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Star Cement Ltd.

BSE: 540575 Sector: Industrials
NSE: STARCEMENT ISIN Code: INE460H01021
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VOLUME 18674
52-Week high 135.00
52-Week low 102.00
P/E 64.40
Mkt Cap.(Rs cr) 4,697
Buy Price 0.00
Buy Qty 0.00
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Star Cement Ltd. (STARCEMENT) - Chairman Speech

Company chairman speech

It gives me pleasure to present before you the annual performance ofthe Company for FY2016-17.

At Star Cement we always professed that we were positioned as acounter-cyclical company and I am pleased to state that we were able to demonstrate thisconviction during the year under review. The year was marked by macroeconomic disruptionsthat affected consumption following which it would have been reasonable to believe thatwe would report lower offtake.

Macroeconomic scenario

It would be pertinent to explain the sectoral background beforeproceeding to analyse the Company's performance.

The Indian cement industry reported a weak performance during the yearunder review. The country's pan-India cement capacity increased to 409 million metrictonnes per annum by end-FY2016-17 from ~392 million metric tonnes per annum in theprevious year resulting in increased competition in the face of a sluggish economy.

Going ahead the growth in India's cement sector is likely to be drivenby the Central Government's renewed focus on infrastructural development and the privatesector's capital investments. In view of this optimism it is expected that cementproducers will add 50 million metric tonnes per annum capacity over FY16-18 (CAGR of 6%)compared to the 40 million metric tonnes per annum capacity addition during FY13-16 (CAGRof 4.9%).

Even as the country's cement capacity increases we believe that thecement industry will perform better due to improved demand and enhanced capacityutilisation.

The picture is even better in North East India. The development of thisregion is an important pivot of India's Act East policy; the Central Government has takena number of decisive initiatives to enhance the region's reputation as the 'Gateway toSouth East Asia'. With dedicated projects being announced to improve road infrastructureaugment air connectivity and expand the rail network we believe that cement offtake willincrease.

An investment of H40000 crore is expected to boost connectivity acrossthe seven states of North East India. The Central Government embarked on modernising smallairports to improve connectivity as part of the UDAAN project. Some 19 major railwayprojects have been commissioned; the power T&D infrastructure has been strengthened.

The allocation of a sum of US$3.42 billion for extending the 'Housingfor All by 2022' scheme to 600 districts is expected to drive real estate construction inWest Bengal and Bihar which is expected to strengthen offtake in our key focus markets inEastern India.

The result is that the time is near when North East India will achieveits potential and will no longer lag the national cement consumption average.

Strengthening the business

The year under review was marked by divergent performance across thetwo halves. During the first half of the year under review the Company reported strongcement growth in the North East region. The second half of the year under review wasmarked by the unforeseen demonetisation which impacted liquidity and moderated North Eastcement demand but despite this setback the Company performed creditably to match volumesduring the corresponding period of the previous year. In view of this creditableperformance during a challenging sectoral phase the Company strengthened its position asthe undisputed leader of the regional cement market.

One of the Company's priorities at the start of the year under reviewwas share accretion in the markets of its presence.

The Company focused on a number of initiatives in this regard. Even asthe external environment proved challenging the Company added dealers and retailers thatmade it possible to reach products wider and deeper across North East India West Bengaland Bihar. The result is that the Company grew its volumes in West Bengal and Bihar.

As marketplace realities became increasingly resistant the Companyembarked on automating the sales function. The customised apps on the mobile phones of ourexecutives made it possible for them to report sales and for the Company to track offtakein real-time. The result was a more informed ongoing perspective of market realities thatmade it possible to respond with speed to emerging realities of a dynamic marketplace.

At Star Cement we have always treated cement as a service rather thanits conventional understanding as a commodity product. The result is that during the yearunder review the Company engaged deeper with masons and builders; the Company conductedmore than 10000 engagements with the decisionmakers at the last-mile with the objectiveto establish a connect and showcase product efficacy.

With a growing cement demand for our brand driving our corporateinitiatives the Company undertook de-bottlenecking initiatives that improved outputproductivity and cost management. As an extension the Company enhanced cement capacity atthe Lumshnong plant from 0.6 million metric tonnes per annum to 1 million metric tonnesper annum strengthening its prospects to service growing markets.

