cost structure and the debt:equity structure for a two-million tonne plant necessitated the equity that we have. Our cost of debt (pre-tax) is 14 per cent adjusted for lease. Once we start repaying debt, we will be able to leverage better. In any case, cyclicals should be judged on a free cash flow basis.