Nirma-Lafarge deal: A new kid on the cement block1 min read . Updated: 12 Jul 2016, 07:52 AM IST
The deal may bring some uncertainty in the cement business in the eastern region dominated by UltraTech Cement and LafargeHolcim's ACC Ltd
Nirma Ltd’s aggressive bid of $1.4 billion to buy LafargeHolcim’s cement business of around 11 million tonnes per annum was quite a surprise, simply because it beat conglomerates like the Piramal Group and JSW Cement Ltd. Importantly, it marks the entry of a serious new contender in the cement sector.
Nirma has so far worked towards being a household name in detergents. However, in the recent past, it has been noticeably growing in commodities like soda ash. It has tested waters in cement with a small capacity in Rajasthan. Some part of Lafarge’s cement capacity is in the state, which will help Nirma gain a stronger hold in the region.
Next, although some analysts say that the enterprise value of the deal works out to roughly $130 per tonne, which is not cheap, note that Nirma gets a sizable capacity at one go. And, three-fourths of the capacity is in the east, a more lucrative market, both in terms of demand and pricing. Compared with this, the southern belt is hit by overcapacity.
Although benchmarks in mergers and acquisitions are useful, they cannot be sacrosanct in commodity businesses like cement. Further, the cement sector is now poised for an uptrend. Shares of leading cement firms have appreciated significantly in the last few months, following strong pre-monsoon demand and price increases.
However, this deal may bring some uncertainty in the cement business in the eastern region, at least in the near term. At present, UltraTech Cement Ltd and ACC Ltd (a LafargeHolcim subsidiary) have a strong presence in the east. The question is: will Nirma undercut cement prices to establish itself and retain the hold that Lafarge has in the region? Such incidents are not new to the sector. A couple of years back, a leading cement company had reportedly undercut prices to gain a foothold in the market, following capacity expansion.
On the other hand, if an incumbent had acquired Lafarge’s units, then one could have expected consolidation and greater pricing discipline.
Note that Nirma has been an aggressive entity in the packaged consumer goods market, not bucking to pressure from multinationals. Besides, it is known to have deep pockets with strong cash accruals, enough to hold out in a cyclical business like cement.