The big message that I wish to send out is that even as the sectorpassed through a challenging phase in 2016-17 and the country's cement offtake growth wasno more than in the low single-digit the Company strengthened its competitiveness thatshould translate into superior implications across the foreseeable future.

Outlook

Star Cement is consolidating its presence in the markets by wideningits tehsil-wise and panchayat-wise presence. This is expected to open demand pockets thatwere hitherto untapped. Our sizeable operating leverage will allow us to make the most ofthis demand surge.

Based on these emerging trends and Star Cement's formidable brandequity we are confident that FY2017- 18 will emerge as a watershed in our existence.

I am thankful to our shareholders for their support and expect theCompany to add significant value across the coming years.

Regards

Sajjan Bhajanka

Chairman

From largely a North East Indian company with limited market scope toan Eastern India-focused company today (predominantly in the markets of West Bengal andBihar).

How we transfomed

• Expanded our presence in Eastern India (West Bengal Bihar andJharkhand)

• Hired grinding units in West Bengal to service growing cementdemand in Bengal Bihar and Jharkhand

From a peak debt of H902 crore in 2012-13 owing to acceleratedcapacity creation to moderated debt coupled with enhanced scale.

How we transfomed

• Selected to grow in an asset-light way by hiring arrangementsinstead of commissioning greenfield facilities

• Enhanced our gross block from H1337.74 crore in 2012-13 toH1757.10 crore as on 31st March 2017

• Moderated our gearing from a peak of 1.06 to 0.50 as on 31stMarch 2017

• Increased net worth from H859.28 cr in 2012-13 to H1227.99crore as on 31st March 2017

• Reduced debt cost by nearly 250 bps in FY2016-17 from FY 2012-13

We are working continuously to emerge as a competitive cementmanufacturing company in North East India today

How we transfomed

• The Company continuously invested in process improvements tomoderate costs and emerge as one of the most competitive Cement manufacturers in NorthEast India

• Its EBDITA per tonne of H1459 in 2016-17 was among the highestin the markets of our presence

• We are among the lowest power consumers in the North East cementsector - power consumption for OPC was at 97.77 units per tonne and PPC was at 69.25 unitsper tonne

Superior Star Cement positioning

Location

Limestone mines just 2-3 kilometres from the factory

Coal pit is available in close proximity

Key markets within a radius of 500 kilometres from the grinding units

Raw material edge

Captive limestone mine

Captive 51 MW power plant meets entire power requirement of theLumshnong unit

10% of fly ash requirement met through the captive power plant

Focus on branding

360 communication approach comprising OOH TVC radio and presscoverage

Close to H250 crore spent in promotions in the last decade

Periodic trade and consumer schemes undertaken

Brand endorsed by regional celebrities

Provides platform for architects engineers professors and experts

Network

More than 2700 dealers and 9300 retailers across 11 states

A 77:23 ratio of trade: non-trade sales

Around 30% of the dealers are exclusive Star Cement dealers; around 28%with the Company for more than five years in the North-East

What makes us optimistic about our growth

Per capita cement consumption

131 kilograms Eastern India (including NE India)

201+ kilograms India

580+ kilograms global average

Housing shortage

63 million units India

21.6 million units Eastern India (including NE India)

Government focus

Prime Minister's vision for providing housing for all by 2022

Interest subsidy for low cost housing and first time home buyers

Allocation to North East India for road railway and airportdevelopment

Renewed focus on infrastructure development

Strong growth

Annual cement growth potential of 10%

Increased dominance of northeast players - cement arrival from mainlandreduced from approximately 30% to 10% in the last 5-6 years.

