Adhesive for success

I In October 2005, the Rs 602-crore JK Corp Limited got a new name "" JK Lakshmi Cement Limited. Ironically, the name change looks like the company is invoking Lakshmi "" the Hindu goddess of wealth. Because until recently, JK Corp was bleeding. Till March 2004, the company's accumulated losses in the previous 18-month period were nearly Rs 32 crore (Rs 21 crore loss on an annualised basis).

However, in the following financial year (2004-05), the company clocked a profit of Rs 26.05 crore. That's an achievement if you look at the context. To add to the losses, the company had a back-bending debts liability of Rs 630 crore.

Then the cement industry was going through a slump since 1997, mainly because supply overshot demand and companies were selling cement at lower prices "" a bag of cement could fetch Rs 200 until 1996-97, but was now being sold for Rs 120-130.

As the cost of inputs kept increasing, operating margins eroded drastically. FY 2000-01 was the darkest for the industry, when the industry declined by 2 per cent.

"Our strategy was to survive," says S K Wali, whole-time director and head of operations, JK Lakshmi Cement. However, the company did not let desperation get the better of it. "We not only took calculated risks, we went for organised restructuring," reveals S Choksey, also a whole-time director of the company.

How far can you go?

The company's strategy was to first attack major cost heads. Freight costs came under the scanner first. That's because freight costs are equivalent to 40 per cent of production costs. An example: the transportation cost of a bag of 50-kg cement from the plant in Rajasthan, to the dealer in Delhi is Rs 30-35. The company blunted logistics costs to the maximum by better distribution logistics management.

It played to its strong points. JK Lakshmi was predominant in north India, with its 1,500 dealers present in parts of western Uttar Pradesh, Delhi, Punjab, Haryana, Rajasthan, Gujarat and parts of Maharashtra. But now it started paying more attention to marketing and selling its products to areas near the Rajasthan plant. As a result, its target market was refocused to two states, Rajasthan and Gujarat.

At present, the company sells 75 per cent of its production in these areas. In Rajasthan alone, the sale of JK Lakshmi cement increased to 40 per cent of its production from 10 per cent about two years ago.

Consequently, their marketshare has increased, too "" from 9 per cent to 11 per cent in Rajasthan; and from 7 per cent to 9 per cent in Gujarat. This balanced out the marketshare that the company would have lost in UP, Haryana, Maharashtra and Delhi, and fetched better returns on account of lower transportation costs.

Then, 40 per cent of the company's sales came from rural areas. Focusing on this market, JK Lakshmi is now reaching out to markets with a population of less than 2,000.

To target this market, the company used travelling salesmen in the form of technical-cum-promotional vans that conducted mason gatherings; made presentations to showcase the company's products at places like village chowks; distributed user manuals; visited panchayat and block development offices; and participated in local fairs for better visibility. In addition, the company also organised training sessions on best practices in construction to rural masons.

To bond with the masons, the company also set up a "Lakshmi Sahayogi Sanrakhsan Club", which undertakes free insurance of masons against any major disability or death during work. The club has a membership of 50,000 masons.

Sweating it out

The kilns at Jaykaypuram in Rajasthan can produce 20 lakh tonnes of cement every year. But the company claims that they are currently operating at 113 per cent of their capacity. As Wali calls it, that happened by making the "assets sweat". As the prices of cement were falling, the company had to rationalise production costs. This meant optimum utilisation of the assets.

JK Lakshmi decided to update its workers on the situation within the company and the industry. They were encouraged to come up with cost-cutting solutions. The modest recognition for those who delivered: names were mentioned in the company newsletters and they received letters of appreciation from the management.

The result? The kilns produced 25 per cent more cement with an investment of as little as Rs 2 crore. More brown-fielding initiatives (small investments and modifications) were undertaken thereafter, and the cement production capacity of kilns increased from 2,500 tonnes to 3,200 tonnes per day.

