Why it Makes Sense for Adani to Buy Out Holcim's India Stake

Holcim, the world's largest cement manufacturer, wants to sell off its cement plant holdings in India via ACC and Ambuja.

With a total installed capacity of 60 m tonnes, the Swiss giant's Indian operations carry a total value of US$ 10bn.

While the real reason behind the exit is still unknown, there has been a lot of conjecture.

Some believe the company is shifting its core strategy towards sustainability and going green. A step towards that is to rid itself of manufacturing cement, which has a large carbon footprint, and diversify into sustainable building materials like 'smart rooftops'.

Others assume the dormant performance of the Indian cement market has forced the cement major to exit the country.

Apart from looking for a buyer for its Indian operations, Holcim has been selling off its non-core assets in other parts of the world like Brazil, Indonesia, Malaysia, and Zimbabwe. This does validate the theory about the company looking to reduce its carbon footprint.

Holcim ventured into the Indian market in 2005 through acquisitions of its twin arms Ambuja and ACC.

At present, it owns 63% of Ambuja along with a 5% direct stake in ACC. Ambuja owns 50% of ACC, a direct subsidiary.

On a consolidated basis, the two entities control 66 m tn of cement capacity, accounting for nearly 27% of the total capacity.

But who can buy this US$ 10 bn stake?

There are many suitors.

First in line is Ultra tech Cement, owned by the Aditya Birla group. While it makes sense for India's cement behemoth to enhance its installed capacity in India, this acquisition can be challenging.

Apart from bending over backward to get approvals from anti-trust regulators, they will also have to borrow heavily for this acquisition.

Second in line is the country's second-largest steel producer JSW Steel, which is looking to expand its current cement capacity of 14 m tn to 25 m tn.

Last but not least is the Adani group, owned by the richest man in India, Gautam Adani.

Although the company announced its foray into cement a few years ago, they don't have a functioning unit as yet. This acquisition will be the conglomerate's largest to date after buying SB Energy for US$ 3.5 bn last year.

Why this acquisition makes sense

Setting up a cement plant can take up to 2-3 years. From acquiring land acquisitions to meeting environmental norms, commencing operations can be a prolonged and tedious process in India.

Considering coal is a key component in cement manufacturing, the plant's proximity to the mine and the market is imperative. Therefore, expanding inorganically can be highly value-accretive, especially for a new player like Adani.

Another challenge in the Indian cement industry is setting up a widespread distribution network. ACC and Ambuja, both, boast a well-established brand name with a strong network of thousands of distributors spread across the country.

Dependency on a single market exposes cement players to the price fluctuations in that region. Moreover, logistics costs for carrying cement beyond a point can get prohibitive. This makes it a regional affair.

So an effective strategy is to build plants across the country and cater to different markets. For Adani to achieve that organically can be tough. This further incentivises the company to acquire Holcim's India stake.

ACC and Ambuja are pan-India players running plants in all four regions, north, south, west, and east. So, for some reason, if the market in one part of the country doesn't perform well, the profits from the other markets can help mitigate that.

Now all of this bodes well for Adani.

But does Adani really needs to foray into cement?

The Adani group has expressed interest in manufacturing cement by announcing their foray a few years ago. Their flagship firm Adani Enterprises has two cement subsidiaries. While Adani Cement was established in June 2021, Adani Cementation plans to build an integrated facility in Gujarat.

Apart from this, the group has a well-diversified portfolio broadly split into energy & utilities, transport & logistics, and other emerging businesses.

But introducing cement can help the group synergise. It can serve as an effective base to deliver increased business value.

The Adani group companies together have a robust requirement for cement. Their wide presence in infrastructure activities like building roads and airports can further galvanise demand for in-house produced cement.

Fly ash is a solid waste byproduct of coal-based power generation. Mixed with cement, it enhances its quality and lowers the cost of production. Adani Power, a group company, already generates and sells large quantities of fly ash to some of the major cement players in the country.

Can the Adani group afford to buy out Holcim's stake?

The group is likely to route the transaction via its flagship company, Adani Enterprises, which holds two existing Adani group cement companies.

The company's balance sheet is relatively strong, sporting a low debt to equity ratio, indicating its ability to raise funds for acquisition.

Considering the promoters hold 74.9% of Adani Enterprises, the company can either raise funds via a stake sale or borrow from financial lenders.

In conclusion...

There is a good chance the Adani group can bid aggressively for the stake. Given the synergies that can emerge from this combination, it does seem like a step in the right direction.

The Adani group's exposure to multiple nuances of different segments combined with the extensive experience and leadership of ACC and Ambuja can be just the recipe for success.

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