Consolidation in the Indian cement industry has picked up considerable speed in the last 4-5 years. As a result, the Indian cement market is slowly mimicking its more developed counterparts in the US and Europe. The biggest and the most visible benefit of consolidation is that of improving realisations. US and European markets by virtue of high level of consolidation have cement realisations much higher compared to anywhere in the world.
In this article we compare three global cement giants with two major Indian cement producers on the operational and valuation parameters. This article is mainly aimed at giving the reader an idea of how international cement markets function and how Indian cement producers compare with global giants.
In the Indian scenario the top five companies in the Indian market control only 50% of the cement capacity. Due to this reason cement prices are low as smaller cement producers undercut prices. Now compare that with the more developed international markets like North America and Western Europe where just 2-3 players control 90% of the cement capacities. Due to a high level of consolidation small cement producers are not in a position to undercut, as the major producers dictate prices. Consolidation also brings about better understanding among the producers on production related issues, which avert oversupply conditions like the one that the Indian market is currently facing.
Apart from consolidation there is a considerable difference in the pattern of cement consumption between Indian and the developed markets. Per capita cement consumption in India is just 100 Kgs compared to 300 Kgs in Western Europe and 280 Kgs in US. Even Asian neighbours like China (420 Kg) and Japan (600 Kgs) have much higher consumption rates.
* Year ending December
per tonne (in US $)
Figures taken on a standalone basis
Source: company annual reports.
For our study we have chosen Lafarge, Holcim and Cemex to represent MNCs and Gujarat Ambuja (GACL) and ACC as the domestic representatives. As far as capacities are concerned Indian cement companies are too small in comparison to their international peers but in the Indian scenario they are two of the largest. Lafarge is based in France, Holcim in Switzerland while Cemex is based in Mexico. Lafarge and Holcim have a large exposure in the lucrative North American and the western European markets while Cemex has a large exposure to the Mexican and US markets and less so in the western European markets.
||EV/Tonne (US $)
As far as operational efficiencies are concerned, the only Indian company that measures up to global standards is GACL. This is essentially due to GACL’s focus on new technologies as well as the relatively younger cement plants operated by the company. On most of the other parameters also, GACL is comparable with its global counterparts with Cemex leading the pack.
On account of operating in high realisation markets, international cement companies have a higher enterprise value (EV) for their cement plants. A higher EV may also be on account of highly efficient cement plants as well as efficiency in operations. Indian companies on the other hand have considerably lower EVs due to lower realisations. This is apparent as GACL despite operating some of the most efficient cement plants backed by a highly focused management team has an EV of just US$ 70 compared to US$ 233 for Cemex.
The P/E valuations of the companies taken in the study seem to be a reflection of most of the parameters assumed for the study. Due to its high score on all the major parameters, Cemex heads the pack with the highest valuations among the international majors. Among the Indian companies, GACL is the clear leader. Valuations of ACC are an aberration, as the company is in the process of a turnaround.
This study indicates that as the Indian cement markets progress more towards consolidation, frontline cement companies like GACL and ACC who have a large presence in the domestic market are going to be the most likely benefactors. Thought the consolidation process has slowed down recently there is immense value to be unlocked as and when there is a pick up in the same. But consolidation alone will not be enough to match up to global standards, as long as our domestic consumption lags behind.