No new major North East cement capacities expected

Star Cement enduring market leader (around 24% share) in North East

Reach

Being the market leader the brand is available across more than 2700dealers

Created a network of 192 dealers in West Bengal and 149 dealers acrossthe Bihar and Jharkhand markets

Aggressive brand promotion in West Bengal Bihar and Jharkhand

At Star Cement we believe that success in a heavily commoditisedbusiness space like that of a cement manufacturer is derived not from trying to achievetoo many things at the same time but by the passion to chase one overriding goal and doit better than everyone else - that is to achieve qualitative excellence. Here is

how we have grown from strength to strength over the years:

• From one variety of cement to three varieties

• From manual interventions to increasing automation

• From a regional to a pan-zonal presence

• From a promoter-driven to an institutionalised entity

• From its inception in 2004 to market leader in the North Eastregion

Sectoral context

Economic growth: India remained the fastest growing major economygrowth buoyed by an improved performance in the manufacturing and services sectors.Personal incomes strengthened 9.7% to H1.03 lac in FY2016-17 a reality likely to sustain.

Infrastructure boom: In the Union Budget 2017 around H4 trillion wasearmarked for infrastructure spending covering rails roads and ports. Projects such asdedicated freight corridors and new airports and ports could further drive cement demand.

North Eastern focus: The Union Budget 2017 raised the total allocationfor the eight North Eastern states from H32180 crore in 2016-17 to H43245 crore.Correspondingly the budgetary allocation for the Ministry of DoNER was hiked fromH2524.42 crore to H2682.45 crore. Many industry experts hailed the Union Budget 2017 as'path-breaking' for the region.

Consumption potential: The per capita cement consumption in India isone of the lowest in the world (201 + kilograms against a global average of 580+kilograms). The North Eastern and the Eastern parts of the country lag the nationalaverage. With infrastructural and real estate growth booming cement consumption is slatedto grow attractively.

Government push: The Central Government has laid a keen emphasis onovercoming housing shortage in the country by introducing the 'Housing for All by 2022'scheme Smart Cities Atal Mission for Rejuvenation and Urban Transformation (AMRUT) andPradhan Mantri Awas Yojna (PMAY). The targeted number of houses to be built under thePrime Minister's Gramin Awas Yojana increased 33% to 40 million units.

The Star Cement methodology

Long-term: At Star Cement we have proactively invested in capacitiesto address a growing demand for our products. We created an annual clinker capacity of 2.6million metric tonnes per annum along with a cement capacity of 4.4 million metric tonnesper annum. We invested in a captive 51 megawatt power plant to service our growing powerneeds.

Credibility: We enhanced our reputation through the enforcement ofenvironmental regulations. All our facilities attained zero discharge status following theinvestment in advanced systems to monitor effluents and pollutants in real-time.

Strategy: We selected to operate primarily in North Eastern India toaddress a large virgin market. We selectively expanded into eastern India partnering theother grinding units in West Bengal.

Access: Limestone mines and coalfields are within a three-kilometreradius of our plants ensuring round- the-clock raw material availability. Proximity toraw materials provides an edge in curbing our logistics costs. We provide doorstepdelivery through a well-established dealer-distributor network generating a distinctadvantage.

Network: In a business where freight costs constitute more than afourth of the total costs we continued

to implement decisive measures to guarantee cost-effective efficientinbound and outbound movement of material. The Company has a retail penetration across 11states of the country with > 10% of them being associated with the Company for morethan a decade in North East.

Governance: At Star Cement we understand that enhancing trust is ofutmost importance in a competitive sector. The Company is governed by a mix of independentand promoter Directors. The Company communicates with investors and regulatoryauthorities ensuring across- the-table transparency.

The intangibles that drive Star Cement forward

Recall: Star Cement's business commands respect on account of atop-of-the-mind brand awareness. Over the decade the Company has become synonymous withdistinctive facets: ethical (fairness and compliance) reliable (consistency) anddependable (stakeholder welfare).

Pioneering: The Company was the first to commission a cement unit inNorth Eastern India by understanding the severity of cement deficit. The CentralGovernment strengthened infrastructure development in the region (road railcommunication and telecom) improving prospects and empowering Star Cement to capitalise.

State-of-the-art: Star Cement has invested in cutting-edge technologieslike VRM installation of pre-grinder to drive operating efficiencies and competitiveness.By leveraging cutting- edge technologies and collaborations we strengthened productquality development and applications.

Knowhow: Star Cement inducted sectoral experts with relevant expertisein procurement production marketing and branding. A conducive and empowering workenvironment helps in retaining talents in the organisation. A large part of our employeebase has been associated with the Company for more than five years.

