Expansion Holds The Key

Updated: Dec 22 2002, 05:30am hrs
The cement industrys performance during the quarter to September 2002 has not been impressive. But cement major JK Corps bottomline of Rs 8.4 crore (loss of Rs 31.6 crore) during the quarter may give the impression of a big turnaround in the fortunes of the company. The performance is strictly comparable to the corresponding quarter of the previous year as the company has given the figures excluding the working of the divested JK Paper Mills.

A close look at the results reveals that the impressive turnaround owes mainly to other income of Rs 15 crore (Rs 5 crore), that includes profit on sale of investments, dividends and provisions written back. Moreover, while the company has taken credit of Rs 4.8 crore for unrealised gains on investments (provision for diminution at Rs 15 crore), it has not provided for the decline in the value of long-term strategic investments. The non-provision for shortfall in recovery of certain debts and advances is also not a healthy practice even though the company has initiated appropriate recovery actions.

Even if bottomline gains are attributed to higher other income, higher operating profit at Rs 6.4 crore (Rs 4.8 crore) shows that the company has done exceptionally well despite an eight per cent drop in cement prices. JK Corp raised cement output by 17.6 per cent to 23.1 lakh million tonne (mt) and pushed up its sales volume to offset the fall in price realisation. Consequently, sales (excluding excise) moved up 8.1 per cent to Rs 94.4 crore.

Raw material consumption was lower at 13.6 per cent of sales (14.9 per cent), but power and fuel was up at Rs 35.4 crore (Rs 28.9 crore) because of higher production. A noteworthy achievement is a 10.5 per cent reduction in transport cost to Rs 16.5 crore despite higher sales volume. OPM inched up to 6.8 per cent (5.5 per cent). Interest cost almost halved to Rs 5.7 crore (Rs 10.4 crore) due to prudent working capital management and restructuring of debt burden. Depreciation declined to Rs 12.4 crore (Rs 16.2 crore).

During the quarter, the JK group froze its plan to merge its two cement companies, JK Corp and JK Udaipur Udyog. JK Udaipur Udyog has one cement plant in Udaipur, Rajasthan, which is old and has been closed for some time now. If the merger had taken place, it would have dragged down the valuation of JK Corp.

Instead of the merger, the group is now concentrating on the expansion process of Lakshmi Cement, the cement division of JK Corp. It is proposed to increase the cement making capacity by 5-6 lakh tonne through brownfield expansion at its Sirohi Road plant in Rajasthan. This will take installed capacity to around 2.8 million tonne. Besides that, the group is also contemplating putting up a greenfield project.

The capacity expansion is necessary as the size will play even more important part in the cement industry once the consolidation phase gathers momentum.