Shree Cements profitafter tax dropped94.38 per cent.

The management is delighted.

Why?

Shree Cement LimitedAnnu

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epor

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e sh

areo

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2

The companys profit was lower as it retained profit of

Rs 2103 lacs by providing depreciation on assets as revalued

assets in the Profit and Loss Account.

In a year when most cement manufacturers complained of thinner spreads, Shree

Cement increased its post-interest profit by 34.41 percent - from 9.33 percent to

12.54 percent. Inside this annual report, we have explained how we turned one of

the most challenging months in our existence into one of the most inspiring.

Because, in a year when most businesses became less

competitive, Shree Cement reported a 12.28 percent

improvement in its return on capital employed - from

16.94 percent in 2000-01 to 19.02 percent in 2001-02.

Prompting the optimism of a considerably

stronger 2002-3 - and beyond.

We are not.

Most shareholders who find that ShreeCement reported a post tax profit of only1.47 cr. are likely to be disappointed.

ContentsCorporate description

Drivers, vision and mission

Highlights

10 minutes with the Joint MD

Enhancing value for shareholders

Management discussion and

analysis

Information technology

Risk management

Human resources development

Environment report

Community development report

Directors report

Annexure to Directors report

Five year financial highlights

15 year financial highlights

Corporate Information

Ratios and ratios analyses

Corporate governance

Shareholders information

Auditors report

Directors Profiles

Financial section

Subsidiarys Accounts

18

41

42

49

68

59

74

80

95

90

12

14

16

24

26

54

60

73

75

76

86

93

113

2[THE MUST DO COMPANY]

The company enhanced its production capacity from

20 lac tonnes per annum to 26 lac tonnes per

annum.

Since this expansion was achieved at a cost lower

than the prevailing benchmark for setting up a

greenfield project, the company protected its ability

to produce cement at one of the lowest capital costs

per tonne in India.

When the economy revives, Shree Cement will not

just be able to call more capacity into play, but at a

cost considerably lower than the prevailing industry

standard.

Resulting in more cement. And higher profits.

Shree Cement used the industrytrough to strengthen its business.

More capacity

4[THE MUST DO COMPANY]

5

At Shree, manufacturing expenses accounted for 82 per

cent of sales in 2001-02, much below the average in the

Indian cement industry.

Once again, the low cost was the result of scores of

initiatives across all levels within the company. Some

resulting in small savings. Some in big. But each primarily

driven by the belief that what was being done could be

done better.

For instance, Shrees successful substitution of imported

coal with domestically-sourced pet coke saved the

company Rs 25.55 cr in 2001-02. The replacement of

indigenous kiln bricks with an imported alternative saved

Shree Rs 3.94 cr during the financial year under review.

Cooler fans were configured to a higher capacity so that

heat could recuperate better. A better raw mix helped

Shree reduce the proportion of high cost limestone and

saved the company Rs 0.44 cr.

Shree Cement supplemented its attractively lowcapital investment per tonne with one of the lowestmanufacturing costs in the Indian cement industry.

runningcostsLower

6[THE MUST DO COMPANY]

7

In a world where fuel costs are always rising, Shree represents a

welcome change.

This reduction was the result of the companys consistent and

constructive discontent with existing practices.

Until 1999-2000, Shree imported coal from South Africa and

Indonesia. The consignment would be collected at the Kandla port

from where it would be delivered deep into Rajasthan at Beawar.

Instead of the linear strategy of looking for alternative cost-effective

sources, Shree attempted something completely lateral. It changed

the fuel source in favour of pet coke sourced from within India.

The switch was made on the following basis:

Pet coke was cheaper compared to imported coal

Pet coke possessed higher calorific value.

As a result, Shree reported a heat consumption of 694 kilocalories /

kg of clinker against the industry average of 818 kilocalories / kg of

clinker in 2001-02. Shree reduced fuel costs as a proportion of

manufacturing expenses from 21.38 per cent in 2000-01 to 18.76 per

cent in 2001-02.

In 2001-02, the companys fuel cost per tonne of cementstood at Rs 171.30, lower by Rs 27.05 than in theprevious year.

Cuttingthe fuel bill

8[THE MUST DO COMPANY]

9

The companys finance team is among the sharpest in the

business. Managing funds with prudence. And maximising

returns on surpluses. With the objective of reducing the

companys total cost of production.

Before the start of 2001-02, Shrees team set out a target

to lower the companys cost of borrowing by at least three

per cent over the previous year.

These were the various initiatives entered into by the

company:

Re-negotiation in the interest rates from 19.50 per cent

in 1998-99 to 13.50 per cent on long-term borrowings

from financial institutions, leading to net savings of

Rs 17.59 cr.

Substitution of working capital demand loans with FCNR

(B) loans at low rates of interest, resulting in a coupon rate

of 10.11 percent on FCNR (B) loans of Rs 26.49 cr, leading

to savings of Rs 0.96 cr.

Placement of commercial paper worth Rs 20 cr at 8.5

per cent per annum.

As a result, Shrees weighted average rate of interest on

term loans declined from 16.32 per cent as at 30th June,

2000 to 12.78 per cent as at 31st March, 2002. The

companys weighted average rate of interest on working

capital loans reduced from 13.55 per cent as at 30th June,

2000 to 10.61 per cent as at 31st March, 2002.

So even as business grew in 2001-02, Shrees interest

outgo declined by Rs 17.08 cr and interest cover increased

to 2.85 from 2.18 in 2000-01.

Of all the factors of production, perhaps the most powerful andironically the most neglected is the cost of finance.

Not at Shree.

Lowerfinance cost

11

Despite the prevailing recession in the economy in

2001-02, Shree reported a healthy cash flow of

Rs 46.74 cr.

Shree cement managed this resource with

responsibility and invested a part of it in value

enhancing assets.

For instance, in 2001-02, the company embarked on

the exercise to commission a captive 36 MW thermal

power project at a cost of Rs 120 cr. Shree placed an

EPC contract with Thermax Ltd. in September 2001.

Civil work commenced in October 2001. The project

is expected to be commissioned by December, 2002.

The power plant will do more than just ensure the

availability of uninterrupted power to Shrees

production facilities. It will provide quality power,

minimize the companys dependence on the state

electricity grid and indirectly reduce the losses arising

during unplanned downtime caused by unexpected

power cuts.

Shrees power plant, expected to save about Rs 30 cr

in its first full year of operations, is likely to post a

payback of less than four years and strengthen the

companys competitive position in the marketplace.

At Shree, we believe that a soundly run businessmust generate enough cash flow to strengthen thebusiness further.

Strongercompany

10

[THE MUST DO COMPANY]

13

SIZE

The company manufactures cement through the dry process in Beawar,

Rajasthan. The company possesses two plants; the first was commissioned in

1985 with a capacity of 0.6 million tonnes, the second in 1997 with an installed

capacity of 1.24 million tonnes. Following modernization and intelligent de-

bottlenecking, the two plants could produce 2.6 million tonnes in a year. This

made Shree the largest single-location manufacturer in north India. The

companys installed capacity accounted for 14.9 per cent of Rajasthans total

capacity in 2001-02. It was the sixth largest plant in the country.

EDGE

Shrees competitive advantage lay in its ability to consistently generate a

production in excess of its installed capacity. Shree reported a capacity

utilisation in excess of 100 percent for 15 consecutive years. In 2001-02,

Shree reported a capacity utilisation of 107 per cent: an achievement

considering that the plant encountered a number of shutdowns on account of

a shift in the companys feedstock from imported coal to indigenous pet coke.

The company expects to take cost-cutting into a higher league with a Rs 120

cr 36 MW power project expected to be commissioned by December 2002.

MARKETING

The companys plants were not located within the seven clusters in India

where the majority of cement manufacturers were located and where supply

exceeded demand. The companys plants were located in close proximity to

its primary marketing zone (Rajasthan, Delhi, Haryana, Punjab, Himachal

Pradesh and West Uttar Pradesh) and its raw material source. The companys

OPC cement is sold under the Shree Gold, Shree Super and Shree Cement

brands while its PPC equivalent is sold under the Shree Star brand. In 2002-

03, the company will also sell under the Shree Ultra Ash free Cement and

Shree Ultra Red Oxide Cement brands.

PRODUCTS

Shree manufactured ordinary Portland cement (grey cement) and Portland

pozzolana cement (clinker-based).

PERFORMANCE

Shree posted a turnover and cash profit of Rs 397.22 cr and Rs 49.84 cr

respectively in 2001-02. The companys market capitalisation increased to

Rs 145.10 cr during the financial year under review.

As a measure of credibility, CARE accorded the companys short-term debt

the highest rating of PR1+. The companys shares are listed on the National,

Bombay and Kolkata stock exchanges. The promoters - the Bangur family,

based in Kolkata - held 59.54 per cent of the companys equity.

Shree Cementis one of themost energyefficient andproductivecementmanufacturingcompanies inthe world.

The spirit of Shree

12

PEOPLE AS

PROGRESS

DRIVERS

Shree believes that

what is present in

the minds of

people is more

valuable than the

assets on the shop

floor. All the

companys

initiatives are

directed to

leveraging the

value of this

growing asset.

TEAMWORK

Shree leverages

effective team

working to

generate a

sustainable

improvement.

