Emerald Emerging Markets Case Studies

Launch and closure of an Indian cement plant: Decision making at Arco Ltd and EGL, its Associate
Margie Parikh
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 Launch and closure of an Indian cement
plant
Decision making at Arco Ltd and EGL, its Associate
Margie Parikh
Margie Parikh is based
at B K School of Business
Management, Gujarat
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University, India.
Disclaimer. This case is written
solely for educational purposes
and is not intended to represent
successful or unsuccessful
managerial decision making.
The author/s may have
disguised names; financial and
other recognizable information
to protect confidentiality.
DOI 10.1108/20450621111125450
run Mishra, the President and Mr Pulin Kamath, the Senior General Manager of EG Ltd
A (EGL), a Heavy Equipment Rentals Company, ended their meeting in February 2008
after reviewing the financial reports of its Kolkata Ready Mix Cement (RMC) plant
(Figure 1).
The two executives had been disillusioned by the plant’s performance in 2007-2008, little
over three and a half years of life since the first feasibility report in 2004. None of the five
plant heads could check the projections from going haywire – especially the sales
numbers, and the request to revise the projections had been turned down by the senior
management with caustic remarks. The Senior GM’s comment on the first page of the
rejected proposal read:
[the] ground realities are to be factored in [the] ‘project reports’ and not post implementation.
If [the] only answer to any change is change in revenue/returns, rather than change in ‘go to
market’ strategy, then [it should have been thought] of [. . .] before.
At a first glance it appears to be a reasonable response to an error in a decision: a decision to
enter an apparently lucrative business now seemed like a mistake, and management decided
to quit by way of damage control. However, if one drew a timeline of the major events (Figure 2),
one wonders how in three years things changed that a newly started project had to close. What
went wrong in the first place? Any attempt to answer these questions would require an attempt to
understand the decision process at Arco and EGL involving their foray into RMC business and
their rather quick retreat.
Arco Limited: an introduction
Arco Limited (Arco henceforth), is a giant Indian conglomerate. It has various subsidiaries in
all the five continents. These subsidiaries make Arco a strong service provider in the Oil and
Gas, Infrastructure and Petrochemical domains. For the large, global player that it is today,
Arco has had a modest start. Incorporated as Arco Engineering Private Limited in 1988 in
India, it was renamed Arco Private Limited in the following year and then became a public
Limited Company in 1992.
While Arco had started with contracts to lay pipelines, it soon moved to erection of tanks,
refineries, power and civil infrastructure. Now the company has expanded its portfolio to a
whole range of services that integrate the business upward, downward and horizontally in
the energy sector, petrochemicals, chemicals, bio-fuels, utilities and construction.
EGL was established as an Arco associate in order to take care of businesses other than the
Construction and engineering-procurement-construction contracts. The main function of
EGL was to provide various equipments that Arco required on its projects. Being a rental
company, EGL could get very competitive rates for Arco and then return, dispose of or
reassign redundant and unutilized equipments.
VOL. 1 NO. 1 2011, pp. 1-11, Q Emerald Group Publishing Limited, ISSN 2045-0621 j EMERALD EMERGING MARKETS CASE STUDIES j PAGE 1
 Figure 1 A typical RMC plant and a transit mixer
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EGL and the RMC business

Since the RMC business in India was in its infancy, EGL planned to be one among its early
movers. After the Senior General Manager – Rahul Sharma was asked to conduct a market
survey among current suppliers and construction contractors; it seemed that the RMC business
had great potential. He visited Kolkata in June 2004, met various potential customers, and visited
the new construction areas in order to understand the existing requirement and explore future
prospects of RMC in and around Kolkata municipal areas to test the feasibility of the project.

