The largest cement player in the country, UltraTech, part of the Aditya Birla Group, and its close rival Ambuja Cements, now owned by the Adani Group, have trained sights at the south Indian market to usher in the next round of growth.
UltraTech’s recent announcement that it would acquire the promoters’ holding in Chenna-based India Cements is only the latest move in what promises to be an aggressive round of buyouts.
In terms of actual numbers, the south has an installed capacity of 188 million tonnes per annum (mtpa) against 626 mtpa nationally.
Apart from being the largest on this parameter, the region also has the most number of players, estimated to be at least 45. Capacity utilisation is again the lowest at 60-65%, compared to the national average of close to 75%, with the north leading the pack at 85%.
The extent of M&A interest in the south is clear from the fact that starting last December, all the six deals announced came from here.
The prominent ones include UltraTech’s buyouts of Kesoram Industries and most recently India Cements, while the Ambuja-ACC combine picked up a grinding unit owned by MyHome Industries followed by Penna Cements. A report put out by ICRA in June says the Top 5 players in the south account for 47%; contrast this with the North, where the Top 5 account for 83%.
The head of a south-based cement maker, who did not wish to be named, points out that capacity utilisation levels are not evenly distributed even within the region.
“It could be less than 45% in one part and 90% elsewhere,” he says. His view is that not all companies in the south are up for sale, since many are known to be extremely efficient. “In this scenario, M&A becomes a challenging proposition. The valuation gap becomes very wide since the seller often has a huge expectation,” the executive points out. Of course, for every compact efficient player, some struggle to run a profitable operation.
“Large players look to acquire them to consolidate their position and gain market share. The recent acquisition costs have been lower than replacement costs, allowing larger players to acquire these assets at reasonable prices,” says Uttamkumar Srimal, Senior Research Analyst (Cement & Infra) at Axis Securities. The smaller players don’t always have the best cost structure, leading to margin pressure. Mangesh Bhadang, Senior VP of Centrum Broking thinks a plant has to be at least 3 mtpa to make economic sense.
“UltraTech and Ambuja will command a premium; the others typically sell at a discount. If the large players drive down costs, it can be very challenging for the smaller ones,” he says. A recent Emkay Global lists 15 companies—both listed and unlisted—across the country that that could be potential acquisition targets. A significant proportion is from the south, including Deccan Cement, Chettinad Cement, MyHome Industries and Bharthi Vicat.
