COST AND COST CONTROL

 When transport of cement by road proved costly, Ambuja built its own port to ferry
bulk cement by sea.

Three special ships, made for Indian conditions and requirements, and designed in Singapore,
which had the capacity to transport 2,000 tonnes of cement were purchased. Transporting by sea
helped the company substantially lower transportation and packaging costs, reduce wastage and
spillage, and ensure quality. Ambuja has the lowest cost of plant and machinery per tonne of
cement produced. Thinking out of the box has benefited the company not only in monetary terms
but also helped advance its sustainability agenda.When transport of cement by road proved
costly, Ambuja engineers built their own port and delivered bulk cement by sea.

 Compocem is a special type of cement produced by combining clinker, slag and fly ash. Apart
from early strength, it provides the advantage of being a lighter colour, both of which are
preferred in Eastern India. The company’s teams along with the Global R&D centre of LH
identified this latent need of strength and colour. Over the course of 18 months, these teams were
able to convince the authorities to introduce regulatory codes for this type of cement.
Simultaneously, the teams did a series of experiments and tests in their R&D to develop the ideal
product. In February 2017, Ambuja Cement Compocem was finally launched in Eastern India. In
less than a year, it clocked a volume of 1.14 lakh tonnes at an average 5% premium. The real
advantage of this cement, however, is its reduced requirement of clinker. Ambuja’s Bhatapara
plant, where Compocem is produced, has saved 10% clinker over and above the 30% savings
that the company achieved through the usage of fly ash.

Cost developments

On the cost front, the company witnessed significant pressure over the course of the year due to
increments in various input costs. These increments were caused largely due to external factors
and even ended up affecting many other industries. Crude prices, raw material costs and even
fuel costs all saw a significant rise in prices. To limit the impact of such cost increases, the
company significantly improved its efficiency, fuel mix optimisation and strategic sourcing.
Such internal initiatives and measures helped restrict the costs from rising to even higher levels.

Major Cost Movements

. i) Raw Material costs constituted approximately 9% of the total expenses. The cost of major
raw materials increased by 8% the previous year on a per tonne basis. This increase was largely
because of an increase in the cost of fly ash, which saw scarcity in supply and as a result, the
company had to source the same from farther distances. This was however mitigated through
optimal sourcing and a judicious change in the gypsum mix, which helped the company to
reduce the gypsum cost by 2% in comparison to the previous year. The company also saw a
reduction in the per tonne cost of Bauxite and Iron Dust, which further helped to reduce the
impact of the rising cost of raw materials.
ii) Power and fuel costs constituted approximately 24% of the total expenses. In comparison to
2016, 2017 saw a significant increase in fuel prices. This was because of an increase in the prices
of coal and petcoke. As a result, the power and fuel cost in 2017 increased by more than 12% in
comparison to 2016 on a per tonne basis. This impact would have been significantly higher,
however, the dynamic fuel mix strategy helped restrict the impact. Over the course of the year,
the company was able to remain alert and time and again was able to change its fuel mixes in
Kiln and CPP by using a relatively lower cost fuel. The usage of alternate fuels in captive power
plants also increased by 1%. Furthermore, the company consumed 70% of the total power
requirement from captive sources, including an increased usage of the Waste Heat Recovery
System. As a result, this helped in limiting the power and fuel cost increase to just 12% over the
previous year.

iii) Freight and forwarding costs constituted 31% of the total expenses. On a per tonne basis, the
cost increased by 7%. This increase was largely due to an 11% increment in diesel prices in
comparison to the previous year. To tackle this, the company took up various logistical initiatives
such as the improvement in yard despatches by 1% and higher road direct despatches by 2% as
compared to the previous year. Such initiatives helped offset the impact of higher diesel prices to
some extent.

iv) Other expenses that constituted 20% of the total expenses were restricted to an increase of
just 2% over the previous year, despite a 7% increase in packing bag cost, which increased
because of the PP granule price increase. The company undertook a fixed cost optimization drive
and as a result, saw savings in many fixed cost elements. Such initiatives helped to keep other
expenses in check.

Cost mitigation measures / efficiency improvement initiatives.

i)To further strengthen the company’s philosophy of Sustainable Operations, central focus was
placed on the production of fly ash based on its PPC. While keeping its PPC in mind, several
initiatives were taken up to enhance fly ash consumption to maintain the best-in-class quality.

ii) The company continued its effort of minimising costs of the fuel mix and worked on its fuel
flexibility to mitigate any risks associated with the dynamic fuel market. All efforts were
directed towards using low-cost fuels like petcoke.

Depreciation on property, plant and equipment

 Depreciation is provided as per the useful life of assets which are determined based on
technical parameters / assessment. Depreciation is calculated using “Written down value
method” for assets related to Captive Power Plant and using “Straight line method” for other
assets.
 The residual values, useful lives and methods of depreciation of property, plant and
equipment are reviewed during each financial year and adjusted prospectively, if appropriate.
 The Company identifies and determines cost of each component/ part of the asset separately,
if the component / part have a cost, which is significant to the total cost of the asset and has
useful life that is materially different from that of the remaining asset.
  Depreciation on additions to property, plant and equipment is provided on a pro-rata basis
from the date of acquisition or installation or construction, when the asset is ready for
intended use.
 Depreciation on an item of property, plant and equipment sold, discarded, demolished or
scrapped, is provided upto the date on which the said asset is sold, discarded, demolished or
scrapped.
 Capitalised spares are depreciated over their own estimated useful life or the estimated useful
life of the parent asset whichever is lower.
 In respect of an asset for which impairment loss, if any, is recognised, depreciation is
provided on the revised carrying amount of the asset over its remaining useful life.

Inventories

Inventories are valued after providing for obsolescence, as follows:

1. Raw materials, stores and spare parts, fuel and packing material: Lower of cost and net realisable
value. Cost includes purchase price, other costs incurred in bringing the inventories to their
present location and condition, and taxes for which credit is not available. However, materials
and other items held for use in the production of inventories are not written down below cost if
the finished products in which they will be incorporated are expected to be sold at or above cost.
Cost is determined on a moving weighted average basis.
2. Work-in-progress, finished goods and stock in trade: Lower of cost and net realisable value.
Cost includes direct materials and labour and a proportion of manufacturing overheads based on
normal operating capacity, but excluding borrowing costs. Cost of finished goods includes excise
duty, as applicable. Cost of stock-in-trade includes cost of purchase and other cost incurred in
bringing the inventories to the present location and condition. Cost is determined on a monthly
moving weighted average basis. Net realisable value is the estimated selling price in the ordinary
course of business, less estimated costs of completion and estimated costs necessary to make the
sale.

Government Grants and Subsidies :

i. Grants and subsidies from the Government are recognized when there is reasonable certainty
that the grant / subsidy will be received and all attaching conditions will be complied with.
ii. Where the government grants / subsidies relates to revenue, it is recognized as income on a
systematic basis in the Statement of Profit and Loss over the periods necessary to match them
with the related costs, which they are intended to compensate. Government grants and subsidies
receivable against an expense are deducted from such expense.
iii. Where the grant or subsidy relates to an asset, its value is deducted from the gross value of
the asset concerned in arriving at the carrying amount of the related asset.
iv. Government grants in the nature of Promoters'' contribution are credited to capital reserve
and treated as a part of Shareholders'' Funds.
Cash flow analysis

With the given figures we can analyze that in the year 2017, company has improved on the cash
flow to a great extent as compared to 2016. The major impact is due to reduction in the net cash
used in investing activities. The company invested a lot in the year 2016 as compared to 2015
and 2017. There is a rise in net cash flow from operating activities. Depreciation and
amortization expenses had a decline which resulted in an increment in net cash flow from
operating expenses. Also trade receivables and trade payables had a great rise contributing to rise
in cash flow from operating activities. Acquisition of equity shares in HIPL were nil in 2017 as
compared to (3500.27)cr. in 2016 which had a major impact in reduction of net cash used in
investing activities. Investments in bank deposits (having original maturity of more than three
months) also declined from (281.48)cr. to (4.96)cr. Interest paid rose from (87.02)cr. in 2016 to
(155.83)cr. in 2017 getting a rise in net cash used from financing activities.
RATIO ANALYSIS

Key Financial Ratios of Ambuja Cements

Dec 17 Dec 16 Dec 15

Liquidity Ratios
Current Ratio (X) 1.33 1.23 2.03
Quick Ratio (X) 1.08 0.95 1.75
Inventory Turnover Ratio (X) 9.93 9.81 10.57

Profitability Ratios
Return on Capital Employed (%) 6.09 4.67 7.38
Asset Turnover Ratio (%) 42.43 39.38 66.80

The current ratio for the year 2017 is 1.33 and ideal CR is 2:1. Hence, company is above
satisfactory level. It can cover it’s current liabilities. This also suggests that the company has
sound liquidity position. It’s working capital is positive. It also tells us that company has a good
margin of safety and is solvent.

