The proposed merger of ACC and Ambuja Cements, both group companies LafargeHolcim of France, has thrown up more questions than one, the most pertinent being: is there room for more consolidation? Significantly, before the ACC-Ambuja move, the Indian cement industry, over the past three years, had seen 47 million tonnes of capacity change hands for an enterprise value of more than Rs 36,000 crore. These nhad already led to significant consolidation in the sector.
If the ACC-Ambuja merger comes through, the merged entity will be India’s second largest cement company in terms of market value. Ultratech Cements, which was created by consolidating the cement operations of L&T and the AV Birla Group, will still remain the largest cement company in India. LafargeHolcim currently owns 66 per cent in ACC and 55 per cent in Ambuja Cements.
The proposed merger appears to be timed to capitalise on the emerging opportunities in this sector. Although there is no official data available on the overall latest industry capacity, analysts estimate the overall size of the cement industry in India to be in the range of 410-420 million tonne. Following the major consolidation moves over the last three years or so, there have been two new entrants – Nirma Group and Birla Corp Ltd – while Lafarge India and Jaypee Group made an exit.
Top three
Interestingly, the wave of consolidation, so far, has been, restricted to the top three cement producers. And this has to be seen in the light of the fact that the Indian market is highly fragmented. There are many sector analysts and industry officials who felt that although there may not be any more consolidation of such high values, smaller deals and consolidation of smaller sizes may also happen, going forward.
There are some players, yet to be part of any such consolidation, who think that the capacity in the hands of the top 10 cement producers in the country will increase. But, as a percentage of the total market, this will always be low because the entire cement market size is growing at a faster pace, driven by demand growth.
For instance, looking ahead, Ind-Ra expects cement producers to add additional 50mtpa capacity over FY16-FY18 at a CAGR of 6 per cent compared to the CAGR of 4.9 per cent during FY13-FY16 (additional 40mtpa). ICRA expects cement demand to grow by around 4-5 per cent during FY2018, mainly driven by a pick-up in the infrastructure segment – mostly housing, road and irrigation projects. Further, the increased budgetary allocation for the infrastructure sector, which includes roads, railways, metro, irrigation and housing, during FY2018 will directly and indirectly support cement demand. Also, higher rural credit and increased allocation for rural, agricultural and allied sectors, including the demand for rural housing, are expected to be significant contributors to the overall cement demand.
Growth
Ind-Ra (India Ratings) also expects the cement industry to grow at 4 per cent to 5 per cent year-on-year (yoy) in FY18, driven largely by demand stemming from infrastructure activities and a revival in housing demand in rural areas, both led by government spending. Ind-Ra also expects the credit profile of cement manufacturers to remain stable on stable operating profitability and in the absence of debt-led capex.
At the outset, it may also make sense for some to sell their cement assets and make an exit, considering the valuation of the cement assets that the industry had seen in some of the recent deals. At least that’s what Shree Cement managing director H.M. Bangur feels.
Vivek Chawla, CEO, Emami Cement Ltd, a relatively new player in the field said, “We have a positive outlook on the ongoing consolidation that is taking place in the cement industry. This is likely to have a positive impact on the industry as a whole.”
Asked if relatively newer/smaller players/local players will also have to join the bandwagon, Chawla said, “In spite of the consolidation in the last few years, the top four players will continue to have a capacity share of around 45 per cent including the recently announced ACC-Ambuja possible merger. There will therefore always be space for cement players with reasonable capacities in the market. The way forward for us is to grow into a meaningful player in the cement industry with a respectable market share.”
Chawla is possibly right. A sector analyst, pointed out that the total cement capacity in the hands of the top 10 cement producers in India, following the mergers and acquisitions seen in the past three years (before the ACC-Ambuja move, of course), stands at 280.93 million tonnes. If those deals had not happened, the cement capacity in the hands of the top 10 producers would have been nearly 273.1 million tonne. The difference, therefore, caused by these moves has been a meagre 7.83 million tonnes. Therefore, with the demand growing, the key concern and look out for relatively smaller players would be to increase their market shares.