The effectiveness of our business model

Capacity: Star Cement's ability to relentlessly outperform its sectorcan be assessed from its ability to scale capacity. Our clinker capacity increased from0.8 million metric tonnes per annum in FY2010-11 to 2.6 million metric tonnes per annum;our cement capacity increased from 1.27 million metric tonnes per annum in FY2010-11 to4.4 million metric tonnes per annum in FY2016-17.

Profitability: Star Cement's industry standing is reflected in itsgrowing PAT. The Company reported progressively higher profits in successive four-yearslabs: from H171.63 crore in FY2016-17 compared to H89.82 crore in FY 201112 and H86.99crore in FY2006-07.

Sustainability: Despite being engaged in a commoditised space wemoderated gearing from 1.03 in FY2013-14 to 0.50 in FY2016-17. The Company reported anEBITDA margin of 24% in FY2016-17 and a ROCE of 12.3% thanks to our ability to sweatassets better and improve capacity utilisation.

Operational review

Star Cement's operations are carried out through plants across NorthEast and Bengal. The Company has invested in systems and processes that have enhancedcost-effectiveness and competitiveness across cement producers in North East India.

Location Number of units Capacity
Meghalaya 4 Cement: 1.67 MMTPA
Clinker: 2.6 MMTPA
Power: 51 MW
Assam 1 Cement: 2.00 MMTPA
West Bengal (hired units) 3 Cement: 0.7 MMTPA

Highlights 2016-17

• Achieved lowest-ever power consumption in SCML Kiln of 53.72kilowatt hour/metric tonnes of clinker from 54.53 kilowatt hour/ metric tonnes of clinker(FY 15-16) with a target of moderating this to less than 50 kilowatt hour/Mt

• Increased mineralogical component (MIC) addition in OPC grindingfrom 6 to 10% enhancing savings

• Used waste oil in place of high speed diesel for AmmoniumNitrate mixing reducing costs

• Changed the operation of bag filters from timer mode todifferential pressure mode reducing costs

• Installed mesh in coal mill outlet to avoid foreign materialresulting in a steady coal flow that is expected to reduce flushing from FK pump and kilndowntime

• Arrest of false air from pyro and mill circuit reduced fuel andpower consumption

• Online power consumption and MIS generation started to monitorpower consumption

• Initiated lighting automation to reduce consumption

• Replaced worn out table liners and tires in coal mill enhancingoperational and power efficiency

• Installed variable fan drives in raw mill cyclone discharge bagfilter raw mill reject bag filter fan RABH air slide blower bag filter fan kiln tirecooling fan blending silo top bag filter fan and silo aeration blower lowering powerconsumption

• Identified and eliminated plant leakages.

• Modified coal crusher to prevent frequent jamming and increaseTPH

• Eliminated jamming of additive crusher and high powerconsumption due to idle running; high maintenance cost was eliminated by installing avibrating screen

• Increased total packers to three; everyday around 10000 unitscan be packed (final packaging) reducing the turnaround time for trucks/ lorry forloading from five to six hours to two to three hours

• Installed dry fly ash feeding system into classifier increasingcapacity

Plan for 2017-18

We are planning to augment capacity through de-bottlenecking whichshall result in cost reduction.

Sales

Star Cement manufactures PPC OPC and PSC cement. The Company was amongthe first in the region to offer anti-rust cement. The Company markets its products in 11states through 2700 + dealers supported by more than 360 field staff. The Company is themarket leader in North East India.

Highlights FY2016-17

• Achieved flat volume growth due to an extended monsoon anddemonetisation

• Maintained regional leadership with around 24% market share inNorth Eastern India

• Added around 500 dealers

• Provided field staff with Sales Force Automation-enabled mobileapplication for real-time demand reporting and superior market tracking

• Initiated demand generation through customer proximity;delivered the product to those relocating their residence

Road ahead

With a rise in the number of infrastructure projects the demand forcement is expected to surge. The implementation of GST will create a level playing fieldfor 'A category' players and organised players like Star Cement.

Corporate social responsibility

The Company believes in returning prosperity to society through variousinitiatives in the fields of healthcare education livelihood generation andinfrastructure support.