LEADERS AT

EVERY LEVEL

Shree believes in

creating leaders -

not just at the

organisational apex

but at every level,

resulting in a

strong sense of

emotional

ownership.

CULTURE OF

INNOVATION

Shree believes that

what is good can

be made better -

across the

organisation.

CUSTOMER

FOCUS

Shree is

committed to

deliver a superior

quality of cement

at attractively

affordable prices.

SHAREHOLDER

VALUE

Shree is focused

on the

enhancement of

value through a

number of

strategic and

business initiatives

that generate

larger and a better

quality of earnings.

COMMUNITY AND

ENVIRONMENT

Shrees community

concern extends

from direct

assistance to safe

and dependable

operations for its

members and the

environment.

14

DRIVERS

15

To register a strongconsumersurplusthrough asuperiorcementquality ataffordableprices.

VISION

MISSION

To sustain its reputation as the

most efficient cement

manufacturer in the world.

To strengthen realizations through

intelligent brand building.

To drive down costs through

innovative plant practices.

To increase the awarness of

superior product quality through a

realistic and convincing

communications process with

consumers.

16 This is what we

An increase in

interest cover from

2.18 in 2000-01 to

2.85 in 2001-02.

An increase in the

return on capital

employed from 16.94

per cent in 2000-01 to

19.02 in 2001-02.

An increase in the

pre-interest margin

from 17.26 per cent in

2000-01 to 19.31 per

cent in 2001-02.

A drop in the debt-equity

ratio from 1.07 in 2000-01

to 1.03 in 2001-02.

Receipt of the Best Annual

Report Award (2000-01) from

the Institute of Chartered

Accountants of India, Jaipur,

with respect to sound

corporate governance and

investor transparency.

A 46 per cent increase in the

distribution network from

492 dealers in 2000-01 to

881 in 2001-02.

A leading 15 per cent

share of the Delhi

market.

Receipt of the National Award for

Energy for the fifth consecutive

year from the Ministry of Power

for achievements in energy

conservation in the cement

sector.

A drop in sundry

debtors from

Rs 40.82 cr in 2000-

01 to Rs 30.03 cr in

2001-02.

A 34.4 per cent

increase in gross profit

as a per cent of sales

from 9.33 per cent in

2000-01 to 12.54 per

cent in 2001-2002.

17achieved in 2001-02

A 18x2 MW power

project implementation

at a cost of Rs 120 cr.

Receipt of NCBMs Best Electrical

Energy Performance and Best

Thermal Energy Performance

Award for the year 2000-01 from

the Ministry of Commerce and

Industry, Government of India.

Change in the

accounting year from

June to March.

Successful launch of the

Shree Ultra Ash Free and

Shree Ultra Red Oxide

brands.

20

We accelerated our

10 MINUTES WITH THE JMD

What is the big take-home for Shree Cementat the end of 2001-02?

Every organization builds up a series of habits and

assumptions, which become sacrosanct over time and

begin to represent the character of the organisation.

Depending on the nature of the practices and the

evolving environment around us, this character can be a

prison or a playground.

When we looked within a couple of years ago, we began

to see the first signs of a divergence between what we

were and what the marketplace was becoming. We

were production-obsessed; the marketplace was

increasingly consumer-led. We recognized that we would

have to change to enhance value for our owners.

Change! This is exactly what we commenced in 2000-01

and accelerated in 2001-02. This transition was not

limited, it was sweeping. We analysed every process.

We questioned every practice. We unlearnt. We learnt.

As a result, we have created a new company. We have

inducted professionals with fresh thinking. We have

given them adequate operational freedom to re-orient our

methods with the best practices used by the best

19

re-inventionin 2001-02

Mr Hari Mohan Bangur, joint managing director, analyses the companys improved performance

30

companies within India and abroad. We have

restructured the marketing function completely. And in

the process beaten the economic slowdown with a

better performance.

To what extent did this change reflect acrossthe company?

Most importantly, the change was brought in by our

people across all management tiers and functions.

Without their support for reform, the change would have

been restricted to just a few managers or at best, just

one department. As a result, intra-departmental

brainstorming is now a regular feature within Shree with

a clear action schedule. The change has transpired with

speed. Let me give you two instances: despite a strong

competitive pressure we raised our market share across

all the primary markets that we served. Secondly, a

number of cost reduction initiatives were driven not by

the senior engineers but by their juniors and in some

cases, even by people who had no functional

responsibilities across certain aspects of our working. I

could not have visualized this to happen as fast when we

embarked on the process of change more than a year

ago.

Did this change reflect in the numbers? Immediately. At the start of 2001-02, we targeted an

output of 26 lac tonnes, a cost reduction by 10 per cent

driven through a greater use of pet-coke, a stronger retail

offtake and sales realization at par with the industry

average. Even as the economic slowdown persisted, it is

remarkable that Shree met these goals successfully.

Shree Cement posted a higher cash profit by 28 per cent

in 2001-02 than in the previous year on an annualized

basis. This was absolutely commendable: this transpired

when the cement industry continued to be affected by a

slowdown in the economy. Besides, Shree Cement could

not produce enough cement because it had taken a

shutdown during the early part of the financial year under

review. And thirdly, we lost a little production during the

switch over from imported coal to pet coke during the

course of the year.

What reasons would you ascribe for thecompanys better performance?

The big thing that we did in 2001-02 was to

progressively change our focus from a production-centric

organization into a marketing-centric one. Let me give

you an instance of the extent to which we have

changed: for a number of years, we considered

manufacturing to be our core competence. Since this

was so, it made sense for us to sell as much as possible

to as few people as possible. So we sold primarily to

institutions, the people who buy in bulk to build bridges,

dams, airports and residential complexes. This relieved

us of the headache to sell in small quantities across

Indias retail markets.

20

WE HAVE CREATED A NEWCOMPANY. AND IN THE PROCESS

BEATENTHE ECONOMIC SLOWDOWN WITH

A BETTER PERFORMANCE.

Starting from 2000-01 and even more so in 2001-02, we

re-configured our focus. We conceded that while selling

to institutions was perhaps the easier option, it did not

give us enough room in which to strengthen our brand. It

did not give enough reason to expand our dealer

network. It did not give us enough scope to raise our

realizations.

The result was a complete U-turn in our corporate

strategy: we now began to focus more aggressively on

the retail segment than ever before. We appointed more

dealers in one year than we did in the 16 years of our

existence. We restructured our marketing team to reach

out to dealers quicker and service them better. We

penetrated our primary market more intensively than we

had ever done earlier. We re-invented the Shree Cement

logo. Thanks to these initiatives, we evolved Shree

Cement from a commodity into a brand. The result was

reflected in the numbers: retail offtake as a percentage

of total sales increased from 50 per cent in 2000-01 to

about 60 per cent in 2001-02.

How important was the brand building?Let me state that positioning Shree in the mind of the

marketplace is an exercise that will continue for a number

of years. The change may be subtle but its impact more

pronounced. For instance, thanks to a more favourable

impression, Shree immediately graduated within the

various price bands in the marketplace. In the Jaipur

market, we added Rs 4 per bag of cement in realizations

and moved within Rs 2 per bag of the market leader; in

Punjab, we added Rs 2.5 per bag, this happened likewise

in Haryana and West UP as well. Over the coming years,

these price increments will have a strong effect on the

bottomline.

What other reasons were responsible forShrees improved performance?

We continued to do what we had always done well:

reduce costs. I can sum up the mood of the organization

with an interesting reference: when the mile was first

run under four minutes in the early Fifties, the

achievement was considered awe-inspiring. But within

the next year, 37 runners had done the same and a

number of them ran the distance in less than it took

Bannister during his record-breaking run. There is a

parallel with Shree: after we had cut costs upto a point,

the inspiration enabled us to cut costs even more

aggressively thereafter. The result is showing in our

numbers: all our costs prior to the interest and

depreciation stage dropped from 85 per cent in 1999-

2000 to 82 per cent in 2001-02 of sales, despite an

increase in all costs.

21

THE BIG THING THAT WE DID WASTO PROGRESSIVELY

CHANGEOUR FOCUS FROM A PRODUCTION-CENTRIC ORGANIZATION INTO A

MARKETING-CENTRIC ONE.

THE TARGETS THAT SHREE CEMENTHAS SET FOR 2002-3: A 10 PER CENT

HIGHERPRODUCTION AND A 10 PER CENT

LOWER COST STRUCTURE. HIGHER REALIZATIONS PER BAG.

AND AN INCREASE IN THEPROPORTION OF THE RETAIL

OFFTAKE TO 65 PER CENT.

23

In what way did you strengthen theorganization for the long-term through cost-cutting?

Continuing our switch in feedstock was a momentous

decision in the history of our company. In doing so, we

were taking a risk of upsetting a stable production

process, we were risking losing significant output, we

were risking the bottomline of the company and we

were risking our position in the marketplace. The

experiment could well have failed and we would have

had to revert to the erstwhile process with little to show

to our shareholders. If we pulled it off in the face of

formidable odds - we became the only company in India

to do so - it was because of the resilience of our

production team. They just wouldnt give up. But for

them, the switch to pet coke would have gone down as

a tentative experiment in the annals of the company.

