40 years ago... And now: ACC: From a leader to first among equals

If holding your ground is a measure of success then ACC (earlier Associated Cement Companies Ltd) is one of the most enduring and successful companies in India. In the mid-1970s ACC was almost synonymous with cement in the country. Forty-years later ACC remains the most recognisable brand in the industry but has lost the race for market share to a company it once helped start. ACC at one point controlled nearly a third of the country's cement market but its share has fallen to around 10 per cent, behind Ultratech Cement, a much younger company.

ACC was founded in 1936 when ten cement companies belonging to India's top four top business groups decided to merge to form Associated Cement Companies Ltd. These 10 companies together accounted for nearly 92 per cent of India's cement market and the merger was a way out of 'self-destructing' competition. ACC has been on a downhill journey ever since, and losing market leadership to the Aditya Birla group's Ultratech Cement in the middle of the last decade was the culmination of this process.

For most of its history, however, ACC was barely in a position to consolidate its market share. After independence,  the government's priority was to promote state-owned companies and ensure a steady supply of cement to public projects at reasonable prices. Being one of the largest corporates and the dominant cement maker, ACC was always on the government's radar. Regulatory restrictions on the company were especially intense in the 1970s when it was placed under the Monopolies and Restrictive Trade Practices (MRTP) Act. The law imposed restrictions on how fast the company could grow, allowing competitors to walk away with most of the incremental demand. This coupled with controls on the production and sale of cement hampered ACC's prospects during the roaring 1980s.

Indian industry's fortunes took a turn for the better in the 1980s but ACC was not prepared to grab the opportunity. Cement production and pricing was liberalised partially in 1982 and then completely in 1989. Now companies were freed to produce as much cement as they liked. For the first time in nearly a generation an Indian could buy cement from the open market. The resulting boom in construction attracted a slew of new players to the industry, including those with deep pockets like the Birlas and Larsen & Toubro. ACC was not in a position to challenge the newcomers. Poor profitability had stretched ACC's balance sheet, providing it little headroom to increase capacity in the 1980s. It was also saddled with old plants, many built at the time of independence. In comparison, the newcomers were setting up plants that were energy-efficient and could produce more with the same numbers of workers.

ACC needed to shed flab before it could participate in the growth race. Faster growth also needed a large upfront investment, but its operations were not generating enough resources. ACC could not turn to its promoters for funds, unlike its competitors that were parts of diversified conglomerates which could cross-subsidise their cement ventures by dipping into profits from other businesses. All of ACC's original promoter business groups had sold out by the mid 1970s with the exception of the Tatas. But with just a 14 per cent stake, ACC was a Tata company only in name and its management led by long-time chairman Nani Palkhiwala never missed an opportunity to assert independence. With no deep pockets behind it, ACC had to fend for itself.

All through the 1980s, ACC's finances were torn between funding growth and maintaining financial solvency and this predicament shows in the financial ratios. On the eve of the 1991 economic reforms, ACC was one of the country's most indebted cement companies with only a small rise in capacity to show for it. During the year ending March 1989, ACC reported a debt to equity ratio of 2.3. Competitors like Grasim Industries (debt-equity ratio of 1.6 in 1990-91), L&T (1.26) and Gujarat Ambuja Cement (1.27) were in much better shape despite building significant capacity during the previous decade. (see chart)

ACC continued to face headwind all through the 1990s with its debt to equity ratio running at around one throughout the decade. In the late 1990s, ACC had a chance to formally become a part of the Tata group and access the resources of Tata Sons. Its largest shareholders, the financial institutions, however, thwarted plans by Bombay House to raise its holding in the company through a preferential issue of shares. Failing to get control of the company, the Tatas sold their 14.45 per cent stake in ACC to Gujarat Ambuja Cement in two tranches beginning 1999. One of India's oldest independent and professionally run companies was now a part of a family enterprise. The change in ownership did little to change ACC's fortunes and it managed to maintain its leadership with 10 per cent share of the market volume. Its new owners, however, could not retain control over ACC for long.

In 2005, Gujarat Ambuja Cement sold its stake in ACC to Swiss multinational Holcim which came out with an open offer to become the largest and controlling shareholder. For the first time in its history ACC had a clear owner and promoter and could bank on its resources to consolidate its leadership and grow faster. There was a new sense of purpose at Cement House, ACC's historic headquarters in Mumbai opposite Churchgate Station. One of India's most financially stretched firms was debt-free within three years of Holcim taking charge. With its new financial heft, ACC could now recapture some lost opportunity, but it was no more the same company and the goal posts had shifted. ACC's management was not free to chart its own course but had to fit into Holcim's overall strategy for India.

The boom in cement demand and ACC's profitability from 2005 was most visible in its dividend payout and ever increasing cash pile. In the nine years since March 2005, ACC's cumulative investment in plant and equipment (net block) doubled, lagging dividends that are up 4.5 times and net profits, up 2.7 times. This suited Holcim because the higher dividend income helped it recoup a big chunk of its investment in acquiring ACC  (see chart). The transformation at Cement House was complete when in December 2012, the ACC board agreed to pay royalty to Holcim for using its technology at the rate of 1 per cent of its net sales. A former executive wondered whether ACC was the same company that offered its technical and geological services to newcomers in the industry.