Mumbai: A year after it witnessed two acquisitions in quick succession—HeidelbergCement AG’s buyout of a 51% stake in Mysore Cements Ltd and Holcim Ltd’s of a 14.8% stake in Ambuja Cement India Ltd—India’s cement sector remains fragmented in part. Analysts predict that consolidation in the sector will continue, but say that it could take time and be expensive in an economy that expanded by 9.4% in 2006-07. India is the second largest market for cement.
A market growing at around 9% continues to attract new companies. The price of cement has risen almost 50% between 2004-05 and 2006-07 to an average Rs227 for a 50kg bag. “The sector is seeing good times as the (cement) demand is high. The valuations are high for buyout. We see some new entrants coming in instead of the existing ones exiting,” said Rakesh Arora, cement analyst at Macquarie Securities (India) Pvt. Ltd.
A Citigroup Global Markets report released in May said manufacturers produced 152.8 million tonnes (mt) of cement in 2006-07. Around 47% of the country’s capacity of 169 mt is controlled by the Holcim-Ambuja-ACC combine and the Aditya Birla Group’s cement companies. The rest 53% is accounted for by around 25 companies led by India Cements Ltd which has a share of 7-8%.
Faced with a decision to buy or build, most new entrants are opting for the latter. With Indian cement manufacturers having a capacity of 2-3 mt and the requisite technology not actively looking for foreign know-how, it is becoming difficult to find the right seller, said Sourav Mallik, vice-president, Kotak Investment Banking. “Gone are the days when the manufacturers would be under compulsion to exit. From now onwards, they will exit out of choice,” he added.
Thus, the Mumbai-based JSW group plans to set up a cement plant as part of its 4-mt steel manufacturing facility in Karnataka’s Bellary district. India’s largest steel maker by capacity, Steel Authority of India Ltd, has announced a joint venture with North India-based Jaiprakash Associates Ltd and Cemex SAB, the world’s third largest cement maker by capacity is also looking at India, said investment bankers close to the development who did not wish to be identified.
“Despite coming off their highs, enterprise value per tonne valuations are still high in the range of $120-210, especially considering replacement costs in the range of $90-100/tonne,” says the Citigroup research report. “The valuations are no doubt expensive when compared to what it was three years ago, but the valuations reflect the growth the sector promises,” said Ravi Menon, managing director and co-head, global investment banking HSBC Securities and Capital Markets (India) Pvt. Ltd.
In absolute terms, the valuations of cement firms are double those in 2001. “Seller expectations are high. The valuations have risen from $85 per tonne to $150-175 per tonne,” said Amrish Baliga, former head of private capital practice at ICICI Securities Pvt. Ltd.
As a result of this mismatch between the expectations of sellers and the prices that buyers are willing to pay, not too many deals are happening. “Consolidation has slowed in the recent past as the cement manufacturers are in no financial emergency. They are not willing to sell because the growth is enormous,” said Kotak’s Mallik. Indeed, despite the government removing tariffs on the import of cement, a booming economy has meant that domestic manufacturers have not been affected.
Anil Singhvi, former managing director of Ambuja Cement India Ltd and now chief executive officer of Ican Investment Advisors Ltd, Indian arm of Swiss asset management company Notz Stucki, said consolidation would continue but at a higher cost. “The cement sector is in a sweet spot, so the sellers are expecting higher valuations. In a year, there could be another round of consolidation, but it will be expensive,” he added. He foresees valuations rising once the distribution strength of companies is factored into valuations instead of just the replacement cost of capacities.
“The next wave of consolidation should begin when the stocks move up or when the sector starts seeing a downturn in big way. All the companies with just a million tonnes capacity and are not financially sound will be the first ones to be acquired,” said Arora of Macquarie. Except for ACC, all major cement stocks reached their peak in January 2007. They have seen since corrections in the range of 18-33%.