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PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 Figure 2 Timeline of major events concerning entry into and exit from the RMC business
by EGL, an associate of Arco Ltd

September 1, 2005 September 26, 2005 February 2008

June 7, 2004 Plant Bottlenecks Closure
First field report Commissioned Reported, Decision
Deadline Projections
For detailed Revised
Proposal
July 2004
September 28, 2004
First projections,
October 31, 2005
RMC Kolkata
Revisions rejected

The demand of RMC was increasing in metro cities as many of the construction
organizations did not want to compromise on the quality of cement, and the government
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bodies also specified the quality norms about the concrete grades to be maintained in all
construction contracts awarded by them. This has given a great boost for growth of RMC
business.
Typically when the Arco project sites closed due to completion, the equipment such as
batching plant, chilling plant, transit mixers, dumper, wheel loader, weigh-bridge, etc. would
be decommissioned and remain idle until some other project came up requiring deployment
of this equipment. If EGL started the RMC business, all this equipment could be utilized for the
manufacture and supply of RMC, contributing to the revenue and profitability. Hosting the new
venture thus became the role of EGL.
Looking at the growth of infrastructure and construction activity in India, it was decided to
establish batching plants at three ‘‘hot’’ locations namely Gurgaon, Noida (both in northern India
near Delhi), and Kolkata (East India). The locational suitability and feasibility of operations at all
three proposed sites was evaluated in 2004. Gurgaon operation started in 2004 but Kolkata
plant lagged behind by one year. Noida proposal did not get the environmental clearance from
the authorities, and was put off for future.

What is RMC?
RMC is a ready-to-use material, with predetermined mixture of cement, sand, aggregates
and water. RMC is a type of concrete manufactured in a factory according to a set recipe or
as per specifications of the customer, at a centrally located batching plant. It is delivered to
a worksite, often in truck mixers capable of mixing the ingredients of the concrete en route.
This results in a precise mixture, allowing specialty concrete mixtures to be developed and
implemented on construction sites. Ideally, the RMC should be poured at the site for use
within five hours of mixing the aggregate, cement, sand and water. If the delivery is
delayed, say due to a traffic jam, an admixture made of substances such as naphthalene
and melamine has to be added at regular interval to prevent the cement from setting even
as it is constantly stirred. These ad mixtures are carried along by the drivers of the transit
mixtures.
RMC has various advantages over site mixed concrete in spite of its short shelf life and slightly
higher price. Once the standard for desired strength or grade of cement is specified, the
automated mixing of the required ingredients by a computerized plant ensures consistency in
proportion of material irrespective of the size of the project, total quantity of cement to be
supplied or number of batches to be prepared. Construction is thus made more reliable and
durable. With use of RMC, systematic quality control becomes possible. Consumption of raw
materials is optimized, resulting into operational efficiency and conservation of natural

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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3
 resources. RMC eliminates the need to store basic materials at site as well as the need for
procuring or hiring a plant and machinery to mix those into cement concrete. Wastage of basic
materials is avoided, labor and supervision costs associated with production of concrete are
eliminated, and the construction activity is greatly speeded up. Noise and dust pollution at site
are also reduced. Site organization is more streamlined and focused on the central job:
construction.
The RMC business in India was found nowhere in comparison with developed countries like
Japan, where nearly 70 per cent of cement consumption is in the form of RMC and 25 per
cent in the form of site-mixed cement. In India RMC accounted for less than 18 per cent of
total consumption and as much as 82 per cent of cement consumption was in the form of
site-mixed concrete. Yet it appeared that this was set to change. The cement majors were
anticipating huge potential for the product and at least six of those were planning their foray
into the RMC business. This was likely to jack up the share of RMC relative to the site-mixed
cement and bring it closer to the global average of 70 per cent, according to the industry
players.

Organizational structure of EGL

EGL, like many other companies in business, is organized in a simple structure as shown in
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Figure 3.

