Consolidating the Cement Industry – Brick by Brick

It was recently announced that Irish specialist CRH is to acquire a controlling 51% stake in the two 2.4 MT plants in Gujarat of the Jaypee Group, the country’s third-largest cement producer, the deal reportedly valued at an enterprise value of Rs 4,200 crore. CRH had earlier acquired MyHome Industries in 2008. This foreign direct investment signals renewed consolidation in the Indian cement industry which had reached its peak in the last decade. This is a fresh respite from the ongoing concerns among global buyout firms about investing in India since returns have gone down due to rupee depreciation, increasing costs of production and policy paralysis and hence the prospects of the Indian cement sector were on the verge of a downtrend.

Indian cement industry – an overview

Driven by domestic GDP, cement demand in India has grown at a CAGR of ~9% in the past decade. Demand for cement is closely driven by the construction sector which in turn is correlated to growth in GDP. With growing Indian GDP, there has been an increased focus on infrastructure development along with a growth in demand in the housing and industrial sector.

 

Demand-supply is typically balanced in all regions of India i.e. North, South, East, West and Central. The West is a net importer of cement followed by East which imports some cement. South and North are the both the biggest consumers and producers of cement. They account for 49% of the total consumption and 55% of the total production of cement in India.

The Budget this year removed a 5% duty on coal imports (cement makers import 25% of their coal); there is no import duty on cement. Cement will gain from rationalization of taxes and duties and a simpler excise duty regime. There is increased pressure on the government to completely remove the import duty on gypsum which is an essential product for the cement industry.

Consolidation – History

Globally, most cement markets have witnessed significant consolidation. After the dismantling of government controls for the cement industry in 1989, the rate of growth in capacity addition in the cement industry increased. Due to the increased production and the lack of matching consumption, there was excess capacity in the market which resulted in companies struggling to remain viable. Entry of foreign players resulted in the consolidation of the fragmented industry. Though the industry has seen consolidation by domestic players starting in the mid-1990s, it was only in the late 1990s that foreign players entered the market. Holcim entered India by investing in Kalyanpur Cements in 1990 and Lafarge commenced its Indian operations by acquiring Tisco’s cement plants in 1999.

Consolidation – Last decade

In the past decade, there was a wave of consolidation in the Indian cement industry. A number of large mergers and acquisitions were witnessed. In most cases, global companies have acquired regional players. In the period of high growth, large players, in order to increase their market share and establish pan-India presence, have followed the inorganic route of acquiring small and regional players. Grasim as a part of Aditya Birla Group (ABG) acquired a controlling stake in Ultratech Cement from L&T in 2004. In the same year, Holcim acquired 40-45% stake in Gujarat Ambuja Cements and ACC. Recently, Grasim merged into Ultratech to create a single entity. Other than these major mergers and acquisitions, Heidelberg cement acquired Mysore cements (2006), Italcementi acquired Zuari Cement (2006) and Vicat acquired Sagar Cements (2008).

As a result, currently, there are only 2 pan-India players – ABG & Holcim, together accounting for ~38% of the capacity. Top 19 players account for 87% of the capacity. The Eastern reagion enjoys the highest level of consolidation in the industry with the top 5 players occupying over two-thirds of the total market share.

In spite of the rupee depreciation, Indian cement industry is an attractive option for FDI primarily due to its size and growth prospects. India is the second largest cement producing country in the world. During 2007-12, the cement capacity in India almost doubled to around 300 MTPA. As per projections in the 12th Five Year Plan, the cement sector would need to raise its capacities to 470 million tonnes by 2017 to meet the rising requirement for the commodity. Entry into the market is relatively easy since there are some loss-making companies which can benefit from the infusion of funds.

The advantages of consolidation have been witnessed for over a decade now since sustained merger and acquisition activity in cement has led to much improvement in profitability and valuations in the sector. First of all, consolidation reduces sprinkling of capacities and boost competitive pressures. There is a better opportunity to tap in economies of scale which is likely to control cement prices. With the demand in the cement sector poised to grow over 9% in the next two years, increase in prices is a huge concern. Thus, consolidation amy help in stabilizing prices.

Secondly, the top 5 players after consolidation enjoy a better cost structure, driven by higher level of vertical integration and locational advantage with respect to sourcing of raw materials and market access. Most other players have a weaker cost structure and moderately high leverage levels.

Thirdly, the financial strengths of the acquiring companies could help rescue assets which are loss making at present.

However, cartelization remains a possibility since the top five players control half the total capacity. Recently, the Competition Commission of India (CCI) has slapped 11 cement companies with a fine of Rs. 6,304 crore for price cartelization, the highest penalty ever imposed by the fledgling, but increasingly assertive, anti-trust regulator. It is predicted that the levy of penalty will lead to further consolidation in the industry. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, another wave of consolidation would not come as a surprise.

– by Kirtika Sharma

Kirtika is a PGP-1 student at IIM, Ahmedabad and a member of the Consult Club. She graduated from IIT, Delhi in 2011 with a B.Tech in Textile Engineering and has worked for AT Kearney as a Business Analyst for an year

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2 thoughts on “Consolidating the Cement Industry – Brick by Brick

  1. I think the article is well written and comprehensive, nice work.

    Although one wonders how consolidation might lead to a stabilization of prices as suggested, especially in the light of the CCI probe, the anti-trust case and the fines. Can wait and watch.

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