Industry review

Cement industry overview

India the second largest producer of cement in the world after Chinaaccounts for 6.7% of the global output. Domestic cement production has been increasing ata CAGR of 6.44% to 282.79 million metric tonnes over FY07-16. In the first 10 months ofFY17 (March 2016-January 2017) total cement production in India stood at 233.15 millionmetric tonnes. Capacity increased at a CAGR of 5.7% from 328 million metric tonnes in FY11to 431 million metric tonnes in FY16. Although the domestic cement industry only grew3-3.5% in FY17 it is expected to grow at a rate of ~4.5% y-o-y in FY18 on the back ofincreased demand from the infrastructure sector and a revival in housing offtake in ruralareas.

(Source: India Ratings & Research)

Demand

The housing sector accounting for about 67% of the total cementconsumption is the biggest demand driver of cement consumption.

Demand is expected to be further boosted by rising levels orurbanisation and growth in the real estate sector. The Government also laid a keenemphasis on overcoming housing shortage in country by introducing the 'Housing for All by2022' scheme Smart Cities Atal Mission for Rejuvenation and Urban Transformation (AMRUT)and Pradhan Mantri Awas Yojna (PMAY) schemes. The target number of houses to be builtunder the Prime Ministers Gramin Awas Yojana has increased by 33% to 40 million units.Growth in the infrastructure and construction sectors will also result in increased demandfor cement. To reduce logistical constraints the nation's transportation infrastructurei.e. rails roads and ports is receiving a facelift. Projects such as dedicated freightcorridors and new airports and ports will further drive cement demand.

Supply

The pan-India cement capacity increased to 409 million metric tonnesper annum by end-FY16 from ~392 million metric tonnes per annum India's cement productioncapacity is expected to touch 550 million metric tonnes by FY20. This growth will bedriven largely by the Central Government's renewed focus on infrastructural developmentand capital investments made towards boosting economic growth. It is expected that cementproducers will add an additional 50 million metric tonnes per annum capacity over FY16- 18(CAGR of 6%) as compared to the 40 million metric tonnes per annum capacity additiontaking place during FY13-16 (CAGR of 4.9%). As the economy revives the country's cementindustry is expected to perform better due to the improved demand and enhanced capacityutilisations.

(Source: IBEF)

During the first eight months of the fiscal the Central Government'sPlan and non-Plan expenditures grew by 22% y-o-y on the back of a 25% y-o-y growth inroads and highways expenditure and an 88% y-o-y growth in urban development expenditure.The development of 14 coastal economic zones under the Sagarmala Project should enhancecement production by 40 million metric tonnes per annum by 2025.

Budgetary support

• A 80% increase in budgetary allocation towards theinfrastructure sector from H2.21 lac crore in the earlier Budget to H3.96 lac crore forFY18

• Allocation of a sum of US$3.42 billion for extending the'Housing for All by 2022' scheme to 600 districts

• Allocation to the roads and highways sector increased to H64900crore

• An 8% increase in allocation (H131000 crore) for laying 3500kilometres of railway lines

• Allocation towards the Pradhan Mantri Awaas Yojana (constructionof one crore houses for the homeless by 2019) increased from H15000 crore to H23000crore

• Tax incentives and infrastructure status accorded to affordablehousing

Governmental initiatives

In the 12th Five Year Plan the Government of India plans to increaseinvestment in infrastructure to the tune of US$ 1 trillion and increase the industry'scapacity to 150 million metric tonnes. The Cement Corporation of India (CCI) wasincorporated by the Government of India in 1965 to achieve selfsufficiency in cementproduction in the country. Currently CCI has 10 units spread over eight states in India.In order to help the private sector companies thrive in the industry the CentralGovernment has been approving their investment schemes. Some such initiatives by thegovernment in the recent past are as follows:

• The National Housing Bank will refinance individual housingloans of about H20000 crore (US$ 3 billion) in 2017-18

• The Parliament of India has cleared amendments to the Mines andMinerals Development and Regulation (MMDR) Act which will enable companies to transfercaptive mines leases similar to

mines won through an auction and which is expected to lead toincreased mergers and acquisitions of steel and cement companies

• The Government of India is planning to revive the state-runcement factories across India in order to give a boost to road and realty projects bybringing down their construction costs

• The Government of India has joined hands with Switzerland toreduce energy consumption and develop newer methods in the country for more efficientcement production which will help India meet its rising demand for cement in theinfrastructure sector

• The Government of India has decided to adopt cement instead ofbitumen for the construction of all new road projects on the grounds that cement is moredurable and cheaper to maintain than bitumen in the long run

• Launch of the Real Estate Regulatory Act (RERA) is expected tobring transparency and enforce the timely completion of projects.

