UltraTech sees life beyond cement

The cement maker is trying to transform itself into a building solutions provider

If you make it big, make it visible. This seems to the new mantra at UltraTech Cement, country's largest cement maker. Having raced to the top of the league table through a mix of organic growth and strategic acquisitions, the Aditya Birla Group company has now hit the street in a bid to become the most visible brand in the industry. It wants to transform itself into a building solutions provider from just another cement maker. This strategy, it believes, will convince customers to pay more for the product besides, making for better use of the company's non-cement products such as ready mix concrete, water-proofing solutions, bricks and even sand and aggregates and thus expand the revenue frontier.

The company is pushing its dealers to convert themselves into providers of building solutions to home solutions from sellers of cement. UltraTech has steadily stepped up its brand spend and is now the largest advertiser in the industry. In FY14, the company spent Rs 150 crore on advertisement, nearly 50 per cent higher than ACC and nearly twice that of Ambuja Cement, two of its biggest competitors.

The trigger is the declining wallet share of cement in the home-construction spend. There is also, of course, the fact of UltraTech's growing size in the industry. "Cement is most often the first building material to be bought by families when they start building their homes but then their involvement with product and the brands ends there itself. Their attention shifts to interior products such as paints, tiles and bathroom fittings among others. And the trend is only getting stronger as disposable income grows and aspirations rise," says Vivek Agrawal, its chief marketing officer.

This led to a situation where cement is increasingly becoming a minor expenditure head for home builders from being the prime cost head till a decade ago. Now people spend more money on home interiors than erecting the structure.

According to industry estimates cement now accounts for just seven per cent of the total construction cost for a typical home or apartment in India. Experts say that this presents a long-term strategic challenge. "When a product occupies such a small wallet share consumers stop bothering about it. This makes it tough for companies to differentiate their product and the product becomes a commodity. Growth suffers and margins take a knock hurting company's long-term financial viability," says Harish Bijoor, brand and marketing consultant. UltraTech has the most to lose if the industry gets 'commoditised' and sticker price becomes the sole distinguishing factor in the market place. The company is the top investor in the industry, using its financial muscle to race ahead through brown and green field expansions and by acquiring struggling competitors. In last three years UltraTech spent nearly Rs 10,000 crore in raising capacity and implementing another Rs 5,000 crore worth of projects across four locations. Besides, it has acquired cement assets worth Rs 7,600 crore from Jaiprakash Associates with a combined capacity of 9.7 million tonnes per annum.

The company plans to increase capacities to 71 million tonnes by March 2016, which translates into a nearly 50 per cent increase in its grey cement capacity over three years. This is similar to the ACC sales volumes in 2014. By 2020 UltraTech aims to become a 100 million tonnes company.

Rising capacity could create a sales problem especially in the short to medium term. UltraTech claims to be the premium brand in the market place and usually sells at a premium to competition. "UltraTech is perceived to be a superior product and customers are willing to pay Rs 10-15 per bag higher than typical market price," says Agrawal. This seems to be true. For example during year ending March 2015, every bag of cement fetched UlltraTech around Rs 244, slightly higher than its competition. ACC and Ambuja Cement for instance earned Rs 237 and Rs 230 per bag respectively during the year ending December 2014.

UltraTech also tops the industry in operating margins. For example in FY15, company reported core operating margins (excluding other income) of 17.2 per cent, against industry average of around 15 per cent and ahead of its key competitors such as ACC and Ramco Cements and comparable to Ambuja Cement.

This hard earned premium could come under threat if the sales team tries to push its rapidly rising volumes without creating enough brand pull. "There could be a downward pressure on margins unless it finds way to maintain realisations," says a senior executive with a rival cement maker.

Cement demand grew by just three per cent in FY15, lowest in nearly a decade and a fraction of historical average growth rate of 8 per cent. Industry surplus capacity increased to 134 million tonnes - a third of the installed capacity, at the end FY15 from 117 million tonnes at end of FY14. UltraTech is trying to win customers' hearts rather than their minds, just like consumer companies. Its latest campaign asks customers to build beautiful and uses attractive women as models. This is big change for a company that used to pride itself on selling engineer's choice cement. Will the home builders bite? Time and UltraTech's financial numbers in the coming years hold the answer.