To what extent did it succeed?Our capacity utilisation might not have increased

significantly last year, but our profitability has. This

improvement can in a large part be attributed to the

increased use of pet coke. Nearly 90 per cent of the

cement produced during the year was based on the pet

coke feedstock. The increasing use of pet coke during

the course of the year transformed our bottomline in

2001-02. My estimate is that in a full years working

based on this new feedstock, the company should

register a saving of Rs 30 cr. The lower cost of

production will give our marketing team just the

ammunition it requires to sell the increased output in the

marketplace.

Did the company raise its installed capacity?We did. We added 0.6 million tonnes to our installed

capacity at a substantially lower cost than what it would

take to go greenfield. The argument that we have faced

is: why did we not set up a new plant altogether. We

didnt for a few good reasons: if we had set up a

greenfield plant at that stage, it would have distracted

our focus from the marketplace to the manufacturing. It

would have set our captive power plant back, it would

have postponed our drop in production costs by a couple

of years and it would have taken away the anticipated

surplus that we can now invest and create a virtuous

cycle of growth. Besides, a strong bottomline and

balance sheet can now support an inorganic expansion

should such an opportunity present itself.

What targets has Shree Cement set for 2002-03

A 10 per cent higher production and a 10 per cent lower

costs structure. Higher realizations per bag. And an

increase in the proportion of the retail offtake to 65 per

cent. We expect to sustain the organisations momentum

thanks to the Governments effort to kick start

infrastructure, low interest rates on housing, a

consolidation in cement prices and a rise in cement offtake

in the country. We definitely see better days ahead.

22

24

Shree Cement's improved performance is reflected in a

higher return on employed capital, an improved Total

Shareholder Return and an increase in its market

capitalisation.

Total Shareholder Return (TSR)

Shree Cement's investors enjoyed a Total shareholder

return of 38.47 per cent in the last financial period

compared with the BSE-Sensex return of 1.85 per cent

during the same period, an endorsement of Shree's

strategies to grow its earnings over the long-term.

Shree also registered a growth in TSR (in per cent terms)

by 41 per cent. It increased from 27.25 per cent in 2000-01

to 38.47 per cent in 2001-02.

Total shareholder return reflects the gain delivered to

shareholders by the company directly and indirectly:

EnhancingVALUE

for shareholders

25

Shree's shareholders enjoyed a 11.85 per cent average

TSR return across three years ending 31.03.2002,

compared with 2.08 per cent in the three years ending

30.06.2000 and a negative 8.94 per cent in the three years

ending 30.06.1999. Shree's three-year TSR% was higher

than the returns from the BSE-Sensex during the same

period.

Return on capital employedReturn on capital increased from 16.94 per cent in 2000-01

to 19.02 per cent in 2001-02.

Market capitalisation

In 2001-02, Shree Cement posted a 32.43 per cent

increase in its market capitalisation as compared to a 27.59

per cent growth recorded in the previous financial year

indicating an improved perception.

directly in the form of the dividend received

by them and indirectly in the form of capital

appreciation registered by the stock during

the financial year under review. TSR is

calculated by deducting the opening market

capitalisation from the closing market

capitalisation, and adding the dividend paid.

It is the gain expressed as a percentage of

the opening market capitalisation.

Annual TSR

Shree Cement 1998-99 1999-2000 2000-01 2001-02

Opening price as on 1st July 15.75 32.20 25.50 30.80

Closing price as on 30th June/ 31st March 31.90 24.65 31.45 41.65

Difference 16.15 -7.55 5.95 10.85

Add: Dividend - - 1.00 1.00

TSR 16.15 -7.55 6.95 11.85

TSR% 102.54 -23.45 27.25 38.47

Market return % 28.16 14.58 -28.65 1.85

Three - Year TSR %

1998-99 1999-2000 2000-01 2001-02

Price as on 1st July (three years earlier) 43.60 23.20 15.75 32.20

Price as on 30th June / 31st March 31.90 24.65 31.45 41.65

Difference 11.70 1.45 15.70 9.45

Add: Dividend (cumulative) 1.00 2.00

TSR 11.70 1.45 16.70 11.45

TSR % 26.83 6.25 106.03 35.56

AVG. TSR% 8.94 2.08 35.34 11.85

BSE-Sensex return % 3.43 3.47 2.33 -5.44

-40

-20

0

20

40

60

80

100

120

1998-99

Market return %TSR %

1999-2000 2000-01 2001-02

26

ManagementDISCUSSION

and analysis

27

Nature of businessShree Cement Limited is engaged in the manufacture

of cement through the dry process route in North

India. The company possesses two plants in Beawar,

Rajasthan. The state was the largest cement producing

state in India in 2001-02. Shree Cement manufactures

cement of two varieties - ordinary Portland cement

(grey cement) and Portland pozzolana cement (clinker-

based). The company also occasionally markets clinker

to cement companies.

2001-02 vs. 2000-01

In 2001-02, Shree Cement recorded a turnover of

Rs 397.22 cr as against Rs 554.60 cr in 2000-01. This

was because 2001-02 comprised 9 working months

sans the peak period of April-June (July to March) as

compared to 12 months covered in the previous

financial year. In 2001-02, Shree Cement posted a 28

per cent increase in its cash profit as compared to the

previous year on an annualized basis.

Objectives, 2001-02 Increase installed capacity from 2 million tonnes to

2.6 million tonnes, increase capacity utilisation, reduce

manufacturing costs by 2 per cent and reduce

downtime by 5 per cent over 2000-01.

Make funds available to finance business growth at

the lowest cost. Raise finance to fund the expansion

and backward integration. To maintain cash flow

equilibrium at the lowest possible cost. Work with

credit agencies for the rating of instruments to reduce

coupon rates on loans. Interact with the investing

community to enhance the companys perception.

Maintain a prudent debt-equity ratio to protect the

capacity to repay and mobilise fresh loans at low rates.

Maintain raw material cost as a percentage of sales,

inspite of rising prices and strengthen the MIS to

facilitate informed decision-making.

Initiatives, 2001-02 Thanks to a continuous de-bottlenecking, upgradation

and modernization, installed capacity increased by 0.6

million tonnes in 2001-02. Production increased by

1 per cent (annualized) inspite of stoppages in process,

the power factor increased from 0.95 to 0.99, power

costs reduced 11 per cent while fuel costs dropped by

5 per cent.

Through intelligent re-negotiation, the company

achieved a reduction in the average cost of borrowings

for term and working capital loans. The company

substituted working capital demand loans with FCNR

(B) loans carrying low rates of interest. It placed

commercial paper worth Rs 20 cr. It syndicated a loan

of Rs 85 cr for its power project from commercial

banks at PLR. Working capital limits increased from Rs

59 cr to Rs 65 cr to support a higher volume of

business during the year.

28

Besides, the company finalised financial

statements by the 12th of the ensuing month and

the profit and loss account by the 9th of the ensuing

month (compared to the 13th of every month in the

previous year). For the first time in the companys

history, the six monthly financial results were audited

within a fortnight and submitted to the Board of

Directors. The transit period for funds from one bank

to another reduced from 1.51 days in 2000-01 to 1.26

days in 2001-02. Surplus funds were not idled for

even a day but invested in safe financial instruments.

Through an early remuneration of vendors the

company availed of cash discounts of Rs 7.94 lacs.

Ernst and Young evaluated the accounting systems

of the company.

Raw material costs increased marginally from 9.04

per cent of sales in 2000-01 to 9.63 per cent in 2001-

02 through a stronger negotiation process with

vendors. This was achieved inspite of an increase in

prices.

Rationale for presenceThe management of Shree Cement entered the

business of cement in the mid-Eighties on the basis

of the growth opportunities for housing and

infrastructure in India.

Large and growing marketThe Indian cement industry is the second largest

producer and the third largest consumer of cement in

the world. According to a US geographical survey,

the top four cement producing countries in 2001

were China, India, US and Japan.

Fast growing The demand for cement in India has grown at nine

per cent per annum over the last five years, higher

than Chinas growth rate of five per cent during the

period. Interestingly, cement demand has been -14

per cent, 3 per cent and 1 per cent in Japan, USA

and China over the last three years while it has been

much higher in India thanks to the under-penetration

and the increasing focus on infrastructure creation.

INDIAS THREE YEAR GROWTH

Particulars 1999 2000 2001 2002

Capacity 105 109 114 130

Growth % 8 4 5 13

Demand 80 92 90 99

Growth % 8 15 2 10

Capacity Utilisation% 78 87 82 79

Source: CMA

Industry growth

The Indian cement industry grew 9.7 per cent in

2001-02 compared to -2 per cent in 2000-01. In 2001-

02, the Indian cement industry produced 102.40

million tonnes against 93.61 million tonnes in

2000-01, an 9.4 per cent increase inspired by a

stronger government focus on housing and

infrastructure, an excellent monsoon, a positive

credit cycle and higher disposable income.

SizeIndia has 124 large cement plants owned by 57

companies. In 2001-02, the total installed capacity for

cement manufacture stood at 135.03 million tonnes,

11.10 per cent higher than in 2000-01. It is expected

that a slower capacity addition will transpire over the

next three years - not more than 15 million tonnes -

in view of weak prices and poor profits. This could

lead to deficit for cement in the country at that time.

