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Cement - Once again in the limelight - Views on News from Equitymaster
 
 
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  • May 30, 2000

    Cement - Once again in the limelight

    And this time it is because of large capacities coming into the market for purpose of sale. Post the Gujarat Ambuja and ACC deal several smaller deals have been struck (deals involving capacities of 1 2 million tonnes). Now, deals are getting larger. So are the stakes.

    Century Textiles, a diversified conglomerate, has decided to put on the block its 1.5 million tonne cement plant. The company, which has a total cement capacity of 4.7 million tonnes, is in the midst of a restructuring exercise, which should see it emerge as a textile manufacturer (implying that the other two units too could come into the market for sale). Another deal is said to involve Birla Corporation's four units comprising 3.9 million tonnes of capacity.

    The pace at which consolidation is taking place in the cement sector is breathtaking. Now with the deal sizes growing larger, the situation has assumed greater importance. Cement being a commodity business requires that companies be cost efficient in order to control margins even in an era of declining product prices. Volumes help companies exploit economies of scale and are thus very important. Another factor that has contributed to the increased demand for cement capacity is the desire of multinational companies to set up a base in India, which promises to be a great business opportunity in the years to come.

    Few domestic majors, including Gujarat Ambuja, can match their leading international peers in terms of efficiency and productivity levels. There is therefore need to step up capacity to generate economies and dominate markets, which in turn gives them greater pricing power. However, so far, they seem to be conspicuous by their absence in the acquisition game (bar the Gujarat Ambuja ACC deal).

    A number of domestic cement companies face the prospect of being marginalised in coming years as companies like Gujarat Ambuja and Grasim take center stage along with the multinationals (one should not take it for granted that all of them will succeed in their Indian ventures). The successful companies are also likely to be the ones that are more aggressive in their acquisition strategy. Expect more consolidation in the sector.

     

     

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