Road ahead

The Eastern states of India are labelled as 'virgin' markets by cementcompanies considering their ability to contribute to their bottomlines in the future. Overthe next 10 years India is expected to emerge as one of the major exporters of clinkerand grey cement to the Middle East Africa and other developing nations of the world.

Cement plants near ports for instance in Gujarat and Andhra Pradeshwill be logistically prepared to face stiff competition from cement plants that lie in theinteriors. A large number of foreign players are also expected to enter the cement sectorowing to steady profit margins and demand.

Looking ahead domestic cement companies could go for global listingseither through the FCCB route or the GDR route. With the Central Government passingfriendlier laws lowering taxation levels and infrastructure spending increasing thesector is expected to grow with leaps and bounds and take India's economy forward alongwith it.

SWOT analysis

Strengths

• Initiative to build 100 'smart cities'

• FDI inflow in industry related to manufacturing of cement andgypsum products reached US$3.11 billion in September 2016

• Low threat from substitutes

• Central Government-led projects getting into execution mode

Weaknesses

• High logistical costs

• Capacity under utilisation

• Strict environmental norms

• Stiff sectoral competition

Opportunities

• North Eastern India is experiencing a construction boom andoffers attractive investment opportunities

• Proposed GST implementation can moderate tax expenses

• Low per capita consumption of cement (190 kilograms as of March2015)

• Availability of fly ash (from thermal power plants)

• No new capacity addition in pipeline

Threat

• Fluctuations in prices of pet coke and coal prices.

• Stringent Government royalties levies and taxes

Demand drivers

• Housing sector accounts for 67% of the total cement demand

• The Indian real estate market is anticipated to reach US$180billion by 2020

• Property sales are expected to grow at a CAGR of 14% between201618 and 18% between 2020-25

• Residential real estate demand is driven by rising populationand growing urbanisation

• Home loan interest rates have fallen to their lowest levels inthe last five years

• Rising income levels are leading to a higher demand for luxuryprojects

• Demand for affordable housing is growing in order to meet thedemand from lower income groups

• Commercial real estate demand is being driven by growth in theIT-TeS sector and organised retail.

• India's investment in infrastructure is estimated to double toabout US$1 trillion during the 12th Five Year Plan (2012-17) compared to the previous Plan

• The total FDI in cement and gypsum industry reached US$3.11billion between April 2000 and September 2016

(Source: IBEF Morgan Stanley)

Infrastructural development

• A total of 197 ongoing road development projects are beingimplemented under various programmes of the Ministry of Road Transport and Highways.

The total length and the total sanctioned cost of these projects are4320.95 kilometres and H37691.05 crore respectively

• 20 major railway projects consisting of 13 new lines two gaugeconversions and five doublings across a length of 2624 kilometres at a cost of H52030crore have been taken up.

Company overview

The most significant event to have taken place during the fiscal goneby was the Company getting listed. The merger of Star Ferro and Cement with Star Cementenhanced brand visibility. Star Cement has consistently maintained its position as themarket leader in the North Eastern region and is now looking to foray into the Easternregion. One of the strengths of the Company has been its ability to

11th Five Year Plan 12th Five Year Plan 13th Five Year Plan
North East Region GDP Growth 10% 13.7% 16.4%
North East Region per capita growth 8.6% 12.4% 15.2%

Budgetary highlights 2017-18

The allocation towards the Ministry of DoNER has increased fromH2524.42 crore to H2682.45 crore whereas the Finance Ministry has increased the transferfrom Centre from H31422 crore to H42499 crore. Of the 3500 kilometres of new railwaylines set to be commissioned during FY2017-18 a sizeable portion will be constructed inthe region. Several new railway projects amounting to around H13500 crore have beensanctioned including new lines bridges and an elevated rail tract project from Kamakhyato New Guwahati at a cost of H3062 crore.