The quick ratio for the year 2017 is 1.08 and ideal QR is 1:1. Hence, the company is safe in
terms of paying short term obligations as and when they are required. This ratio is usually used
by the companies to remove the errors in current ratio.

The inventory turnover ratio for the year 2017 is 9.93. The inventory turnover ratio measures the
number of times inventory has been turned over (sold and replaced) during the year. It is a good
indicator of inventory quality (whether the inventory is obsolete or not), efficient buying
practices and inventory management. The company is doing good in terms of inventory. The
company might improve your buying practices and inventory management.

Return on capital employed is 6.09. This means that company makes profit 6 times the amount
invested. Investors are interested in the ratio to see how efficiently a company uses its capital
employed as well as its long-term financing strategies. Companies’ returns should always be
high than the rate at which they are borrowing to fund the assets.

The asset turnover ratio is 42.43%. The company can improve on this. The asset turnover ratio is
an efficiency ratio that measures a company’s ability to generate sales from its assets by
comparing net sales with average total assets. In other words, this ratio shows how efficiently a
company can use its assets to generate sales. Ambuja cements can increase it’s sales by reducing
the costs.
Profit/volume ratio
The profit-volume ratio measures the rate of change of profit due to change in the volume of
sales. The advantages of profit-volume ratio are that it can be used to measure profitability of
each product, or group of them, separately so that the necessity for continuance of such
production can be examined. It may also be used to measure the profitability of each production
centre, process or operation.

For ambuja cements ltd. the change in profits for the year 2016 and 2017 was Rs. 317.33 crores
and change in sales for the same period was Rs. 1250.21 crores. Hence, the PV ratio turned out
to be 25.38%. A high P/V ratio indicates high profitability so that a slight increase in volume,
without increase in fixed cost, would result in high profits. A low P/V ratio, on the other hand, is
a sign of low profitability so that efforts should be made to improve P/V ratio.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY:

The Company has in place an adequate budgetary control system and internal financial
controls with reference to financial statements. No reportable material weaknesses were
observed in the system during the previous fiscal. Further, the Company has laid down internal
financial control policies and procedures which ensure accuracy and completeness of the
accounting records and the same are adequate for safeguarding of its assets and for prevention
and detection of frauds and errors, commensurate with the size and nature of operations of the
Company. The policies and procedures are also adequate for orderly and efficient conduct of
business of the Company.
The Audit Committee of the Board of Directors actively reviews the adequacy and
effectiveness of the internal control systems and suggests improvements to strengthen the
same. The Company has a robust Management Information System, which is an integral part of
the control mechanism.
The Audit Committee of the Board of Directors, Statutory Auditors and the Business Heads are
periodically apprised of the internal audit findings and corrective actions taken. Audit plays a
key role in providing assurance to the Board of Directors. Significant audit observations and
corrective actions taken by the management are presented to the Audit Committee of the
Board. To maintain its objectivity and independence, the Internal Audit function reports to the
Chairman of the Audit Committee.

2017 data: current cement industry situation

The stellar performance of Ambuja Cements in the December quarter has surprised the Street.
The impressive show came mainly on the back of higher-than-expected cement volumes and
better cost control measures. Ambuja follows the January-December financial year.

A growth of 17.4 per cent in cement volumes pulled up revenues, which grew 19.4 per cent year-
on-year (y-o-y) to Rs 26.12 billion (up 14.5 per cent sequentially). Realisations, however,
remained subdued as expected. These were up 3 per cent y-o-y at Rs 4,427 a tonne, but were 2.2
per cent lower sequentially.