(million tonnes)

29

Definition of regions:

NORTH: Punjab, Delhi, Haryana, Himachal Pradesh, Rajasthan, Chandigarh, J&K, West Uttar Pradesh and northern parts of Madhya Pradesh

WEST: Maharashtra and Gujarat

SOUTH: Tamil Nadu, Andhra Pradesh, Karnataka and Kerala

EAST: Bihar, Orissa, West Bengal, Assam, Meghalaya and eastern parts of Madhya Pradesh.

CENTRAL: Uttar Pradesh and Madhya Pradesh.

THE INDIAN CEMENT INDUSTRY

GREW9 PER CENT IN 2001-02 COMPARED

TO -2 PER CENT IN 2000-01.

*figures are based on a 9 per cent growth rate

(million tonnes)

E E E

Region wise consumption / production

South India recorded the highest production across all regions in India - 29.88 million tonnes in 2001-02 compared

to 27.32 million tonnes in 2000-01, accounting for almost 29.18 per cent of the countrys offtake. North emerged

second with an offtake of 21.94 million tonnes in 2001-02 or 21.43 per cent of the Indian market. The Northern

region posted the highest capacity utilization.

2001-02 2000-01

Installed Production CU % % Share YOY % Installed Production CU % % Share YOY %

capacity capacity

North 23.40 21.94 93.76 21.43 12.46 21.17 19.51 92.14 20.88 1.62

South 42.91 29.88 69.63 29.18 9.38 33.43 27.32 81.71 29.24 5.48

East 21.22 16.67 78.56 16.28 9.91 19.85 15.17 76.41 16.23 145.42

West 21.89 17.23 78.71 16.83 8.93 20.07 15.82 78.79 16.93 4.69

Centre 20.48 16.68 81.45 16.29 6.94 19.16 15.61 81.50 16.71 -34.88

Total 129.90 102.40 78.83 100.00 9.61 113.68 93.42 82.18 100.00 -0.62

DEMAND-SUPPLY EQUATION*

2001-02 2002-03 2003-04 2004-05

Domestic demand 99.00 107.90 117.60 128.20

Domestic supply (net of export) 99.03 109.00 117.00 125.00

Net surplus/ (deficit) 0.03 1.10 (0.60) (3.20)

capacity & production figure are in million tonnes)

Section Unit I Unit II

Guaranteed Best Achievement Guaranteed Best Achievement

Raw Mill 210 TPH 278 TPH (Day) 300 TPH 444 TPH (Day)

244 TPH (Month) 387 TPH (Month)

Kiln 2200 TPD 4073 TPD (Day) 3700 TPD 5610 TPD (Day)

3307 TPD (Month) 4614 TPD (Month)

Cement Mill 125 TPH 188 TPH (Day) 210 TPH 361 TPH (Day)

149 TPH (Month) 277 TPH (Month)

TOTAL PRODUCTION

Year 96-97 97-98 98-99 99-00 00-01 01-02 (9 months)

Clinker Production 1.254 1.670 1.945 2.285 2.113 1.625

Cement Production 1.185 1.726 2.044 2.313 2.383 1.806

(In million tonnes)

Region wise growthGROWTH % IN CEMENT CONSUMPTION

Northern region % change Punjab 19Rajasthan 10Delhi 10Himachal Pradesh 16Haryana 14Total northern region 16Western regionGujarat 18Maharashtra 1Total western region 6Eastern regionBihar 5Orissa 11West Bengal 25Total eastern region 19Southern regionAndhra Pradesh 15Tamil Nadu 2Karnataka 24Kerala 2Total southern region 9All India 10

Industry characteristics Freight accounts for 15 per cent of the delivered cost

of cement. As a result, manufacturer attempt to

maximize their sales in regions close to the plants.

Rail is a preferred mode of transport over reasonable

distances. As a result, cement is sold within regions

or clusters only. Even though cement is sold within

regional markets, a glut in one region adversely

affects the price economics in the adjacent markets.

ProductionShree reported a production of 18.06 lac tonnes

during 2001-02, a marginal increase of 1 per cent on

an annualized basis over the previous year. This

corresponded to a capacity utilization of 107 per cent.

CAPACITY UTILISATION

Year 96-97 97-98 98-99 99-00 00-01 01-02

CU(%) 129 118 111 116 119 107

Source : CMA

ACHIEVEMENTS

31

SHREE FOCUSED ON RAW MATERIAL

QUALITYIMPROVEMENT. THE COMPANY USED

ROCK BREAKER AND COMPUTERIZED

MINING SOFTWARE

Raw material cost as a per cent of turnover

98-9997-98 99-2000 00-01 01-02

10.00

8.75

7.50

6.25

0.00

Raw materials managementCement raw materials comprise limestone, coal,

gypsum, clay, iron ore and fly ash. At Shree, raw

materials constituted almost 23 per cent of the

companys cost of production excluding interest and

depreciation. Raw material cost as a percentage of

sales increased from 9.04 per cent in 2000-01 to 9.63

in 2001-02. Despite a 10 per cent increase in raw

material prices, this marginal increase was attributed

to aggressive negotiations with vendors.

As a result, Shrees cost of high grade limestone

reduced from Rs. 223 per tonne to Rs. 214 per

tonne. The transportation of crushed limestone to the

plant by ropeways and conveyor belts lowered the

transportation cost. The purchase of marbles in a

semi-processed form at the companys stock yard

resulted in Shree incurring a lower cost.

In addition to a reduction in cost, Shree focused on

raw material quality improvement. The company

used rock breaker and computerized mining software

to improve the quality of limestone, raising yields in

the process. The company prudently used limestone

from other mines keeping in mind the blended

content of calcium carbonate to arrive at the optimal

content and yield.

RAW MATERIAL COST

Particulars (Rs. cr) 97-98 98-99 99-00 00-01 01-02

Turnover 355.42 442.14 484.56 554.60 397.22

Raw Material Cost 28.83 40.50 46.47 50.14 38.26

RMC as a %

of Turnover 8.11 9.16 9.59 9.04 9.63

QualityThanks to an improved quality of cement, among

other factors, the company maintained its realisations

inspite of a pressure on prices. The quality and

strength of 43 grade and 53 grade was actually more

than the normal standards of the 53 grade of

cement, resulting in a stronger value for buyers.

Shree achieved a consistent production of quality

cement through the use of international processes

and practices. Some of the processes included:

sampling of raw material and the intermediate

product for purity on receipt, before stacking, before

being fed to the hopper, prior to grinding in the raw

mill, before being delivered to the CF silo for

blending, before the raw mix was taken to the kiln

for burning, from the silo before going into the kiln

every alternate hour and before the clinker was

delivered to the cement mill. The end product was

tested for compressive strength, soundness, setting

time and fineness.

32

SHREES QUALITY

BIS specifications Shree qualityFineness (Mt sq./Kg) 225 M2 377SoundnessLe Chatelier expansion (mm) Max. 10 1.00Auto-Clave expansion (%) Max. 0.8 0.089Setting Time (mins)Initial Min. 30 122Final Max. 600 180

Compressive Strength (Mpa)3 Days Min. 27 417 Days Min. 37 5428 Days Min. 53 66

60

Housing GovernmentIndustrial &Infrastructure

20

20

At Shree, the quality control team works closely with

the marketing team and the technical support group,

strengthening the product in line with consumer

feedback. Shrees quality team provides regular

certification, testifying the products fineness,

soundness and strength when compared with BIS

specifications, helping reinforce customer

confidence.

Demand drivers

In India, the per capita consumption of cement

stood at a modest 99 kg against the world average of

263 kgs. With some triggers from the government,

the cement manufacturers are confident of boosting

per capita consumption of cement towards the global

average.

Housing accounted for almost 60 per cent of the

demand for cement in India. Official estimates

indicated a shortfall of 25 million houses in the

country whereas unofficial estimates indicated a

shortage of 35 million dwelling units. Demand is

expected to chase supply over the coming decade.

Year 97-98 98-99 99-00 00-01 01-02

Total no. of

houses built (mn) 3.0 3.2 3.6 4.3 4.4

Growth (%) 8.3 8.4 9.9 21.3 1.2

Housing growth is expected at 11.3 per cent

compounded over the next three years on the basis

of lower interest rates, lower property prices,

government schemes like the Ambedkar Awas Yojna,

tax shelters for housing construction companies, tax

incentive schemes on housing loan repayments and

the increasing trend towards nuclear families. The

government recently permitted up to 100% loans for

the development of integrated townships including

33

THE INDIAN CEMENT INDUSTRY IS

ESTIMATED TO

GROWBY 9 PER CENT THIS FISCAL

housing, commercial premises, hotels, resorts and

urban infrastructure facilities such as roads, bridges

and mass rapid transport systems. As a result, the

Indian cement industry is estimated to grow by 9 per

cent this fiscal.

Investments in road building are expected to

generate a cement demand of around five million

tonnes per annum till 2003 and around six million

tonnes from 2003-2007, according to industry

sources. It is estimated that even if cement concrete

roads comprised 25 per cent of the total

infrastructure projects, the incremental demand from

the concretisation of roads is likely to be

approximately 10 million tonnes (shown below in a

tabular form).