EGL comes to Kolkata in 2004

Feasibility report
A proposal was created in September, 2004 based on the findings of Rahul Sharma’s visit,
covering the following areas:
1. Location suitability and future trends. Looking into the developments in construction
activities in and around Kolkata, a consistent rise in the demand of RMC was reported. In 2004,
the State Government of West Bengal along with Central Government had undertaken various
development projects within Kolkata. Owing to the development in the areas surrounding salt
lake, the construction activities had picked up.
The survey estimated the market of RMC to the tune of 35,000 to 40,000 cubic meters (cum)
per month, which was projected to go up to 50,000 to 60,000 cum/month in the next financial
year. Most of the construction companies were confident about an annual increase at the rate
of 25-30 per cent over the coming four to five years. The governments were categorically

Figure 3

President

Senior general
manager

Plant head (Gurgaon) Plant head (Noida) Plant head (Kolkata)

Site staff Site staff Site staff

On rolls Contracted On rolls Contracted On rolls Contracted

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PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 mentioning in their tenders that parties should use RMC and they were not allowed to use the
batching plant in the municipal area.
In 2004, there were three areas of Kolkata where construction activities including residential
buildings and other civil projects such as flyovers and subways were in full swing. The metro
rail project was being expanded for another stretch of 20 kilometers. Approximately,
30 flyovers were either under construction or likely to start construction within next six months.
The government had already finalized tenders for ten new water treatment plants outside
Kolkata. All these activities were likely to reach their peak in the next three to four years and so,
the demand of RMC.

2. Estimated demand. Most of the construction companies had set up their own plants with 30
or 60 cum/hour capacity, since the RMC supply in the market was not regular and they had to
solely depend on ACDL for RMC. B&P had also set up a plant, but it was basically meeting the
needs of B&P and their sub contractors. Though B&P also supplied some quantity to others,
it was irregular and depended on surplus generated after catering to captive demand.
Rahul Sharma estimated the market situation if all the parties who expressed desire to start
RMC plant did set those up (Table I). However, he was assured by the cite staff of the following
in Rajarhat and Salt Lake area that they would take major quantities from EGL if the plant was
commissioned in the next three to four months (Table II).
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There were some small players whose average off-take was not estimated. The above
demand was inclusive of 20,000 cum/month supply from ACDL, leaving behind a net
shortage of 33,000 cum/month.
3. Estimated prices. The grades popularly in demand in Kolkata market consisted of M-20
which was sold for Rs 2,550/cum and M-25 which was sold at Rs 2,680/cum (Table III for the
complete table). Beyond this range, transportation costs are charged extra. These rates
were exclusive of 11.5 per cent sales tax (only 2 per cent if Form-11 was submitted), but
inclusive of transportation costs if the destination was within 15 kilometers one way from the
plant. Cost for pumping the RMC at site would be borne by the client.

4. Major competitors. Table IV

ACDL. ACDL was a pioneer in commercial RMC in India. The company is the biggest
manufacturer of RMC in India with modern plants in operations. ACDL has three plants each
in Mumbai and Kolkata, four in Bangalore and one each in Chennai, Delhi and Goa (Table V).

Table I Future demand and supply if all proposed plants came up

Particulars 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009

Demand (cum p.a.) 6,00,000 7,56,000 9,60,120 12,28,954 15,85,351

Supply (cum/p.a.) 8,80,000 10,40,000 13,40,000 15,20,000 18,00,000

Table II
Construction companies Approximate requirement (per month)

Quintex projects Ltd 10,000 cum

Paragon Civil (Bengal Ahuja) 8,000 cum
Zircon International Ltd 8,000 cum
Unity Development 7,000 cum
Vantia Construction 7,000 cum
Centor Engineering Ltd 5,000 cum
Slavia 5,000 cum
Bridge and Trench Co. (India) Ltd 3,000 cum

Note: Names and location details have been changed to protect the identity of concerned parties

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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5
 Table III Prices for various grades of cement in Kolkata market (2003-2004)
Grade Price (Rs/cum)a Price (Rs/cum)b revised in July 2005

M-10 2,350 2,750

M-15 2,450 3,050
M-20 2,550 3,200
M-25 2,680 3,250
M-30 2,850 3,300
M-35 3,000 3,400
M-40 3,120 3,500

Notes: aPrices are inclusive of transportation charges if the destination is within 15 kilometers from
the plant, but exclusive of other taxes and pumping charges; bthe revised price is inclusive of
12.5 per cent VAT, transportation cost, pouring of concrete; if pouring is not required, a rebate of
Rs 110/cum is offered by competitors