(Source: Hindustan Times)

• 'Comprehensive Telecom Development Plan for the North EasternRegion' at a cost of H5336.18 crore is under implementation

• The North Eastern Council is implementing 715 developmentprojects at a total approved cost of H714864.98 lacs

• The Ministry of Rural Development is providing assistance inrespective State Governments under the Pradhan Mantri Gram Sadak Yojana programme (Source:Press Information Bureau) consistently grow its sales volumes bottomline and topline. TheCompany is proud to have maintained steady EBITDA margins in a fluctuating market. Case inpoint: EBITDA stood at H410.97 crore compared to H400.16 crore in the previous year.Interest costs declined to H77.97 crore in 2016-17 compared to H83.36 crore. The Companyreported a post-tax profit of H171.63 crore in 2016-17 compared to a post-tax profit ofH134.03 crore in the previous year.

Human resources

Star Cement's unprecedented success is attributable to the relentlesshard- work and unequivocal dedication of its human capital. The Company believes that itsprofitability is directly proportional to its ability to leverage its greatest asset - itspeople. To ascertain employee happiness and ensure optimal productivity the Companyadopted several transformational strategies and streamlined existing people practices.

The talent at Star Cement represents an eclectic mix of fresh blood andseasoned leaders who have passionately contributed in establishing Star Cement as the mostpreferred brand in North East and an emerging player in East India. To foster a culture ofmeritocracy the Company successfully attracted top talent from reputed cement and leadingnoncement organisations at all incumbent levels. Simultaneously to create a strongEmployer Value Proposition 'Campus to Corporate' initiative was launched in 2016 toon-board talent from the top business schools.

The Company gives paramount importance to the all-round development ofits intellectual capital. In order to create a learning culture a number of CapabilityDevelopment Programs suiting the need of employees have been organised across theorganisation with a target of achieving two training man-days per employee therebyensuring a 100% unique employee coverage.

To build a rewarding and performance-driven culture performance-linkedincentive schemes were institutionalised for managerial employees at plant and non-plantwhile the existing sales incentive scheme for the sales workforce was revisited and mademore robust.

Such pay for performance schemes were designed to reward employeescommensurate to their performance and motivate them to deliver their best.

In its quest for excellence through continuous process improvementsthe Company encourages a process of continuous feedback from all corners. The HR ProcessCapability Framework was introduced in FY 2016-17 to evaluate the process strengths andprocess gaps of various HR practices and devise scope for improvement. Effectivenessstudies on Recruitment PMS performance-linked incentive and sales incentive wereconducted throughout the year to gauge the perception of stakeholders and formulate actionplans for process improvement.

The Company goes an extra mile to ensure a sustainable work environmentfor its employees by ensuring high levels of engagement.

One of the key highlights of the bygone year was the first EmployeeEngagement Survey conducted in association with The Great Place to Work Institute with anaim to gain actionable insights into the culture of the organisation. The assessmentprovided a holistic understanding on employee perceptions and helped benchmark theorganisation's practices with global standards.

The survey results revealed a commendable engagement score of 67% ascompared to the national average of 82% with an exceedingly high score in 'Organisationpride'.

This endorses employee trust in the organisation and management.

Apart from nurturing and developing its people Star Cement also offersa steady growth path to employees. This resulted in high employee retention of 83% in FY2016-17. Almost 18% of the employees are associated with the Company for more than adecade.

Marketing

During a challenging 2016-17 the Company adopted various innovativesteps to maintain market share sales and revenue. Prudent cost-cutting exercises wereundertaken by the Company to optimise rentals (reduced by 70.6%) while boosting visibility(by 168%). This was a successful initiative undertaken by a highly dynamic marketing teamwhich resulted in significant savings. What makes the Company different is its scalpelapproach which targets selective areas of strategic importance like high potentialgrowth towns and high- competition towns. The Company is reaching rural areas throughbranded vans by conducting strength-related games and engaging the general publicreinforcing the brand image of which cement strength is an important attribute. Withcompetitive pressure increasing in North East the focus during FY2016-17 was on retainingthe top spot in the North Eastern cement market. The Company is continuing steadily withits leadership position in North East with the aid of various marketing exercises such ascommercials in local languages on relevant television channels and radio stations as wellas campaigns on social media related to infrastructure projects. Major emphasis is laid onengagement in informative advertising focusing on excellence as the main theme andregular wishes during festivals. All such interventions play a pivotal role in reiteratingthe product quality and creating brand recall. Star Cement also strives to sponsorimportant events which lead to top-of-the-mind awareness.

