How Shree became India's most valuable cement firm

The seventh largest wealth creator over the past decade has curiously been a commodity business, the kind that value-seeking investors once turned their noses at.

Shree Cement commissioned a 0.6-million tonnes per annum (tpa) cement manufacturing plant in the mid-eighties, added 1.5 million tpa in 1997 and almost went bust thereafter, nursing a 3x gearing, weak realisations and a sluggish top line.

That education was not lost on the company, which went about transforming weakness into an opportunity as a result of which it is valued at Rs 35,000 crore, through precious lessons.

Lesson one: Controlling costs within your domain is much of the battle won

Since the principal cost elements comprised coal and power, Shree experimented with the transition from the use of coal to PET coke, which at peak replacement moderated costs by Rs 200 a tonne. Thereafter, Shree extended from grid dependence to 100 per cent captive power generation, translating into a saving of Rs 160 a tonne. The combined savings nearly doubled earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne in three years, starting a virtuous cycle of cash-richness.

Lesson two: Focus on becoming the best; the rest will take care of itself

Shree was one of the first to embark on the hub-and-spoke manufacturing approach, setting up grinding units closer to fly ash-rich power plants (raw material) and consuming markets. The logistics arbitrage translated into a saving of Rs 14 a tonne km at legacy fuels costs, since increased to Rs 22 a tonne km, accelerating payback on the older grinding units.

Lesson three: Profit from waste

Shree commissioned a waste heat recovery boiler that was more than twice the size (80 Mw) of its power generating unit, possibly the largest of its kind in the world outside China. The cost of generating power through this appendage was a mere seven per cent of grid cost, translating into an annual saving of Rs 130 crore from 2007.

Lesson four: Grow from within

Shree financed capacity increments through net worth (no equity or debt increase), reducing its breakeven point and making available a sizable surplus for the next expansion round. The result is that Shree is now sitting on Rs 2,500 crore of cash (generating an annual surplus), is adequate to finance its projected expansion from 16 million tpa to 30 million tpa by 2020.

Lesson five: Enumerate, enumerate, enumerate

Shree created a shopfloor environment where downtime is not calculated in minutes but revenues lost, transforming employees into entrepreneurs. As an extension, the company has created a differentiated culture where failure is championed as long as someone was trying out something new.

The success rate may be a mere five per cent of all initiatives but its spinoff is estimated at 10x of the cost of all the failures combined.

The result: Shree is the only family-owned Indian cement company of its scale with a AAA rating. Besides, it is the most valuable cement company in India on a per tonne basis (estimated at $210, compared to Ambuja Cements at $180).

Thinking like a contrarian made the difference.

The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed