M&A deals in cement expected to help stabilise prices

The consolidation in the cement sector through a flurry of merger and acquisition deals in the recent past is expected to bring in production discipline leading to price stability in the long run.

The development would be a blessing in disguise for the cement sector which is trying to overcome the excess production capacity built over time in anticipation of sharp pick-up in demand.

Juicy deals

The country’s largest cement maker Aditya Birla Group company’s UltraTech Cement was the biggest beneficiary in the consolidation game as it added about 26 million tonnes.

It recently completed the industry’s largest acquisition of 21 million tonne stressed cement asset of Jaiprakash Associates for ₹16,000 crore. It also bought over two cement assets of 4.8 million tonnes from the same company.

Detergent and soap maker Nirma made its mark in the most crowded cement sector with the acquisition of 13 million tonnes of Lafarge India asset for ₹9,400 crore.

Birla Corporation acquired Anil Ambani’s cement business of 5.5 million tonnes for ₹4,800 crore. Currently, UltraTech Cement and Dalmia Bharat are engaged in a pitched battle to take over 11 million tonnes of Binani Cement. KK Maheshwari, Managing Director, UltraTech Cement, said it took almost nine months for the company to integrate production and in less than two months investments were made to improve the quality of cement produced to that of UltraTech standard.

Low capacity utilisation

The capacity utilisation of the bought over plants have been increased to 75 per cent from 20 per cent, while retaining all the workers and dealers, he added.

The cement industry has a production capacity of 425 million tonnes and is operating at 70-75 per cent capacity utilisation for the last four to five years due to any reasonable increase in demand. Cement prices have gone up by just two per cent CAGR (compounded annual growth) in the last five years, the production cost has been on the rise steadily.

While cement demand is now showing signs of revival, the government is keeping a close watch to ensure that cement companies does not take advantage of the situation and hike prices.

Binod Modi, Senior Research Analyst, Reliance Securities, said the consolidation in cement sector is inevitable as there are about 20 large cement companies in India compared to four to five in the sector globally.

In the current situation, he added Indian cement companies have lost their pricing power as they increase production on any sign of revival in demand.

The current oversupply situation is making survival difficult for smaller unorganised cement firms. Currently, any cement deal executed in the valuation of $120-140 a tonne sounds reasonable, he said.

Source: THE HINDU BUSINESSLINE