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The Weakening Balance Sheet of Cement Companies
Jun 21, 2017

Cement companies have started the year on a good note. Big-wigs like Ultratech (Ultratech cement share price), ACC (ACC share price), and Ambuja (ambuja cement share price) have seen a 20-25% increase in their stock prices in 2017. A major reason for the rise is the wave of consolidation sweeping across the sector. Two of the top-five biggest mergers and acquisitions (M&A) took place in the cement sector in 2016. While Dalmia Bharat acquired Odisha Cement for US$2.54 billion, Ultratech Cement had to pay US$2.38 billion to acquire Jaypee Cement.

The cement sector was always in a need of revival considering its importance role in India's growth story. The logical route seemed to be consolidation. India, with 550 companies, is the second-largest producer of cement in the world. However, 70% of the cement is produced by the top twenty companies. The other companies used to dump cement at low prices creating havoc in the market. Consolidation is expected to increase the pricing power of the top producers and lead to better margins.

There's been one downside though. All this consolidation has weakened the balance sheet of these top cement companies. The net debt-to-equity ratio of the 26 companies rated by Crisil is likely to increase to 2.9 times in 2018 as compared to 1.5 in 2017. Debt funded 78% of the acquisition cost in FY17. However, once the synergy benefits kick in, debt levels are expected to reduce from FY19. This will provide respite to cement producers who have been engaged in price wars with small players for a long time.

Source: Crisil Ratings, Livemint

This Chart Of The Day was published in The 5 Minute WrapUp - As the House Burns, the Party Continues

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