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Cement: Better import than acquire!

Oct 9, 2006

Consolidation is the name of the game in the cement industry. The booming demand for cement, both in India and abroad, has attracted global majors to India. Demand has been driven by a booming housing sector and increased activity in infrastructure development such as state and national highways. Multinational cement companies have been aggressively picking up stakes in large Indian cement companies. Within a short span, 4 top cement companies in the world have entered India through mergers, acquisitions, joint ventures or greenfield projects. The level of consolidation determines prices - faster the consolidation better the prices. This is because consolidation helps in proper and timely supply of raw materials and finished goods, and every player can have a better market share compared to a situation in a fragmented market, leading to better prices. With this, Indian cement companies have been strategically acquiring smaller cement companies to increase their market share, better access to markets, to gain presence across the country and large Indian companies coming under the umbrella of multinationals.

Benefits to the acquiring company from the acquisition deal are as follows:

  • Economies of scale resulting from the larger size of operations

  • Cost savings

  • Access to new markets

  • Access to special facilities / features of the acquired company

  • Benefits of tax shelter.

  • Better pricing power for the leading cement players and has also reduced undercutting, which results in fall in prices.

Capacity Million Tonnes (MT)
Company FY06
ACC 19
GACM 13.3
GRSM 13.6
ULTRATECH 17
Total 62.9
Industry 160
% Of Industry 39%
Consolidation of capacities over the years has seen UltraTech, Grasim, and Gujarat Ambuja emerge as the leading players apart from ACC. Now, in FY06, top 4 companies account for 39% of the total industry capacity.

Prior to consolidation during 1990's, there were more than 50 players (with large plants in capacity) in the industry, scattered across India. Now with consolidation effect, the industry is less fragmented in terms of number of plants and players, resulting in better pricing power.

Consolidation has led to the formation of two large alliances in the country. A careful look at these two alliances points out that the companies in these alliances have the advantage of large and diverse capacities, which will enable them to cater to the demand across the country.

Grasim is a diversified entity with cement contributing more than 50% of revenues. Grasim bought a small southern-based cement manufacturing company, Dharani with the aim to become largest cement player in the country and to have presence all over India. Prior to this acquisition, Grasim had presence in northern, eastern and western markets.

GACL acquired ACEL (Ambuja Cement Eastern Ltd) and the strategy behind acquisition was increase former's market share in eastern region and, also to avail of the tax benefits due to ACEL's accumulated losses. Holcim-ACC-Gujarat Ambuja deal will benefit all players. Holcim is known for its energy-efficient technology. With Holcim coming in, both companies will now work on alternate fuels, R&D, logistics and transportation. There will be savings for both companies. ACC has got pan India presence, which will help Holcim to position its brand across India. Export of bulky commodity is cost effective for Gujarat Ambuja because of its locational advantage and has got its own jetties at Gujarat port (the cheapest mode of transport).

But all is not rosy with respect to consolidation. Though large capacities help, operating efficiencies decide whether the business is sustainable in the long run. Currently, firm liquid fuel prices are putting pressure on margins. But with narrowed demand-supply gap, companies are enjoying better realisation, which is helping these companies post robust numbers.

Going forward, we are positive on the growth prospects of the cement sector in India, given the above-mentioned factors. However, as regards valuations, we believe that the growth has already been factored in, on an EV/tonne basis. Just because Holcim paid more than US$ 200 per tonne (enterprise value) does not mean that every cement company should attract similar valuations. At the end of the day, lets understand that cement is a commodity and commodities do have cycles!


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