Consolidation in cement gains strength

By Our Staff Correspondent

MUMBAI, NOV. 19. Reliance Industries's decision to sell just over 10 per cent of its stake in the engineering-cement giant Larsen & Toubro (L&T) to the A. V. Birla group flagship, Grasim Industries, for a consideration of Rs. 766.50 crores is a major move in the cement sector.

RIL's association with L&T is more than a decade long and there were indications some years ago that it would take over the company but that did not materialise. The deal between Grasim and RIL, which was struck at a price of Rs. 306.60 per share for 2.5 crore equity shares of L&T, is expected to have some impact on the cement industry which has already gone through some major consolidation.

Although there are no clear indications as yet whether Grasim would take over L&T as the financial institutions have a major 24 per cent stake in it, the fact of the matter is that the Rs. 8,000 crore plus L&T is today the largest domestic player in both engineering and cement sectors and the A. V. Birla group is the third largest player in the domestic cement industry.

Speaking to The Hindu, Mr. Saurabh Misra, head of the Aditya Birla Group's cement business said, ``This deal has worked out well because as a rule, we do not believe in hostile moves. We like the company and the management. A 10 per cent equity is a substantial investment and it will allow us to get to know the L&T better and at a later date we can always re-visit our position".

Consolidation is not new to the cement industry. The domestic cement industry is about 100 million tonne capacity and in the last three years, there have been about a dozen takeovers.

Only last year, the world's second largest cement maker, Lafarge SA of France bought two plants in India. Gujarat Ambuja Cements, the fourth largest player in the country bought 14 per cent stake in the second largest domestic player Associated Cement Companies (ACC).

The Aditya Birla group has already identified cement and the knowledge-based business with a strong service orientation as significant growth opportunities and according to Grasim, L&T's portfolio of business is a perfect fit with this aspiration.

``We have two basic portfolios of business - cement, which is the growth vehicle, and knowledge intensive business, which is the new thrust area. Cement has forward linkages in construction which in turn has forward linkages in EPC. This is less capital intensive and more knowledge intensive," said Mr. Misra.

L&T last year said it would spin off its 16 million tpa cement division. The division accounts for about 28 per cent of sales and the company was looking to sell 37.5 per cent to an overseas player. At that point, players like Lafarge and Cemex SA had evinced interest.

Grasim has a cement capacity of 13 million tpa while domestic demand is of the order of 80 million tpa. Cement manufacturers have seen sales decline in the last two years as drought conditions prevailed in eight States. However, this year with a better distribution of the monsoon, demand is expected to pick up. L&T had projected a 30 per cent increase in its engineering and construction business over the next two years as infrastructure projects pick up and for the quarter ended September 2001, L&T's profit more than trebled to Rs. 40.46 crores as against the year ago period.

There is a school of thought that Grasim has paid too much for the acquisition of the 10 per cent stake. But Mr. Misra said, ``We believe we got the block at a fair price. L&T's average share price in the last two years has been Rs. 258 but then during January-March 2000 it was ruling more than Rs. 600".

Further, Mr. Misra added, ``In the short term, the benefits will be from knowledge sharing, and best practices. Our debt-equity leveraging has gone up by 0.7 per cent which is a fair position and we have not overstretched ourselves".

Regarding a change in the board of L&T to facilitate Grasim management to come on board, Mr. Misra said, ``As and when the L&T board meets, it will decide and announce any change in the board.

Any announcement from our side will only follow their announcement".

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