Cement demand from the Golden Quadrilateral

project and NEWS corridor

Cement demand Golden North East quadrilateral West

South corridor

Total road length (km) 5846 7300

Volume of concrete per km (mt) 7500 7500

Cement per km of roads (tonne) 2625 2625

Total cement requirement 4 6

Project Four laned Under approved for Balance length Total implementation award for civil length

Golden quadrilateral (kms) 1,063 3,977 713 93 5,846

North South West East corridor (kms) 717 644 0 5,939 7,300

Source: NHAI

* A World Bank study indicated that construction

activity in India offers the highest economic rate of

return, given the cost competitiveness of the Indian

labour. For instance, cement demand grew at 7-8 per

cent CAGR over the last decade while the economy

grew at 5-7 per cent.

SEGMENT WISE CEMENT DEMAND (Million tonne)

2001-02 2004-05 (E) CAGR %

Housing 45.8 63.1 11.3

As a % of total

new construction 62 66.7

Industry and infrastructure 13.3 16.7 7.9

As a % of total

new construction 18 17.7

Government 14.8 14.8

As a % of total

new construction 20 15.7

Total new construction 73.9 94.6 8.6

Repairs and maintenance 16.1 20.9 8.7

Total cement demand 90.0 115.5 8.6

34

TOTAL INCOMERS 397.53 CR

INCOME FROMSALES

RS 397.22 CR

RETAIL SALESRS 238.80 CR

PUNJAB

RAJASTHAN

HARYANA

DELHI

U.P &UTTARANCHAL

RETAIL SALES 58 %

TOTAL SALES(IN QUANTITY)

INSTITUTIONALSALES 42 %

RETAIL 72 % OFWEST U.P SALES

RETAIL 47 % OFDELHI SALES

RETAIL 51 % OFHARYANA SALES

RETAIL 69 % OFRAJASTHAN SALES

RETAIL 58 % OFPUNJAB SALES

INSTITUTIONALSALES

RS 158.42 CR

OTHER INCOMERS 0.31 CR

INSTITUTIONAL 42 %OF PUNJAB SALES

INSTITUTIONAL 31 % OF

RAJASTHAN SALES

INSTITUTIONAL 49 % OF HARYANA

SALES

INSTITUTIONAL 53 % OF

DELHI SALES

INSTITUTIONAL 28 % OF

WEST UP SALES

FinanceThe performance of the company in the financial year

2001-02 is not strictly comparable with that in the

previous accounting year since the former comprised

nine months of working (July 2001-March 2002) and

the latter covered 12 months (July to June).

Income accounting methodThe accounts presented in the report are based on

the accrual system of accounting - revenue was

recognised as income as soon as the transaction was

recorded in the companys books even though the

disbursement transpired later. The format of

accounting corresponded to the Generally Accepted

Accounting Principles practices in India. Wherever

the treatment of accounts required an interpretation,

the company preferred to be cautious and

conservative.

Conservative accounting policies The company wrote off Rs 1.55 cr as doubtful

35

PUNJAB EMERGED AS THE MOST

PROFITABLEMARKET FOR THE COMPANY

debts despite the fact that these debtors are under

legal cases and the dues may be paid following a

settlement.

According to the Indian Accounting Standard - 22,

the company provided its net deferred tax liabilities

up to June 2001 of Rs 49.54 cr out of the general

reserves and Rs 2.14 cr out of the profit and loss.

The company provided for depreciation on revalued

assets in the profit and loss account. As a result, the

profit for the period was lower by Rs 21.03 cr.

The company adopted a conservative policy with

regard to its investments. In 2001-02, the company,

adopted the Indian accounting standard - 13, wherein

investments were stated at the cost of acquisition or

the market price, whichever was lower. As a result,

the companys profits were lower by Rs 4.66 cr. In

the past, long-term investments were stated at the

cost of acquisition.

The company wrote off the one-time premium of

Rs 2.85 cr paid to banks and financial institutions,

which enabled the company to avail of a reduction in

interest rates over a period of four years.

The entire advertisement and sales promotion

expenditure was completely written off in 2001-02

even though their benefits are likely to accrue over

the foreseeable future.

Revenue analysisTotal income was Rs 397.53 cr in 2001-02 compared

to Rs 556.41 cr in 2000-01.

State wise/ market wise revenue analysis

In 2001-02, Punjab emerged as the most profitable

market for the company with average net realisations

of Rs 1328 per tonne. Haryana was the next with

average net realisations Rs 1277 per tonne.

Capital employedThe companys capital employed decreased from

Rs 731.18 cr in 2000-01 to Rs 654.76 cr in 2001-02, a

10.45 per cent decline. This was on account of a

number of reasons. On the liabilities side, the

companys reserves decreased from Rs 362.53 cr in

2000-01 to Rs 310.04 cr: a drop of 14.48 per cent

due to provision of deferred tax. The companys

36

secured loans declined from Rs 306.48 cr in 2000-01

to Rs 272.61 cr, a decrease of 11.05 per cent over

the previous financial year. This decrease in secured

loans was on account of the repayment of long-term

loans worth Rs 41.64 cr in the current financial year.

On the assets side, investments decreased from

Rs 3.60 cr in 2000-01 to Rs 1.25 cr, a decrease of

65.28 per cent over the previous financial year.

Debtors decreased by 26.43 per cent from Rs 40.82

cr in 2000-01 to Rs 30.03 cr. The companys loans

and advances decreased from Rs 65.84 cr to

Rs 64.23 cr in 2001-02, a reduction of 2.45 per cent.

The companys net current assets decreased to

Rs 77.97cr from Rs 99.42 cr in 2000-01, a declined of

21.58 per cent.

Capital structureThe companys capital structure of Rs 49.84 cr

comprised equity and preference shares. The former

accounted for Rs 34.84 cr while the latter accounted

for Rs 15 cr. Of the total preference shares, 7.5 lac

cumulative redeemable preference shares of Rs 100

each were issued at a coupon rate of 7.5 per cent

and the rest were allotted at a coupon rate of 9 per

cent.

ReservesIn 2001-02, reserves stood at Rs 310.04 cr as

compared to Rs 362.53 cr in 2000-01, a decrease of

14.48 per cent over the previous financial year mainly

due to the provision for deferred tax, a non-cash

charge. The revaluation reserve decreased from Rs

165.30 cr in 2000-01 to Rs 144.27 cr in 2001-02, on

account of the provision of depreciation, a reduction

in debenture redemption reserve from Rs 38.30 cr in

2000-01 to Rs 18.87 cr in 2001-02, a decrease by Rs

19.44 cr due to the redemption of debentures and a

reduction in the general reserves from Rs 125 cr in

2000-01 to Rs 85.56 cr, a decrease of 31.55 per cent

over the previous financial year, due to the provision

of deferred tax, a non-cash charge, in compliance

with AS-22.

In the current financial year, Rs 21.03 cr was

transferred to a special reserve from the revaluation

reserves created by the Board, to be used for any

purpose as per the discretion of the Board. The profit

and loss balance stood at Rs 9.59 cr in 2001-02 as

compared to Rs 3.20 cr in 2000-01.

LoansIn 2001-02, loans including working capital loans from

banks declined from Rs 318.82 cr to

Rs 294.88 cr following repayment. In 2001-02, the

company repaid long term loans worth Rs 41.64 cr.

The company borrowed for the long-term from

financial institutions to fund fresh assets, expansion,

de-bottlenecking, modernisation and the upgradation

of equipment. The company borrowed for the short-

term to finance working capital requirements.

It has been the companys endeavour to raise funds

at the lowest possible cost. The company capitalised

on a lower cost economy and re-negotiated interest

rates for long term loans at 13.5 per cent, raised

fresh loans at 11.30 per cent and working capital

loans at sub PLR rates (10.86 per cent). As a result,

the companys average rate of borrowing stood at

12.31 per cent. Debt-equity ratio stood at 1.03 in

2001-02 as against 1.07 in 2000-01. The company

does not expect to exceed a debt-equity ratio of 1.00

even after raising Rs 85 cr from debt for the power

project (details elsewhere in the report).

Interest Interest outflow was Rs 26.93 cr compared to

Rs 44.01 cr in 2000-01. The average cost of funds

dropped from 18.60 per cent in December 1998 to

12.63 per cent in March 2002. Interest outflow as a

proportion of the turnover dropped from 7.93 per

cent in 2000-01 to 6.78 per cent in 2001-02. Interest

37

DEBT-EQUITY RATIO

DROPPEDFROM 1.07 IN 2000-01 TO 1.03 IN

2001-02.

outgo on term loans/debentures was Rs 28.05 cr in

2001-02 as against Rs 39.30 cr in 2000-01, a

decrease of 4.8 per cent on an annualised basis.

This interest outflow included a one-time payment of

Rs 2.85 cr to financial institutions in lieu of a

reduction in the interest rate, the benefit for which

will accrue over four years. Had the company written-

off this amount over the period of loan tenure, the

margins would have been higher.

