Top four enjoy 50 p.c. market share

By Ramnath Subbu

MUMBAI, NOV. 24. The move by Grasim Industries last week to take a 10 per cent stake in Larsen & Toubro (L&T) is one more step in the consolidation process taking place in the country's fragmented cement industry.

Consolidation is not a new phenomenon to the domestic cement industry - the 100 million tonne industry has, in the last three years, been a witness to about a dozen takeovers.

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

GACL had overtaken Lafarge by striking a deal with the Tatas to acquire a 14.4 per cent stake in ACC for about Rs. 1,000 crores. GACL again moved quickly to block Lafarge's entry by acquiring the 1.4 million tonne DLF Cement in Delhi for Rs. 131 crores and renaming it Ambuja Cement Rajasthan.

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 capacity of 13 million tpa of cement 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 of India's states. However, this year with a better distribution of the monsoon, demand is expected to pick up.

As a consequence of Grasim's move, now, the top four players in the domestic industry - Grasim, L&T, Gujarat Ambuja Cement (GACL) and ACC - enjoy a market share of more than 50 per cent. Essentially, the four players would comprise two major blocks - the Grasim-L&T combine and the GACL-ACC combine. Grasim and L&T will have a combined capacity of 29 million tpa while the GACL- ACC combine has a capacity of 25 million tpa.

What Grasim's move has done successfully, is to virtually shut out the possibility of any multinational cement company gaining a major foothold in the Indian market. Lafarge already has a 4.5 million tonne capacity in India while the other global majors Holcim and Cemex have been keenly eyeing the Indian market for possible targets for the past few years now.

Lafarge has built up a capacity of around 4.5 million tpa in India through acquisitions - it acquired the 1.7 million (since expanded to 2.3 million tpa) of Tata Steel three years ago for Rs. 550 crores and bought Raymond's 2.2 million tpa cement business for Rs. 785 crores.

Holcim has a minority stake in Kalyanpur Cements, a 1 million tpa company and Italcementi is the other major with a presence here through its 50:50 joint venture in Zuari Cements.

In fact, all three majors - Lafarge, Holcim and Cemex - were prospective buyers for L&T's 16 million tonne cement capacity, having even completed due diligence. It is believed that the multinationals could be accused of being overcautious and having taken too long to decide on their acquisitions. Now, these large multinationals will have to wait for another opportunity to come their way or will have to acquire one of the big guns in the industry.

Mr. T. M. M. Nambiar, managing director, ACC, and president, Cement Manufacturers' Association (CMA) said ``As such, the industry was not so worried about takeovers by multinationals. What we were worried about was the creation of a situation where the domestic industry finds it hard to compete. Then if there are takeovers, it would be bad because valuations would be deceptive".

Further, Mr. Nambiar said, ``The financial health of the industry should be better. The industry is among the leaders in the world as far as technology and marketing are concerned. So the concern was more about the financial health as distress sales would not have been good for the industry".

CRIS-INFAC, a subsidiary of the rating agency, Credit Rating and Information Services of India (Crisil), has said that cement demand in the second half of the current year is expected to go up by about 8.5 per cent as against the corresponding period in the previous year and as a result, demand in 2001-02 is likely to be around 7 per cent higher.

According to CRIS-INFAC, the increase in demand could be attributed to the normal monsoons during the June-September period especially in the drought hit areas of Rajasthan, Gujarat, Andhra Pradesh, Karnataka and Chattisgarh.The Cement Manufacturers Association (CMA) figures indicate that cement prices in the major metros had seen a reaction over the six month period from April-October 2001. In Delhi, prices were down from Rs. 147 per bag in April to Rs. 139 in October. In Kolkata, prices reacted from Rs. 155 to Rs. 136, in Mumbai from Rs. 179 to Rs. 163 and in Chennai from Rs. 173 to Rs. 163 per bag over the six month period (April-October).

But there are indications that cement prices are firming up with some of the metros particularly in the west and north having increased prices by about Rs. 10-12 per bag. With an increase in cement prices, there have been the attendant allegations of cartelisation and prices moving up in tandem. ``I do not subscribe to the view about pricing power and that companies are able to dictate prices. The accusation of cartelisation is strange because it is too fragmented a market - there are more than 130 factories spread across the country. It is not possible to have a cartel. After all, prices still fluctuate as per demand and seasonality. If there was a cartel, why should prices come down at all?" said Mr. Nambiar.

Further Mr. Nambiar said, ``From last year, there is a slight improvement in the price situation although it is still not satisfactory. Prices should move up from now on. For this year, we are hopeful of a 6-7 per cent pick up in demand. In the first six months of the year, demand grew by 5 per cent and we are confident that in the second half it will be better. Going forward, we want to grow at 8-10 per cent but this will depend on the infrastructure projects kicking off".

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