Why cement companies are going in for M&As
It’s a dog-eat-dog scenario in the Indian cement sector as the pace of mergers and acquisitions (M&As) has been robust in the last few years.
“From FY14 onwards, capacity worth 59 million tonne per annum (mtpa) (13% of FY17 capacity) changed hands in the Indian cement industry,” said an IIFL Institutional Equities Research report. This includes acquisition of Jaiprakash Associates Ltd’s 21 mtpa cement assets by UltraTech Cement Ltd, which concluded recently.
Opting for inorganic growth or a brownfield expansion is both time and cost efficient. However, there are a couple of other factors too that have contributed to the ongoing M&A spree in the cement sector.
First and foremost, cement demand is yet to see a significant revival. Coupled with an oversupply situation it is making survival difficult for smaller unorganized cement firms. For instance, in the southern region, one may increasingly witness a scenario of big fish eating the little ones. According to analysts, in the states of Andhra Pradesh and Telangana the total available capacity is nearly 85 mtpa and demand is around 20 mtpa. So, even if the demand scenario improves, the situation for small firms doesn’t get any better.
Region-wise, the east reports the highest share of all-India capacity addition and is expected to see 58% capacity hike over FY15-20E versus all-India average of 17%, said a report by Elara Capital (India) Pvt. Ltd .
Secondly, given the subdued profitability of sellers, deal offers are largely at around replacement cost, which is spurring completion of deals, say analysts. Some examples are the Orient Cement Ltd and Jaiprakash Associates deal and the acquisition of Reliance Infrastructure’s cement arm Reliance Cement Co. Pvt. Ltd by Birla Corp. Ltd.
A channel check conducted by IIFL indicates sale of Binani Cement Ltd’s 6.25 mtpa capacity in the northern region may happen this year. Last month, the National Company Law Tribunal, Kolkata, admitted an insolvency plea against the cement maker filed by Bank of Baroda, which is one of the company’s lenders.
Also, amendments made to the Mines and Minerals (Development and Regulation) Act last year allowing transfer of lease for captive mines as a part of deals to sell cement assets has aided M&A activities.
“From an industry perspective, consolidation is good because it brings more pricing discipline for cement manufacturers. However, from a consumer perspective, it is bad since it leads to an oligopoly-like situation,” said Rohit Natarajan, an analyst at IDBI Capital Markets and Securities Ltd.
Meanwhile, after the UltraTech-Jaiprakash deal, the market’s focus has shifted to another large and anticipated merger between ACC Ltd and Ambuja Cements Ltd. In May, boards of both the firms informed exchanges that they would start evaluating a potential merger. ACC and Ambuja are part of conglomerate LafargeHolcim.
In short, consolidation is likely to be the name of the game in cement in the near term.