REDUCTION IN THE COST OF FUNDS (%)

Period Term loan Working capital Total cost

December 1998 18.93 16.30 18.60

June 1999 17.43 14.81 17.02

December 1999 17.10 14.32 16.50

June 2000 16.32 13.55 15.72

December 2000 16.02 13.39 15.44

June 2001 13.50 13.01 13.41

December 2001 13.18 11.95 13.00

March 2002 12.78 10.61 12.31

RE-NEGOTIATED INTEREST RATES

Institution Loan type Loan Interest rate Interest rate Gross savings Premium Net

amount before after on interest paid saving

Rs/cr restructuring restructuring (Rs) Rs/cr Rs/cr

IDBI Corporate loan 96.42 16.50 % 13.50% 6.15 2.51 3.64

NIA Overrun NCDs 0.35 17.50 % 13.50% 0.02 0.01 0.01

OIC Overrun NCDs 0.20 17.50% 13.50% 0.012 0.005 0.007

NIC Overrun NCDs 0.20 17.50% 13.50% 0.012 0.005 0.007

UII Overrun NCDs 0.27 17.50% 13.50% 0.012 0.005 0.007

LIC Project loan 9.34 16.50% 13.50% 0.58 0.24 0.34

GIC Project loan 1.09 16.50% 13.50% 0.07 0.023 0.047

NIC Project loan 0.65 16.50% 13.50% 0.04 0.02 0.02

NIA Project loan 1.02 16.50% 13.50% 0.06 0.02 0.04

38

Capital expenditureThe company invested Rs 42.17 cr in capex in 2001-

02, of which Rs 19.72 cr was on account of 36 MW

power project and the balance towards the

completion of the expansion from 2.0 million tpa to

2.6 million tpa.

The pet coke project was funded with a Rs 26 cr

ICICI loan, repayable over six years. Since the project

was approved by the World Bank under the Pollution

Prevention Scheme, the company enjoyed an

interest rate subsidy of 1.50 per cent that will save

Rs 1.71 cr over the period of the loan.

Loans and advancesLoans and advances stood at Rs 64.23 cr in 2001-02

as compared to Rs 65.84 cr in 2000-01, a decrease

of 2.5 per cent. Loans and advances constituted 45.6

per cent of the total current assets in 2001-02. The

decrease in loans and advances was primarily on

account of a reduction in inter-corporate deposits and

short-term deposits in mutual funds. Nearly 37 per

cent of the total loans and advances comprised

short-term deposits with mutual funds worth Rs

23.63 cr.

Gross block In 2001-02, the companys gross block increased by

9.2 per cent to Rs 844.59 cr, compared to Rs 773.63

cr in 2000-01, indicating the companys continuous

investments in assets. The increase in gross block

was on account of the installation of new equipment,

plant and machinery as well as the replacement and

modification of existing equipment to increase the

companys installed capacity.

The companys accumulated depreciation of Rs

249.93 cr in 2001-02 constituted 29.59 per cent of

the companys gross block. The companys capital

work-in-progress stood at Rs 30.29 cr in 2001-02

compared to Rs 59.07 cr in 2000-01.

The companys turnover-to- assets ratio was 0.85x in

2001-02, reflecting optimum sweating of fixed

assets. The companys gross block to capital

employed stood at 1.22 at the end of the financial

year under review indicating that a high per cent of

capital expenditure was used in productive assets.

Depreciation Shree made a depreciation provision of Rs 43.13 cr in

2001-02 (9 months) as against Rs 53.73 cr in 2000-01

(12 months). Total accumulated depreciation stood at

Rs 249.93 cr in 2001-02 compared to Rs 207.14 cr in

2000-01.

The company provided depreciation on a straight-line

basis as per the rates specified in schedule XIV of

the Companies Act 1956. Depreciation in 2002-03 is

expected to increase following the commissioning of

the captive power plant. The increased depreciation

is expected to provide the company with a significant

tax shield.

InvestmentsIn 2001-02, the company provided diminution in the

market value of investments in the accounts

(mentioned elsewhere in the annual report). Shrees

investments stood at Rs 1.25 cr in 2001-02,

compared to Rs 3.60 cr in 2000-01, a decrease of

65.24 per cent. The company invests short-term

surpluses in mutual funds. These funds are liquidated

when required to directly fund the business. [The

companys investment policy has already been

discussed under surplus management elsewhere in

the annual report].

Working capital outlayIn the cement business where the production and

marketing cycle times can be long, working capital

funds a number of activities: the purchase of raw

39

THE COMPANYS GROSS BLOCK

INCREASEDBY 9.2 PER CENT TO RS 844.59 CR,

INDICATING THE COMPANYS

CONTINUOUS INVESTMENTS IN

ASSETS

materials, making advances, availing cash discounts

on the total billing, maintaining an inventory of

production spares, sustaining the production cycle

without interruptions and sustaining all the usual

functions within the organisation.

Working capital accounted for 12 per cent of the

companys total capital employed in 2001-02. The

total quantum of working capital was Rs 77.97 cr

compared to 99.42 cr in 2000-01, a 21.58 per cent

decrease. The companys turnover to working capital

ratio increased from 5.6 times in 2000-01 to 6.8

times in 2001-02.

Sundry debtorsRetail sales increased by 10 per cent in 2001-02,

sundry debtors decreased by Rs 10.79 cr; debtors

exceeding six months decreased by Rs 1.0 cr. This

indicates that the company collected its outstandings

faster from the marketplace.

Sundry debtors stood at Rs 30.03 cr in 2001-02,

compared with Rs 40.82 cr in 2000-01, a 26.43 per

cent decrease. Debtor days decreased from 27 days

in 2000-01 to 21 days in 2001-02, reflecting prudent

debtor management. In the retail segment, debtors

reduced from 17 days in 2000-01 to 13 days in 2001-

02 on account of a stronger financial discipline

wherein the company evolved to a cash-and-carry

system. Credit worthiness was appraised on a

periodic basis. Attractive financial incentive schemes

and a standardised discount system was instituted to

ensure a quicker settlement of outstandings.

In the institutional segment, debtor days dropped

from 33 days in 2000-01 to 30 days in 2001-02 on

account of a non-trade cell to monitor oustandings,

assess the quality of buyers, collect bank guarantees,

post-dated cheques and upfront payments.

Inventories Inventories increased from Rs 34.72 cr in 2000-01 to

Rs 41.03 cr, an 18.17 per cent increase over the

previous financial year primarily due to an increase in

the stock-in-process. As on 30.06.2001, inventories

were low on account of higher dispatches. However,

the company succeeded in reducing inventories from

Rs 66.78 cr in 1999-2000 to Rs 41.03 cr in 2001-02, a

decline of 38.56 per cent, an encouraging

achievement given the state of the industry. In 2001-

02, the increase in inventories was on account of an

increase in material-in-transit from Rs. 0.92 cr to

Rs 1.62 cr and an increase in goods-in-process from

Rs 1.19 cr to Rs 7.32 cr.

TechnologyInformationChanging Role of ITInformation technology has come a long way at Shree

Cement. Previously it provided support to the

accounting function in a Character user interface (CUI)

environment. Now it provides online support in a

Graphic user interface (GUI) environment to different

functions like finance, personnel & administration with

a state-of-the-art Oracle 8I database at the back end,

and using Visual Basic as a front-end tool.

The changes happening in the marketing organisation

would not have been successful without IT seamlessly

integrating the effort of their department. The Sales &

Distribution model used Java at the front end and

Oracle 8I as the database. The S&D module not only

supported intranet computation but it could be

accessed online. Field officers accessed the S&D

module through the internet. Order booking, Inquiry,

bills generation were also done online.

The backend server, located at Beawar did the online

processing of all the inputs. The backbone of this

system was the leased Internet line.

This IT infrastructure provided a considerable

advantage over the other option of implementing ERP.

The ERP would have been difficult to implement,

because of its low flexibility. Besides, the cost of

maintaining the ERP would have been very high. The

Internet leased line was chosen as the backbone of

the network, because of lower amount of data loss as

compared to the V-SAT network and its cost

effectiveness over the next alternative.

Other Achievements Launched website, www.shreecementltd.com.

A dedicated team updates this website. The link to

sales & Distribution module is also given here. Those

authorized can access this module by entering their

respective username and password.

Employees were provided with a web-mail facility.

Computers were also increased. Communication

between the employees became much easier and cut

phone and fax bills.

Instead of a 64 kbps leased line, Shree switched to a

256 kbps internet leased line.

Initiatives for the Future Making the financial accounting module available

online for the authorized user.

Getting the inputs from weigh bridge online to

exercise better control on in-bound and out bound

logistics.

Fully computerize the employee attendance and

payroll system.

In the coming days, IT is expected to play an even

more important role in terms of integrating the various

activities of the business, maintaining data and

providing information.

Corporate taxIn 2001-02, Shree Cement provided income tax of Rs

3.10 cr. In addition it provided for deferred tax of Rs

2.14 cr, as per accounting standard AS-22 introduced

for the first time. This did not involve a cash out go.

Miscellaneous taxThe companys products attracted an excise duty of

Rs 350 per tonne of cement and Rs 200 per tonne of

clinker. The companys second plant is entitled for

sales tax deferment for a period of seven years -

from 1997 to 2004-05 - subject to maximum

deferment quantum of Rs 156.3 cr. At the end of the

exemption period, the company will be required to

remit sales tax to the government in 10 half-yearly

installments starting from 2005-06. The total sales

tax deferment availed stood at Rs 56.64 cr till 31st

March, 2002.