Ambuja Cements Ltd’s stock fell nearly 3% intraday on BSE on Tuesday and ended the trading
session in the red. Investor nervousness indicates that a beat on the profit parameter is not
enough to please the Street.
Cement volumes declined 8.8% year-on-year to five million tonnes in the fourth quarter as
demand remained weak due to a cash crunch in the trade segment. This fall, which signals a loss
of market share for Ambuja Cements, came as a disappointment.
It remains to be seen how the company addresses this. Price realizations were down sequentially,
but increased on a year-on-year basis.
Secondly, on the cost front, power and fuel expenses fell year-on-year and quarter-on-quarter,
but freight cost jumped sequentially. Its Ebitda (earnings before interest, tax, depreciation and
amortization) margin improved by 50 basis points to 13.4%, year-on-year. A basis point is
0.01%. This time around, higher usage of petroleum coke (pet coke) has aided the overall
profitability, but going ahead, operating efficiency is likely to be limited. As some analysts point
out, the gap between low-cost pet coke and high-cost fuel has now narrowed to a large extent, so
the benefits seen earlier will now wane.
Ambuja Cements increased usage of pet coke to 65% in the fourth quarter, up from 50% a year
ago. According to a Kotak Institutional Equities report, the company’s operating cost per tonne
increased 2% year-on-year to Rs3,804 in the December quarter.
The management expects cement demand to improve due to government initiatives. However,
unlike some peers, it hasn’t indicated any capacity addition which, according to some analysts, is
a cause for concern, apart from other factors like escalating input costs, falling market share and
weaker price trends.
With the rise in demand, certain regional markets like North India have also seen an increase in
cement prices, according to two Delhi-based cement dealers. However, pan India average cement
prices remained lower at Rs.290 per bag for the March quarter compared to Rs.294 in the
previous quarter due to a slump in the South and East markets, said the Motilal Oswal report.
Not everyone is convinced that the pickup in demand is here to stay. Some say the increased
demand is largely seasonal.

“Expecting demand growth over 6% would be aggressive. The demand uptick seen in the
January-march period is more seasonal and not a trend yet,” said Amey Joshi, associate director
(corporate) at India Ratings and Research, the local unit of Fitch Group Inc.

The last and first quarter of a financial year are typically considered the best quarters for the
cement sector due to increased construction activity seen before the onset of monsoons.

India Ratings estimates demand growth in the range of 4-6%, according to its 2016-17 outlook
report released on 1 February. The demand forecast builds in “slightly better demand from the
construction and infrastructure segments led by government spending,” said the report while
adding that it does not expect any significant revival in housing demand in either rural or urban
areas.

Outlook & Valuation Several cost savings initiatives i.e.

(a) higher production of composite cement; (b) increased usage of WHRS at Rabriyawas unit;
(c) reduction in lead distance; and (d) better usage of fuelmix and fuel flexibility enabled ACL
to withstand cost pressure. We continue to believe that ACL’s growth trajectory will sustain,
going forward as well despite capacity constraints till new capacity comes on-stream
Kaizen costing
LOGISTICAL PRODUCTIVITY
The response to the implementation of GST was managed extremely well, all thanks to the
extraordinary efforts of various functions involved in the planning and conceiving stages. This
involved a major IT infrastructure revamp which resulted in all plants going live on the 1st day
of GST implementation, with the shortest shutdown time being 12 hours. On the cost front,
several initiatives and a wide range of activities spanning across various stages of the shipping
cycle were rolled out to improve service, efficiency and cost. In comparison to the previous
year’s fuel rates, the fuel rates of 2017 were 12% higher. This impacted Ambuja’s road freights
by L26 per ton. To ensure the sustainability and the improvement of its evacuation strategy, the
company entered into a long-term tariff contract (3 years) with Indian Railways. The main
objective of this policy was to ensure collaboration with Indian Railways in terms of long term
freight revenue commitment and the assurance of the supply of wagons.
Operating beyond energy cost fluctuations
Energy security largely depends on the availability and cost. Risks associated with energy costs
account for a significant part of the production costs of the company. Cement production
requires a high level of energy consumption, especially for the kilning and grinding processes.
The principal elements of these energy costs are fuel expenses and electricity expenses (which
include amongst others, costs for coal, petroleum coke, natural gas and alternative fuels such as
biomass).