Table IV
Name No. of RMC plants Capacity/hour
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ACDL Rajarhatat (2) Joka (1) 30 cum, 60 cum 30 cum

B&P Rajarhatt (1) Proposed – 1 30 cum ? (unknown)

Table V ACDL at Kolkata

Year Total production (cum/month)

2001-2002 12,000
2002-2003 16,000
2003-2004 22,000

Rahul Sharma visited one of the RMC plants of ACDL in West Bengal and had detailed
discussion with their Project Manager, Mr Mehta. This discussion brought forth some ideas.
ACDL had installed a weighbridge to check that exact quantity of RMC being dispatched to
the clients’ site. The main demand in the market was of M-25 grade of cement, which
constituted roughly 60 per cent of the total market requirement across grades. The raw
material stocked by ACDL was brought from:
Aggregate:
Jharkhand, West Bengal.
Sand:from the river nearby, available in plenty.
Cement:
manufactured by ACDL (home production).

ACDL markets its product in both ways, direct and indirect. Direct marketing method delivered
the promotional materials individually to potential customers via direct mail, telemarketing or
similar means. The indirect marketing targeted the franchisee dealers appointed and
supported by the company on commission basis.
B&P. B&P is the country’s leading construction company and the largest cement manufacturer.
It has constructed some outstanding structures both in India and abroad. It has more than 50
state-of-the-art batching plants out of which 24 are being used for manufacturing RMC for
commercial purpose (Table VI).
5. Fulfillment of government formalities. The essential formalities would include WCT, Sales
Tax Registration, Pollution Control Board Clearance and clearance for land use, etc. would be
required.

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PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 Table VI
Growth of B&P at Kolkata

Years Total production (cum/month)

2001-2002 3,500
2002-2003 5,000
2003-2004 7,000

6. Plant location. Two locations were recommended – the location north of the city had been
given first preference from the accessibility point of view. The land rentals over there range
between Rs 15 to 16 lakhs per acre per annum for a 15-20 year lease. The second preference
was given to the location west of the city. The 15-20 year lease rental in this area ranges
between Rs 6.5 to 7 lakhs per acre per annum (Figure 4 Kolkata map).
7. Strategic options. It was proposed that EGL join hands with either some cement
manufacturing company or a construction company. This was vital because the health of the
RMC business depended upon the steady supply of cement at favourable prices and other
terms on one hand and the steady orders and regular collections on the other, because the
margins were spread very thin on account of competition. The following options emerged:
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B Quintex Projects Ltd had shown keen interest in joining hands with EGL. They were a
successful, three-generation old family-owned civil construction company. They had

Figure 4 Map of Kolkata

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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 7
 contacts in government circles and were keen to participate in the marketing of RMC on
profit sharing basis.
B Vantia Construction, enjoyed professional reputation could be interested in partnership
B Centor Engineering Ltd had strong contacts with that state government
B EGL waited for Quintex as they informed that they needed to have their own market survey.
This proposed survey by Quintex and their probing with the government authorities would
be over in about 15 days. The other two were not approached by EGL.

8. Operations at the plant

B The first choice was between a 120 cum/hour plant and a 30 cum/hour plant. It was decided
to start the production with 30 cum/hour plant and gradually increase the capacity as the
demand increased. Working hours required and total production per month were
estimated (Table VII).
B Sourcing of raw material. Three components, namely the aggregates, sand and cement
are already discussed earlier in case of ACDL. Additionally, it was found that 10 per cent
discount would be available if aggregates and sand were purchased under annual
contracts. The source of aggregates would be approximately 120-170 kms away, while
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the same for sand would be 40-50 kms away. ACDL, B&P and JBL had their own cement
depots at the outskirts of the city and were the most sought after in the city. A discount of
2-3 per cent might be obtained in annual contracts.
B Transit mixers. For an average production of 5,200 cum per month, a fleet of seven transit
mixers would be required.
B Other details. The raw material cost, different from other costs (Table VIII), and Sales were
estimated.
B Financial terms

– Sale. 50 per cent of the sale was estimated to be in cash and 50 per cent on 30-day
credit as per the going practice in the market.

