Cement: acquisitions, order of the day

By Ramnath Subbu

MUMBAI, FEB. 19. The consolidation that commenced in the cement industry last year is now in full swing and is set to accelerate in the near future. With smaller players being marginalised, takeovers and mergers seem to be gaining ground.

The industry grew at 18 per cent in 1999 and capacity today stands at 107 million tonnes against a demand of around 95 million tonnes. Production almost matches demand as capacity utilisation has been 85 per cent at its maximum. There is not much fresh capacity being added now and institutions are unlikely to fund new, greenfield ventures.

According to Gujarat Ambuja Cement Limited (GACL), the demand for cement is robust in the current year and for the first nine months (April-December 1999), it has grown by 18 per cent. Consumption during the period was 66.25 million tonnes (56.33 million tonnes). The demand impetus, which has started during the year, is continuing and the growth is expected to be above 15 per cent.

According to Mr. V. M. Mohan, general manager, corporate finance, India Cements Ltd., ``Over the last 2-3 years, about 20-25 million tonnes of existing capacity have either been acquired or taken control of. There is another 20-25 million tonnes available to be acquired. Today between 60-65 per cent of the capacity is controlled by the larger groups.''

Multinationals are also keenly scouting out for attractive buys and Lafarge's entry is likely to accelerate consolidation. The flurry of activity in relation to acquisitions is attracting global players who have been focussing on the Southeast Asian markets. The Indian cement industry has inherent attractions for MNCs. It is the second largest market in Asia after China. It is also the third largest market in the world. Demand growth in the Indian market continues to remain positive unlike other Asian countries and there is a renewed focus on profitability.

Cement is essentially a high volume low margin cyclical business. A company's sustenance is driven by volume growth and this holds true irrespective of the market conditions and it is therefore imperative that cement companies expand capacity, adds ICL's GM.

An acquisition or a merger makes sound business sense as a greenfield mid-size plant of one million tonnes capacity costs between Rs. 350-400 crores. Then there are the attendant problems of project completion and gestation period of 3-4 years. New plants would have gestation periods of up to five years as procuring the lease for limestone quarrying takes upto a year. As against this, an acquisition gives a company an opportunity to select a location, assess the market, check for raw material availability and consider competition. Among these factors, the availability of limestone - the major input - is very important. It requires 1.5 tonnes of limestone to produce one tonne of cement.

Four major players have been increasing their presence in this industry over the last two years - L&T, India Cements, Gujarat Ambuja Cements and Grasim Industries. They now control more than 50 per cent of the total installed capacity of the industry of close to 110 million tonnes.

L&T with 12 million tpa capacity is the largest in the industry. In it's cement division, the operational initiative comprises further improvements in cost competitiveness in clearly defined areas and an increase in production capacity of current assets by nearly 50 per cent. These areas include upgradation of existing capacities, change in product mix, addition of grinding units in select high price realisation locations and brownfield expansion will result in six million tonnes capacity increase.

The phased increase is planned over three to four years with a minimal capital expenditure of $40 per tonne (Total capital expenditure estimated to be around Rs 1000 crores.

The planned increase follows the company's successful initiative in increasing output to nearly 13 million tonnes and will catapult it into a 19 million tonne major. This would increase the company's relative market share from 11 per cent today to over 15 per cent by 2003. Its cement plant at Tadipatri in Andhra Pradesh and the captive power plant at Awarpur, Maharashtra have started operations.

Gujarat Ambuja Cements (GACL) last month tied up two important deals - firstly a controlling stake in DLF Cements and a strategic 7.2 per cent stake in Associated Cement Companies (ACC). It has been among the most dynamic of cement majors and today boasts of being the most efficient cement producer. The DLF Cements deal will enable the company to have a presence in the northern markets of Himachal Pradesh and Punjab.

ACC's captive power plants of 25 MW each at Jamul and Kymore as also the project for augmentation of grinding capacity to 1.7 million tonnes per annum at Kymore were commissioned in November 1999.

Grasim has benefited tremendously from Indian Rayon's cement business being transferred to it. It is now among the few companies to have a diversified geographical presence. The credit rating agency ICRA expects this factor would insulate Grasim from the regional demand supply imbalances that are a feature of the industry. The company's total cement capacity (including one under erection) currently stands at 10.72 million tonnes, making it the third largest cement player in the country. The project work on Grasim's new 9 lakh tonne cement plant at Reddipalayam, near Tiruchi in Tamil Nadu is under way. A 10 MW captive power plant at an outlay of Rs. 45 crores is also being set up and is expected to be completed in the next one year. With this, Grasim's presence in the lucrative markets of Southern India will be even more significant.

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