Operations of the company are therefore expected to be significantly affected by any movements
in energy prices. Energy prices may vary significantly in the future, largely due to market forces
and other factors including changes in the regulatory regime. The company seeks to protect itself
from the risk of energy price inflation by diversifying its fuel sources, including the use of
alternative fuels, and by negotiating long-term supply contracts.

Staying on track despite the logistical challenges posed by railways

Rail is the ideal mode of transportation for the cement industry because it’s environment
friendly, cost efficient and faster when compared to road transport. It’s also a preferred mode of
transport for distances above 200 km. Rail transport, however, has always been plagued by the
short supply of wagons, particularly during the peak period. Policies of the railways (giving
preference to food and power companies) have been hampering the planned movement of
cement to the consumption centres, thereby adversely impacting the production schedule and
increasing the overall transportation cost.
Internal audits and report

A strong internal control framework is an important part of operations and corporate governance.
It is the overall responsibility of the Directors of the listed company to ensure that the company
has laid down internal financial controls and that these controls are adequate and are operating
effectively. Simplifying the complexities. The company has already developed and implemented
a robust system and framework of internal controls over financial reporting commensurate with
the size, scale and complexity of its operations. The framework has been designed to provide
reasonable assurance related to financial and operational information, to comply with the
applicable laws and to safeguard the assets of the company. This framework contains Entity
Level Controls as well as Business Process Controls.

The operating effectiveness and adequacy of these controls are periodically tested and validated.
The internal control systems are evaluated with respect to their compliance with operating
systems and policies of the company and accounting procedures across all locations of the
company. Ambuja’s Robust Risk Mitigation System. The company has a strong and independent
in house Internal Audit (IA) department that functionally reports to the Chairman of the Audit
Committee, thereby maintaining its objectivity and independence.

The scope and authority of the IA function is defined in the Internal Audit Charter approved by
the Audit Committee. Every year, the IA department conducts an Internal Audit Risk
Assessment which serves as the basis for the preparation of the Annual Internal Audit plan. This
risk-based annual internal audit plan is duly approved by the Audit Committee. The IA
department comprises of Internal Auditors along with Subject Matter Experts (SMEs) and IT
System Audit Specialists that carry out risk-based audits across all locations, thereby enabling
the identification of areas where risk management processes may need to be strengthened.
Significant audit observations and corrective action plans are presented to the Audit Committee.

The IA department provides independent assurance to the Board, the Audit Committee, the
senior management and the regulators regarding the effectiveness of the company’s governance
and controls designed for risk mitigation to enhance the company’s compliance and control. It
assesses opportunities for improvement in business processes and follows up on the
implementation of corrective actions and improvements in these processes after they have been
reviewed by the Audit Committee. Over the years, the formal and independent evaluation of
internal controls and initiatives for remediation of deficiencies by the IA department has resulted
in a robust framework for internal controls. This formalised system of internal control and risk
management framework facilitates the effective compliance of Section 138 of the Companies
Act 2013 and relevant statutes applicable to the LafargeHolcim group.
Outlook: Expected cement growth in 2017, supported by the Government's continued focus on
housing and infrastructure development, and going forward remonetisation should result in
growth normalizing during the first quarter of the year. The announcement of interest subsidy
schemes and an interest rate cut, the recent announcement in the union budget for infrastructure
development, including the award of infrastructure status to affordable housing and the increased
budget allocation for roads, railways and irrigation will all be key drivers for cement demand.
With continuing operational excellence programs, combined with its segmented marketing and
value added special cements products and building solutions, the company is well placed to
benefit from the plans being initiated by the Government.
BIBLIOGRAPHY

http://www.ambujacement.com/Upload/PDF/ambuja-cements-limited-annual-report-2017.pdf

https://www.moneycontrol.com/financials/ambujacements/ratios/AC18

https://www.moneycontrol.com/annual-report/ambujacements/accounting-policy/AC18

https://www.goodreturns.in/company/ambuja-cements/accounting-policy.html

https://www.moneycontrol.com/annual-report/ambujacements/directors-report/AC18

https://www.goodreturns.in/company/ambuja-cements/director-report.html

https://www.moneycontrol.com/annual-report/ambujacements/auditors-report/AC18#AC18