– Procurement. Cement would have to be purchased against cash, while sand and
aggregate could be available on 30-day credit.

Table VII The basis for production estimates

Particulars of output If Plant capacity ¼ 30 cum/hour If Plant capacity ¼ 120cum/hour

Efficiency Factor 0.8 0.75

Output/hour 30*0.80 ¼ 24 cum/hour 120*0.75 ¼ 90 cum/hour
Working/day 10 hours 7 hours
Total Output/Day 24*10 ¼ 240 cum 90*7 ¼ 630 cum
26 working days * 240 ¼ 6,240
Monthly output cum/month 630 * 26 ¼ 16,380 cum/month
Annual output 6,240 cum * 12 months ¼ 74,880 cum p.a. 16,380*12 ¼ 1,96,560 cum p.a.
Factor of .75 ¼ 74,880 * 0.75 ¼ 54,000 Factor of .65 ¼ 1,96,560 * 0.65 ¼ 1,27,764
Scaling down initial working cum p.a. cum p.a.
Production after 5 years 71,100 cum p.a. 1,95,000 cum p.a.
Particulars of working hours
Working hours/month 10*26 ¼ 260 Hours 7*26 ¼ 182 Hours
Actual working hours p.a. when scaled 260 * 12 * 0.75 ¼ 195 hours per month or 182*12*0.75 ¼ 137 hours per month Or
down to a factor of 0.75 2,340 hours p.a. 1,638 hours p.a.
25 per cent of
working ¼ 195 þ (195*0.25) ¼ 243.75 40 per cent
Idle running of the plant hours idling ¼ 137 þ (137*0.40) ¼ 192 Hours
Total working per month Approx. 250 hours 192 Hours

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PAGE 8 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 Table VIII Cost estimates for RMC raw material
Material Reqd. qty/cum of RMC Unit cost INR Cost/cum of RMC

Aggregate 0.85 890 756.5

Sand 0.42 426 178.92
Cement 7 150 1,050
Total Raw Material Costs/cum 1,985a
Other direct and indirect expenses 342b

Notes: aThis cost was Rs 2,005/cum because 1 per cent wastage at plant was added in the proposal 2;
b
this cost was Rs 346/cum in the proposal 2

9. Financial forecast
B It was decided to rent the land.
B The equipments for the plant, i.e. the batching plant, diesel generating set, weigh bridge
were to be obtained from Arco on equalized monthly installments payment along with
insurance premium. After the completion of finance period these equipments would be
transferred/sold to EGL.
Apart from equipment finance by Arco, it was proposed to borrow capital which would be
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recovered in seven months from the date of commencement of operation.

B Initial investment required for the setting up of the plant, with a lead period of three months
was proposed to be Rs 44.55 lakhs. The working capital requirement was estimated to be
Rs 35 lakhs.

The reality dawns

The proposal was approved by the president, who secured the Board approval. The plant
was commissioned on September 1, 2005. However, as the date approached, things did not
work out the planned way. Rahul Sharma could commission the plant only after a year due to
operational problems mentioned in the review conducted on 26 September, 2005 as follows:
B Want of critical inputs: there was an onset of very heavy monsoon in the region. The spare
parts received from Arco along with equipment were worn out. Those were replaced by
September 27 for full-fledged production activity.
B Delay in transportation: the weighbridge could reach the site in the last week of august.
Computer and printer which were to be sent from Halol site in Gujarat, did not arrive and a
purchase was made after a seven-day delay.
B Paucity of funds: Sharma wrote to Arco:
We regret to inform you that till date our bank loan is not sanctioned and also part payment of Rs
20 lacs which was assured for operational expenses, has not been sent to Kolkata. We are to pay
to our civil contractors and suppliers for erection and commissioning of the plant and also for raw
material stock. The stock of cement is very less and can last only up to 500 cum of M-25 grade
output. It is therefore requested to arrange for funds without any delay failing which the
commercial production is not possible.