The sales tax on consumables and stores was 4.6

per cent and the effective input tax on raw material

stood at 3.45 per cent. Customs duty on cement and

clinker imports decreased from 25 per cent in 2000-

01 to 20 per cent in 2001-02.

Surplus managementAn excess of income over expenditure translated into

a surplus. The companys temporary surpluses

financed working capital and for the invested in debt

mutual funds. The company invested temporarily

surplus funds cumulating to Rs 155.84 cr in safe,

income growth funds and mutual funds in 2001-02.

These investments were liquidated to meet debt

repayment schedules. As a matter of policy the

company did not invest in equity markets. The

companys long-term accruals were used to fund

capacity/ expansion, modernization of plant and

machinery, capital expenditure projects and repay

loans.

Challenges, 2002-03* The company intends to prepare financial

statements by the 11th of the ensuing month and

profit and loss account by the 9th of the ensuing

month.

The company expects to finalise its year-end

accounts within 20 days of the year-end.

The company expects to set up a web site wherein

audited accounts can be accessed by investors,

customers and the public at large.

The company expects to reduce the remittance

period from 1.26 days in 2001-02 to 0.7 days in 2002-

03, helping the company maximize returns from

mutual funds and reduce interest outflow.

42 43

RISKmanagementIn 2001-02, the company embarked on a Rs 120 cr

capex programme to commission a 36 MW captive

power plant at Beawar. This backward integration

has been intended to make the company

completely self-reliant for its energy needs at a

significantly lower variable cost - Rs 2 per unit as

against the purchased power rate of Rs 4.19 per

unit from the Ajmer Vidyut Vitran Nigam in 2001-02,

saving the company about Rs 30 cr per year. This

plant same will be operational by December 2002.The turnkey project for this captive power plant has been awarded to the Pune-

based Thermax Limited. The project cost is being funded through debt and

internal accruals.

45

RISK MITIGATIONIndia is protected from imports through distance. The

landed cost of cement (without tariff) works out to $ 40

per tonne (Rs 1960 per ton). Following the imposition of

a 30 per cent customs duty and a counter veiling duty of

Rs 350 per tonne and octroi charges, the delivered price

of bulk cement amounts to Rs 2967 per tonne compared

with the domestic price of Rs 2600 per ton.

IMPORT OF CEMENT VIS-a-VIS LOCAL PRICES

FOB US$/tonne 24

Insurance and freight US$/tonne 16

CIF US$/tonne 40

CIF @ US $ (1USD=49INR) Rs / tonne 1960

Add effective import duty @ 25 % Rs / tonne 392

CIF- After Import Duty Rs/tonne 2352

CVD Rs/tonne 350

Unloading and port charges Rs/tonne 265

Landed Cost Rs/tonne 2967

Pricing riskCement prices are vulnerable to short-term price

pressures exerted by various manufacturers.

RISK MITIGATION48 per cent of Indias total cement capacity is accounted

for by the top five cement companies / groups against 30

per cent a few years ago. This consolidation is a driver of

stable pricing in the industry and has been driven by

large Indian manufacturers and international brand names

buying over weak, debt-saddled companies. Thanks to

this consolidation, cement prices firmed up by Rs 15-40

per bag in the year 2001. It is expected that this trend

will continue.

CONSOLIDATION AND CEMENT PRICES

Country Market share of Cement prices

top three players ($)

UK, France, Germany 90 100

Venezuela 90 120

Canada 80 100

Brazil 60 60

Japan 50 85

United States 40 90

Turkey 35 30

Romania 30 30

China 2-3 35

India 38-40 40

Source: Building material prices survey, UK, Cement (all these rates

include delivery to sites and discounts but exclude VAT and local tax).

Technology riskThe cement manufacturing technology used by Shree

Cement might be phased out.

RISK MITIGATIONWhen Shree commissioned its business in 1985, it

selected to use the dry process for manufacturing

cement over the wet process. The dry process produced

quality cement at a low cost. Over the last decade and a

half, the decision to select the dry process continues to

remain valid. Besides, no other technology has emerged,

vindicating the companys decision to use the dry

process as a long-term alternative. Since the company is

working with leading equipment suppliers, it enjoys an

access to the prevailing technology trends the world

over. As a result, the company is confident that it will be

able to evolve its production process as soon as new

technologies have been established, resulting in a lead

over competitors in the field.

Besides, technology is continuously strengthened at

Shree through an ongoing modernization programme.

This helps the company report a high capacity utilisation

and a lower consumption of fuel inputs and raw

materials.

44

SUPPLIERS COSTFACTORS

Prices of coal and grid

electricity are controlled by the

state. Price increases are

inevitable.

Cement companies have set

up captive power facilities to

ensure cost effective and

reliable power, a critical

requirement in producing

cement.

THREAT OF NEWENTRANTS

High capital costs and/or initial

profitability.

High freight and infrastructural

bottlenecks discourage imports.

INTERNAL RIVALRYIntense price competition

CUSTOMERSBARGAININGPOWER

Limited bargaining

power of retail

customers.

Bulk buyers

(government agencies

and builders) exert

limited pricing

pressure.THREAT OF SUBSTITUTES

Practically none.

Clay and plaster are unproven.

An overviewMichael Porters industry structure explains the various threats and opportunities graphically

Competition riskNew capacity might outprice existing companieslike Shree Cement.

RISK MITIGATIONIt is doubtful whether greenfield capacities will be able

to compete with existing manufacturers like Shree

Cement due to the vast differential in capital costs: the

capital cost for setting up a greenfield plant and

infrastructure (including captive power plant) is placed

at Rs 4200 per tonne, compared with Rs 2397 per

tonne for Shree. Because of this high cost of

commissioning, new manufacturers may find it difficult

to cover the complete cost of setting up fresh capacity

unless cement prices rise beyond Rs 180 per bag.

Besides, fresh cement capacity from 2003 will not

enjoy a lower sales tax structure but be levied a rate of

12 per cent, cutting out any benefit.

Import riskLarge producers like Japan, Korea, China, Taiwan,Thailand and Indonesia, where supply exceedsdemand, could dump their output in India anddepress prices.

4046

THE COMPANYS

QUALITYEQUIPMENT INCLUDES AUTO

SAMPLERS, X-RAY ANALYSERS AND

THE RAMCO SYSTEM

Cost riskIn a mature industry like cement, most cost reduction

opportunities have been explored by most manufacturers

and further reductions are no longer possible.

RISK MITIGATIONAt Shree Cement, we recognise that it will be possible to

achieve incremental cost reductions only through the

intelligent and lateral application of the sciences than

through a linear extension. This was adequately

demonstrated by Shree in 2001-02: instead of attempting

to generate incremental savings through the use of

imported coal, the conventional feedstock, the company

made a complete switch in favour of pet coke. This

daring and pioneering transition resulted in Shree

Cement reporting a cost reduction of Rs 25.55 cr during

2001-02.

Quality riskIn a business where the company turns out 4.80 cr bags

in a year, an under-delivery in any consignment could

damage the companys brand in the marketplace.

RISK MITIGATIONShree has a focused research and development

laboratory, which works with samples of various raw

materials and end product. Quality at Shree Cement is

not an end-of-the-pipe test but an ongoing appraisal at

every stage. As a result, quality deviations are corrected

with the smallest loss and shortest downtime.

Shrees quality intent is supported by a commensurate

investment. The company has invested Rs 2.26 cr in

quality checking and controlling equipment. The

companys quality equipment includes auto samplers, X-

ray analysers and the RAMCO system to ensure a better

and consistent delivery. Quality at Shree is also

supported by a strong documentation process. As a

result, the quality of every outgoing batch of the end

product is checked for quality and the findings

documented. This statement of quality accompanies the

dispatch into the marketplace.

Environment riskIn a business which discharges dust and fuel gases out

of its system, any uncontrolled emission could lead to an

environment censure.

RISK MITIGATIONIn addition to Rs 34.29 cr of investments to minimize

emissions to levels way below those recommended by

the central and state pollution control boards, Shree

Cement also enjoys a proactive culture dedicated to

safety in manufacturing practices.

The company trains its engineers actively in environment

management practices. It has greened an increasing area

within its plant premises with drought-resistant foliage.

Most importantly, the company has integrated

environment management into its manufacturing

practices. Over the years, the company has produced

more cement out of less raw material, minimised waste

and slashed the consumption of fuel (more details in the

environment section).

47

Brand riskThe Shree brand might not generate adequate sales in the

market place.

RISK MITIGATION

Since the majority of the company's sales transpire at the

retail end, the company has embarked on a brand building

exercise. The company has identified its cement with a

clear USP - durability. This attribute has been reinforced

with the logo of the long-living tortoise. The company

expects that these initiatives will help the company

generate a top-of-the-mind recall that cuts through product

clutter, create a customer pull and result in the sale of

higher volumes.

Geographic riskShree Cement's plant in Beawar, Rajasthan, could be

placed in the wrong location.

RISK MITIGATION

Shree Cement is blessed with a favourable location at

Beawar, just two kilometers away from captive limestone

mines, the principal raw material for cement. Shree's plant

is also the northernmost in Rajasthan, the closest to the

growing market of North India. The plant is also just a few

kms away from the national highway. The company already

owns a BG railway siding at its plant.

