ACC Vs Lafarge Vs Holcim

Global cement majors have been eyeing the Indian cement market for some time now. In their bid to do so, they will be competing with established national players like ACC, Gujarat Ambuja and Grasim. In this article, we will try and compare ACC with two of the biggest names in the international cement industry, Lafarge and Holcim. ACC

ACC is the largest producer of cement in the country with a total capacity of 16 million tonnes (MT) (11% of the total capacity in the country). The company has a pan India presence and is particularly strong in the northern and the eastern regions. ACC has a legacy of old plants and excess workforce and as a result, suffers from lower operating margins as compared to its peers.

However, in recent times, the company has upgraded its plant to almost 50% of its existing capacity and has exited from some of its non-core businesses (like Bridgestone). ACC, with its strong distribution network and a pan India presence, is well poised to capitalise on the growing demand for cement in the domestic market. We expect cement demand to grow at 8%-9% in the next five years.

Lafarge

Lafarge is a world leader in construction materials with operations in over 70 countries and leading positions in all four of its divisions: Cement (No. 1), Aggregates & Concrete (No. 2), Roofing (No. 1) and Gypsum (No. 3). The company has a total cement capacity of 148 MT (7% of estimated global cement market size of US$ 100 bn). Close to 71% its cement division's revenues accrue from the Western Europe and the North American regions.

Lafarge is among the first transnationals to enter the Indian market and has already emerged as a market leader in the eastern region. Lafarge is increasingly focusing on developing economies like India, as diversified presence helps it to effectively counter the lower growth rates in its mature markets with growing markets like India and other Asian countries. Asian region accounted for 10% of Lafarge's revenues in FY03. Lafarge has just completed a Euro 1 bn rights issue and it is believed that a significant part of it would be spent to expand its operations in the global markets.

Holcim

Holcim, the Swiss giant, is one of the world's leading suppliers of cement, as well as aggregates, concrete and construction related services. It has a strong market presence in over 70 countries and across all continents. The total cement capacity of the company equals 142 MT. Similar to Lafarge, Holcim is also trying to consolidate its presence in growing markets like Asia to compensate for the lower growth rates in established markets like the US. The company however, does not have a presence in India. Holcim has a 1 MT plant in Sri Lanka.

Let us see how the three companies compare on various parameters

As is evident from the table above, despite being in a growing economy like India, ACC has under-performed Lafarge in terms of revenue growth in the last three years. But it has to be remembered that Lafarge acquired Blue Circle in FY01 and this, consequently, increased the French major's presence in emerging markets. Organically, ACC's revenue growth is on the higher side.

ACC is operationally less efficient than its global peers mainly on account of its old plants and it has also been hurt by lower realisations in the Indian market. Lafarge's high operating margin stems from the fact that the company was able to capitalise on the Blue Circle acquisition. Cement prices are relatively higher in the US and Western Europe as compared to India, which is also a reason for higher margins. The net income margin of Lafarge was however, affected by extraordinary provisions in the form of a fine of around US$ 275 m, imposed by the European commission for alleged price fixing in the UK and Germany. Excluding this item, Lafarge's net margin stood at 4.6% in FY03.

Given the fact that ACC and Holcim are debt burdened, we expect an improvement in net margin in the future on the back of the restructuring exercise. Lafarge is expected to retire debts to the tune of US$ 1 bn from the rights issue proceeds. So, at the net profit level, the restructuring exercise could improve profitability of all three majors.

As far as the valuations are concerned, Holcim's P/E ratio is the lowest among the three as it had a poor FY02 and moreover, it has seen a decline in its topline in the past three years. ACC, on the other hand, trades at a premium to the global majors. There are various reasons for the same. One is that the company's operating margin at 12% in FY03 fares poorly when compared with domestic majors like Gujarat Ambuja (28%) and Grasim (24%). This is expected to improve considering the fact that cement prices are expected to remain favorable in FY04 and in the medium term. Demand could outpace expectation of 8%-9% depending upon the kind of infrastructure projects (Bangalore airport project is an example). Having said that, on a relative basis to both domestic and international companies, ACC's valuations are on the higher side.