The proposal is revised but rejected

By now Sharma had realized that the projections made earlier were way off the realistic
figures both ways – in terms of costs and revenues. So he submitted a revised feasibility
report with the revised projections (Table IX and X). However, the president turned down the
revised feasibility report with a single comment: ‘‘All the activities were under your direct
control. Regret to note the delays. Revised feasibility report is not acceptable’’.
Thus, there was no revision in the set of figures which were to be used as a possibility,
estimate and occasionally even standards and benchmarks, were not adjusted to the new
reality and the activities went on. The following are the highlights of actual performance.

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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 9
 Table IX Projected and actual production (cum p.a.)
Year Proposal 1 Proposal 2 Actual

2005-2006 53,200 28,750 9,735

2006-2007 57,600 59,700 32,554
2007-2008 62,100 63,190 20,006a
2008-2009 66,600 67,700
2009-2010 71,100 75,150

Note: aFigures available up to January 2008

Table X Projected sales growth

Estimated RMC market in Kolkata

Year Demand(cum) Demand (Revised) Actual Production

Annual Prorata Annual Prorata
2005-2006 691,200 403,200 3,45,000 2,01,250 9,735
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2006-2007 745,200 745,200 7,16,400 7,16,400 32,554

2007-2008 799,200 799,200 7,58,280 6,31,900 20,006
2008-2009 853,200 – 8,12,400 – –
2009-2010 1,585,351 – 9,01,800 – –

Note: a Actual billing data

Operations at the plant

B Production. The plant capacity utilization turned out to be around 45 per cent of the
projection with a sharp decline of 30 per cent from the forecasted efficiency. Production
figures fluctuated quite erratically and showed no stability or direction.
B Expenses. The input costs are the most critical component in this industry, and had
deviated from its mean forecast. However, the other expenses worked out to be lower
than the amount projected. The real crunch came from the lack of harmony between the
cash received and cash to be paid out. The biggest head of recurrent cash expense was
cement, which could not be purchased on credit. On the other hand, the RMC was to be
sold at one month credit and as if that was not enough, cement supply was erratic
requiring purchase of quantity little more than the level required for production.
B Marketing and collection. Marketing department handled collection of dues after sales.
A large gap between collected amount and billed amount was observed. The designated
order forms were not filled for many customers with whom the agreement was only verbal.
The company was ready to make the delivery, but the verbal promises did not result into
firm orders. This contributed to an already existing gap between the projected sales and
actual sales. Further, collection did not match the actual sales, and the company
collected approximately Rs one less in the last two years.
B Human resource. The plant head was the key position as far as the plant operations were
concerned, In case of EGL, plant heads did not stay for long. ‘‘We were looking for the
right man, a person who could turn around the situation’’, said Pulin.
B Finance. The projected breakeven levels of output were achieved sporadically four or five
times during the two and half years’ life of the plant. The profits depended critically on
balancing between credit received from vendors and that extended to the suppliers.
B Controls. It seemed that there were reports covering the status quo, but they were not
read carefully by the senior management. Soon it started happening that the different
aspects of the reports would not tally, implying that the MIS had serious problems and
control was endangered.

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PAGE 10 EMERALD EMERGING MARKETS CASE STUDIES VOL. 1 NO. 1 2011
 Decision to rent over the plant
It was soon clear to the president and SGM that they were bleeding losses. Even if EGL made
a profit, it would be too small an addition to the Arco kitty. Nor was the top management
interested in running it anymore. They opted to rent it out to a third party for Rs 5 Lakhs a month,
a two year contract to start with.
Keywords:
Decision making, On recovering of investments, the Senior General Manager, Mr Pulin Kamath had
Cements, commented:
Behaviour, We have to only pay to our vendors, which can come from any kitty. Our rentals will offset our
Organizational behaviour, losses in some time. All the other players too are either in losses or have profits too thin to mention.
India I do not want this anymore, as management is not interested.
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VOL. 1 NO. 1 2011 EMERALD EMERGING MARKETS CASE STUDIES PAGE 11