Distribution and sales

The Company takes pride in its widespread distribution network whichmaximises the potential to serve all customers while optimising sales and distributioncosts to ~45% of sales.

Risk management

Demand risk Lower demand for products can hamper the performance of the Company. Mitigation measures
• India's GDP growth is expected to exceed the 7% mark in FY2017-18 in the aftermath of the demonetisation initiative. Though this move caused short-term cash disruptions in the long run it is expected to bring about a much-needed strengthening of the nation's economic fundamentals
• Cement demand is expected to reach 550-600 million metric tonnes per annum by 2025. The housing sector is the biggest demand driver of cement accounting for about 67% of the total consumption in India. The other major consumers of cement include infrastructure at 13% commercial construction at 11% and industrial construction at 9%.
To meet the rise in demand cement companies are expected to add 56 million metric tonnes capacity over the next three years
• The proposed speeding up of road construction under the Pradhan Mantri Gram Sadak Yojana from 73 kilometres during 2011-14 to 133 kms during 2016-17 will increase connectivity and improve trade relations and working conditions
• The increased budgetary allocation towards the infrastructure sector will support cement demand. Higher rural credit and increased allocation for rural agricultural and allied sectors including the demand for rural housing are significant contributors to the overall cement demand mix
• Acute housing shortfall and lack of proper infrastructural facilities in the Eastern India act as major drivers of demand in the North Eastern region
Competition risk Inability of the Company to deliver quality products could lead to a decline in market share. Mitigation measures • The Company has managed to remain the market leader by consistently delivering quality products which meet the ISO 9001:2008 standards
• The Company's integrated operations healthy operating efficiencies longstanding experience and strong presence enables it to enjoy pricing benefits compared to some of the other cement companies located in the region
Brand risk Ineffective marketing Mitigation measures
programmes can lead to a loss in brand equity. • Star Cement strives to sponsor important events which will lead to top- of-the-mind awareness. On an average Star Cement spends 1% of its total revenue per year on A&P activities and the expenses has increased from H8.20 crore to H17.71 crore in last 5 years
Location risk High logistics costs can Mitigation measures
adversely affect the revenue-earning potential of the Company. • The Company's clinkering units power plant and raw material sources are proximate to the grinding units (owned and hired) and key markets. This facilitates cost reduction and minimum transit time enabling quicker inventory turnaround and better supply reliability
• The Company's plant enjoys tax exemption benefits in the form of fiscal incentives
• The Company's plants are located within 2-3 kilometres of the raw material source and around 500 kilometres from the market thus making it one of the most popular and sought after brands. Having its own captive limestone mines captive power plant (51 megawatts) and being endowed with resources like coal and limestone in close proximity have resulted in increased operational efficiencies and low logistic costs have contributed largely to our profits
Finance risk Inability to utilise own Risk mitigation
funds or procure low- cost funds can impact profitability. • The Company has a strong balance sheet with a net worth of H1228 cr and a debt of H794.88 cr a fall in debt of 15% from last year. During this financial year 15% of debt has been paid off reducing leverage in a phased manner. Thus resulting in an improvement in the debt-equity ratio and interest cover to 0.41 and 5.3 respectively
Capacity Capacity utilisation plays a major role in cost reduction. Risk mitigation
utilisation risk • The Company's average capacity utilisation for the financial year for cement stood at 66.7% and clinker at 84.5%). There was an improvement in the input/ output ratio compared to previous year
HSE risk Employees are assets of an organisation. Thus any mishap can lead to an unsafe environment and image impact. Risk mitigation
• The Company took several precautionary and safety measures to provide a safe working environment for the employees
• Regular awareness programs focusing on health and safety were facilitated and periodic audits were conducted to ensure safety standards