Mumbai/New Delhi: The Aditya Birla Group has emerged as the front-runner in a bid to acquire a stake in the cement business of Jaiprakash Associates Ltd (JAL) that could potentially be valued at $1 billion (around Rs 5,700 crore), according to three people familiar with the matter.
The two sides are in direct talks and negotiations have advanced considerably, said a senior Aditya Birla Group executive requesting anonymity.
“We have emerged as the front-runner. There were not too many serious players, except one multinational company,” this person said. “The idea is to buy out a part of the stake from JP Associates’ cements business. The acquisition could be as big as $1 billion.”
The exercise is aimed at reducing debt and may even result in a complete exit by JAL from the third largest cement business in India.
JAL is an infrastructure company that also runs hotels, cement plants, utilities and the Buddh International racing circuit near New Delhi, besides developing real estate. Its cement units produced 15.87 million tonnes in the year to March 2011.
“Jaiprakash Associates is in direct talks with the Aditya Birla Group. They had approached the top management directly,” said another person aware of the development, seeking anonymity.
The Economic Times newspaper had reported on 15 June that JAL could conclude a deal for its cement plants in Gujarat and Andhra Pradesh with France-based Lafarge SA, the Aditya Birla Group or Switzerland-based Holcim Ltd, which owns ACC Ltd and Ambuja Cements Ltd.
Debt-fuelled growth has taken its toll on JAL. Even as income from operations grew by a healthy 30% in 2011-12, profit contracted 54% to Rs 947 crore, as a sharp rise in interest costs crimped earnings. From Rs 1,979 crore in 2010-11, finance costs surged 58% to Rs 3,134 crore last fiscal. Long-term borrowings during the year increased 12% to Rs 43,912 crore and total liabilities spiked 21.6% to Rs 64,459 crore.
While questions emailed to a JAL spokesperson on Sunday evening remained unanswered at the time of going to press, O.P. Puranmalka, business director at Aditya Birla-controlled UltraTech Cement Ltd, and director, Aditya Birla Management Corp. Pvt. Ltd, said his company would not comment on market speculation in line with its policy.
The moves take place at a time when, in the first order of its kind, the Competition Commission of India (CCI) censured the cement industry for cartelization on 21 June and imposed a penalty of at least Rs 6,300 crore on the top 11 makers of the building material.
Among these, the worst-hit were ACC, Ambuja Cements, UltraTech Cement and JAL, which have been fined in excess of Rs 1,000 crore each. All the 11 firms were fined 50% of their average profit for the 2010 and 2011 fiscal years, the period for which they were investigated.
Fitch Ratings said on Monday that the CCI order may aid the process of further consolidation in the industry over the long term. “To the extent regulatory intervention limits coordinated supplier actions with respect to price and quantity, smaller firms (single or multiple plants with high geographic concentration) with uneconomic cost structures would become uncompetitive and face very significant deterioration in their credit profiles. As such, the fragmentation level in the industry is expected to reduce, and larger and vertically integrated companies are likely to gain market share,” Fitch said in a statement.
Fitch has maintained a negative outlook on the Indian cement industry for the last two years. The industry has been struggling with excess capacity, given the existing muted demand scenario besides having a structural feature of relatively high operating leverage.
An infusion of fresh cash would revive JAL’s finances. According to Kim Eng Securities, the company requires Rs 12,100 crore to complete ongoing projects over the next two years. As the company is only able to meet 30% of its investment obligations through internal accruals because it has little surplus cash after meeting interest costs, it has to tie up funds from other sources for the rest, Kim Eng said in a 15 June note.
It forecasts a cash flow shortfall of Rs 6,000 crore in fiscal 2013 and Rs 2,700 crore in fiscal 2014.