"It is easy to buy or hire services that enhance production capacity. But difficult times showed us paths that we could follow with little investment," says Wali. The company plans to now enhance its production capacity to 30 lakh tonnes by investing Rs 40 crore.

Power cuts

Power and coal make for 60 per cent of a cement company's production costs. JK Lakshmi was dependent on the state electricity board for power. To cut costs, the company decided to trim power consumption.

Processes were made faster with simple innovations like cutting maintenance time, in-house modifications of equipment such as pre-heaters and coolers and so on. Soon, power consumption was brought down from 105 units for a tonne of cement to 84 units. This meant a saving Rs 90 a tonne.

"The co-operation of workers at the factories is what really helped. They were ready to do that little extra," says Choksey. At present, the company is also investing Rs 104 crore through a special purpose vehicle to build a 36-MW thermal power plant for the units. Soon a unit of electricity that costs Rs 4.30 will be available at Rs 3.30.

Next came fuel. The company had been running its kilns on imported coal. Though it costs less than pet coke and is purer (so less problems with burning it), its calorific value (amount of heat emanated) "" 6,250 Kcal/kg "" is less than that of pet coke "" 8,000 Kcal/kg. Since the urge was to cut costs, the company gradually switched over to pet coke. Now pet coke constitutes 95-100 per cent of fuel.

But ruthless cost-cutting came at a cost. Pet coke leaves sulphur deposits that not only corrode sections of the kiln but also create blockages. "We modified parts of the kilns. Sections that faced the problem of sulphur deposits and choked the area were enlarged," says Wali.

Further, the company worked out the raw material and pet coke balancing to optimise production. Depending on the alkali point of a kiln, a ratio of fuel and raw materials was reached, so that the sulphur deposits could be reduced as much as possible.

Searching the web

Technology also came to the rescue. JK Lakshmi sought the services of e-sourcing giant Ariba, and went online scouting for everything from equipment, spares and even packing bags. The rule: any purchase above Rs 5 lakh was done through e-auctions.

"We were initially wary," reveals Choksey, "after all, we were used to meeting the vendors and gave a lot of importance to the personal aspect of it "" understanding the body language and so on." Also, the company was afraid that long-standing relationships with vendors might be adversely affected.

But once the transparency of the process was clear, JK Lakshmi took the plunge. "We were functioning on a bigger platform and there were more choices. We could even reach out to people abroad "" not just vendors but even manufacturers," says Wali.

That cut costs. The total purchase made during 2002-04 (18 months) was Rs 230 crore, of which Rs 119 crore was the value of purchases done through e-sourcing. The company saved Rs 4 crore. In FY 2004-05, the company saved another Rs 4 crore. Transport contracts worth Rs 80 crore through the same model saved the company another Rs 3 crore.

At present, JK Lakshmi is reaping the benefits of shaving off redundant costs from the system. Company Chairman Hari Shankar's picture in the annual report shows him with a broad smile. Will Goddess Lakshmi continue to smile too?

BUILDING BLOCKS

The cement industry is cyclical in nature. Production slows in August-September while it peaks in the month of March. The Rs 40,000-crore cement industry in India comes second only to China in terms of production capacity of about 127 million tonnes.

However, the per capita consumption of cement in India "" about 100 kg "" is lower than the world average consumption of 270 kg per capita. This is likely to change, though.

According to a report by CRIS INFAC (a subsidiary of CRISIL), the cement demand will only grow, courtesy the housing boom and in crease in infrastructure spending (particularly, roads, urban infrastructure, ports and airports).

Several projects such as the Golden Quadrilateral and the National Urban Renewal Mission have increased cement demand. With limited greenfield capacity additions expected over the next two to three years, and the strong growth in cement consumption, operating rates will improve and, thereby, translate into stable prices.

The acquisition of smaller players will mean greater consolidation in the industry over the next five years. Also, the government has slashed the customs duty on pet coke to 10 per cent from 20 per cent.