Concentration riskNearly 98 per cent of Shree's offtake transpires in the

North Indian market, an excessive dependence.

RISK MITIGATIONShree sells profitably in the growing markets of Rajasthan,

Punjab, Haryana, Himachal Pradesh and west U.P. - regions

that are deficit in cement. As a result, the company's

excessive dependence is seen as prudent and not limiting

the company's proposed growth.

Finance RiskCement is a cash-intensive business. In the process of

repaying debt, sustaining production and funding

expansion, the company may be forced into a liquidity

squeeze.

RISK MITIGATIONThe company's cash flow in 2001-02 was adequate to

meet obligations on all three fronts. Cash flow from

operations was Rs 46.74 cr enough to pay the debt

obligations to the extend of 41.64 cr. Debt obligations are

Rs 36 cr in 2002-03, while the cash flow is expected to be

higher. The company also retained Rs 23.63 cr in financial

instruments as a hedge to meet any unexpected cash

requirements at a short notice. The company's interest

cover at 2.85 was adequate to meet the company's debt

servicing requirements.

THE COMPANY'S INTEREST COVERAT 2.85 WAS

ADEQUATETO MEET THE COMPANY'S DEBT

SERVICING REQUIREMENTS.

504148

HUMANresourcePeople are the companys valuableasset. Every initiative, everyimprovement, every strength is theresult of the aggregate peoplestrengths within the organisation.Shree Cement Limited is committedto providing the right environment forpeople to work and inculcate a senseof ownership.

Importance of human resourceThe role of HR is to energise and develop people

to ensure that the company emerges as one of the

most profitable cement manufacturers in the

country. The importance of the HR function lies in

the fact that in an extremely competitive industry

like cement, the companys performance depends

on the creativity, motivation and initiatives of the

individuals. Individuals comprise the critical

resource, instrumental in bringing about

improvements in the manufacturing process

thereby reducing operating costs and maximising

gains. In 2000-01, the company embarked on

creating a mindset that enabled employees to

deliver a winning performance. The results have

been carried in the intellectual capital report, a

supplement to the core annual report.

Initiatives in 2001-02CREATING LEADERS AT EVERY LEVEL.

In 2001-02, Shree embarked on creating leaders -

not just at the organisational apex but at every

level, resulting in a strong sense of emotional

ownership. Result: in November 2001, the

company institutionalized a suggestion scheme

called Jo soche woh Paave. The key objectives of

this scheme were to empower employees to think like

leaders by providing them with a platform to

communicate their ideas, to bring all the members of the

Shree family into the mainstream and ensure their active

participation in the development of their as well as the

organisations health. This was done to harness the

latent potential of employees to will help the company

reduce costs, increase productivity, make the

organisation a safer place to work in and increase

profitability. Aapki bhagedari, hum sab ki khushali.

ELIGIBILITY FOR THE SUGGESTION SCHEME

All members of the organisation - right to the president

of the plant were eligible to participate: employees upto

manager levels were invited to receive cash prizes and

employees above the manager level were entitled for

reward through appreciation certificates.

USP OF SHREES SUGGESTION SCHEME

Unlike suggestion schemes in other companies where

the prize money is a small amount, the companys prize

money range from Rs 2,000 to Rs 20,000 depending on

the nature of suggestion. This reflect the companys

commitment to create leaders at every level by

commensurately rewarding innovative concepts. Another

important way in which the companys suggestion

scheme differed from other companies was that it was

not carried out once in a year but transpired on a weekly

basis. A suggestion scheme committee was formed,

which looked into the suggestions given on a weekly

basis after which the winners were announced

immediately. Lastly, participants who were not satisfied

with the suggestion scheme committees verdict

possessed the right to approach the committee and ask

for a review of the results. This eliminated subjectivity

from the system.

EVALUATION

The suggestions received were classified in four

categories :

Rs - 2,000,

Rs - 5,000,

Rs - 10,000,

Rs - 20,000.

CRITERIA

Suggestions to improve the environment and increase

safety.

Suggestions to generate the savings of Rs 5 lacs per

annum to the company.

Suggestions to reduce the cost of production by

Rs 10 lacs per annum.

Suggestions to reduce the cost of production by over

Rs 10 lacs per annum.

In case the company saved more than the amount

factored in the suggestion, the incremental amount

will be shared with both the suggestor of the scheme

and the implementer. This reflects the companys

commitment to pass on all benefits to the members

of the organisation, to incentivise improvements.

50

THE KEY OBJECTIVES OF THIS

SCHEME WERE TO

EMPOWER EMPLOYEES TO THINK LIKE

LEADERS

51

THE NUMBER OF

TRAININGPROGRAMMES CONDUCTED BY THE

COMPANY INCREASED BY 79 PERCENT FROM 176 IN 2000-01

TO 315 IN 2001-02

RESPONSE

Till 31.3.2002, 730 suggestions were received, of which

527 (72 per cent) evaluated, and 24 suggestions

accepted for implementation. The total prize money

disbursed for the 24 winners amounted to Rs 50,000. Of

the 730 suggestions, 33 per cent came from the workers

and 67 per cent from the staff. The details of the number

of staff members and workers who participated are

shown below :

Number of suggestions received 730

Number of employees who participated 237

Number of staff participants 168

Per cent of total participants 70

Number of worker participants 69

Per cent of total participants 30

Other HR initiatives in 2001-02TRAINING AND DEVELOPMENT

The company recognised that training was the principal

insurance against intellectual obsolescence. Result:

Shree reinforced its training emphasis in 2001-02 to

develop and enhance the inventory of skills. The biggest

change was that training was no longer looked upon as

an HR function but an integral part of the Shree work

culture. Training programmes conducted on a continual

basis. As a result, department heads organized their own

training programmes according to the training needs and

relevance of certain skills. The training priorities were

classified into four big areas: technical, safety and health,

environment (conservation of resources) and behavioural.

The ultimate objective of all training programmes was a

reduction in costs through improved quality, lower

downtime, improved productivity, reduced energy

consumption, enhanced technical skills, better

communication and information sharing through

strengthened interpersonal skills.

The number of training programmes conducted by the

company increased by 79 per cent from 176 in 2000-01

to 315 in 2001-02. The total number of employees

covered by these training programmes increased from

1861 employees in 2000-01 to 4904 employees in

2001-02: a 164 per cent increase over 2000-01. The

number of man-days covered increased from 652 days in

2000-01 to 1255 days in 2001-02, a 92 per cent increase

over the previous financial year. The total number of man

hours covered by the training programme increased from

5159 hours in 2000-01 to 10036 hours in 2001-02, an

increase of 95 per cent.The amount spent on training

increased from 2.06 lacs in 2000-01 to Rs 3.77 lacs in

2001-02. The companys training initiative covered not

just management level employees but also shop floor

workers.

In 2001-02, the company started the concept of multi-

skilling to optimise manpower, enhance skill sets and to

facilitate cross-functional development. Unlike other

organisations who introduce multi-skilling for high fliers,

the company started this concept first for its workers.

SHREE OPTIMALLY UTILIZED ITSSURPLUS

STRENGTHBY DEVELOPING WORKER SKILLS IN

OTHER TECHNICAL PROCESS

Reason: the company faced a problem of surplus

workers. Other organisations would have resorted to

retrenching and laying off, but not Shree. Shree optimally

utilized its surplus strength by developing worker skills in

other technical processes. This helped the company build

in a redundancy factor wherein at any given point there

was always a skilled set of people for any function. The

company reduced overtime through efficient manpower

utilisation, organised smooth functioning of the

production cycle, increased job security leading to a

greater sense of belonging and a strengthened industrial

relations. As a result the company did not lose a single

days work due to strikes or lockouts.

Following the success of multi-skilling with workers, the

company introduced this concept with staff members.

The objective was to enhance competencies and to

enable managers understand how an initiative taken by

their department could affect the productivity and

performance of another department. This broadened the

outlook of staff members, making them think like

business managers.

HR achievementsThe success of the companys training programmes was

reflected in the following instances:

The company was probably the only cement

manufacturer in Rajasthan to have an accident-free

period between 12.2.97 to 31.12.98. In 2001-02, the

company had no fatal accidents due to increased

awareness on safety brought about through strong

training programmes.

The company received the National Safety Award in

2001 for the longest accident-free period.

The company received the Nehru Memorial National

Award for Best Environment & Implementation awarded

by International Greenland Society, Hyderabad for

outstanding initiatives embarked by the company for

environment conservation.

The company received the National Energy

Conservation Award from the Ministry of Power for a

continuous improvement in power consumption and

utilisation.

The company has not lost a single days work on

account of industrial strife. This achievement is

commendable when one considers that despite an All

India strike and three Rajasthan strikes in 2001-02 the

company operated in full swing with 100 per cent

attendance.

The company received a four-star factory rating in the

survey of cement factory performance conducted by

Whitehopleman and International Cement Review. Till

date, no factory has achieved a five star status. The

factory achieved a Best Practice Performer status in the

areas of energy efficiency and equipment productivity.

The kilns and mills at the factory continue to set

standards of excellence for the rest of the industry.

However, downtime at the kilns still remained an area of

concern, which the company needs to strengthen.

Electrical energy consumption and the overall power

consumption were the