Less than a year after it took control of ACC, Swiss cement major Holcim has consolidated its position in the country by acquiring a major stake in Gujarat Ambuja Cements. Besides the impact on the Indian cement industry, the $1-billion investment in a major infrastructure sector company by a global industry leader is an emphatic confirmation of the country's growth potential.

In a major consolidation move in the Indian cement industry, Holcim has acquired a 14.8-per cent stake in Gujarat Ambuja Cements (GACL) from its existing promoters. GACL is the fourth-largest cement manufacturer in the country behind ACC, UltraTech Cements and Grasim.

Holcim would pay Rs105 per share of GACL, including a non-compete premium of Rs15 per share. Holcim would make a voluntary open offer for an additional 20 per cent of GACL later in February at Rs90 per share.(See: Holcim acquires 14.8% in Gujarat Ambuja; to make open offer)

The acquisition of 20 crore GACL shares from the existing promoters has cost Holcim Rs2,100 crore. An additional 20 per cent through the open offer would cost around Rs2,400 crore, taking Holcim's total investment in GACL to Rs4,500 crore or slightly over $1 billion.

The acquisition values GACL at around Rs12,070 crore, excluding the non-compete premium paid to existing promoters. Holcim is paying around $200 per tonne of manufacturing capacity, double of what it paid for ACC.

The high valuation of GACL is mostly on account of the much higher operating margins enjoyed by the company when compared to its industry peers. GACL is also the dominant player in the western parts of the country and strategically located to exploit the export potential to the Middle East. The fact that Holcim would emerge as one of the dominant players after the deal also explains the premium valuation.

Holcim in India
Holcim made its entry into the country by acquiring a two-third stake in Ambuja Cements India Limited (ACIL), a group company of Gujarat Ambuja Cements. ACIL had earlier acquired the stake held by the Tata Group in Associated Cement Companies and was the single largest shareholder of ACC.

After Holcim acquired a majority stake in ACIL, the company made an open offer to the shareholders of ACC. Subsequently, the ACIL stake in ACC went up to 34 per cent.

ACIL also holds a majority stake in Ambuja Eastern Cements, a cement manufacturer based in the eastern part of the country with an annual capacity of 2-million tonnes.

Cement Industry rankings
After the earlier Holcim deal with the Gujarat Ambuja group for ACIL, the Aditya Birla Group acquired L&T's cement division. The cement division of L&T was de-merged into a separate company called Ultratech Cements, in which the Aditya Birla Group has a majority shareholding.

With the GACL stake acquisition, Holcim now controls a 33.5-million tonne capacity of India's total installed capacity of of 165-million tonnes per annum. Of this, ACC contributes 19-million tonnes, Gujarat Ambuja around 12.5-million tonnes and Ambuja Eastern 2-million tonnes per annum.

The Aditya Birla group controls a total capacity of 31.5-million tonnes, of which UltraTech Cement has a capacity of 17-million tonnes, Grasim around 13.5-million tonnes and Shree Digvijay Cements of 1-million tonne.

Source: Company websites

If the control of BK Birla group of companies is eventually handed over to Kumarmangalam Birla, the aggregate capacity of the Aditya Birla Group would exceed that of Holcim even after its plant expansion plans that will add around 1-million tonnes.

All the other groups are regional players unlike Holcim and the Aditya Birla Groups who have a pan-India presence. Jaiprakash Associates has reportedly acquired the UP State Cement Corp, a sick unit with a 2-million tonne capacity. The company is also setting up a 3-million tonne per annum green field cement plant.

Lafarge, the French cement major, currently has a capacity of around 5-million tonnes per annum mostly acquired from companies like Tata Steel. The company is considering a large green field plant, possibly in the state of West Bengal.

Most of the possible consolidation in the cement industry has already taken place after the major deals of the last few years. The remaining attractive acquisition targets for major players are the South India-based groups - India Cements and Madras Cement. Growth rates and realisation levels are higher in the Southern states, which may prompt a bid for one of these companies in the future.

As the industry has consolidated with two large players on top, Holcim and the Aditya Birla Group would enjoy better pricing power in future. Both these groups control more than 20 per cent each of the total industry capacity, leaving the third largest player way behind with around five per cent.

Cement outlook
India is the second largest cement producer in the world, though way behind China, the world's largest producer. Per capita consumption of cement in India is under 150kg per annum, less than one-third the per capita cement consumption in China.

OF the cement industry's total current capacity of around 165-million tonnes per annum, large plants accounting for 154-million tonnes and 11-million tonnes is manufactured by the smaller scale producers. The actual combined production from the large and small plants is expected to be close to 140-million tonnes during this financial year ending March 2006. The industry had reported a total output of 133.5 million tonnes during the financial year 2004-05 with large plants contributing 127.5 million tonnes.

The cement industry has clocked good growth figures over the past few years as India's economic growth has picked up. The housing sector is the single-largest consumer of cement in the country followed by government purchases.

The outlook for the housing industry is highly positive considering the rise in income levels; the easy availability of mortgage finance has led to a very high demand for housing. The demand for cement would remain robust as long as economic growth sustains and incomes continue to rise.

Another major driver for cement demand would be the increased focus on infrastructure. One reason for the vast difference in per capita cement consumption between India and China is the significantly higher Chinese investments in physical infrastructure. Physical infrastructure investments in India have picked up and are expected to gather momentum in the years ahead.

India exported more than 4-million tonnes of cement during the last financial year and around 6-million tonnes of cement clinker. Demand from the Middle East is expected to increase substantially as high crude prices have triggered an infrastructure investment boom in the region. Indian companies like GACL with plants on India's Western coast better positioned to exploit this export opportunity because of its proximity to markets in the Middle East.

Intra-group consolidation
Both Holcim and Aditya Birla group can be expected to consolidate their cement interests in the future. Margins in the cement business depend, to some extent, on controlling transportation costs and better logistics management. Operational integration of various companies would help both groups to achieve better margins.

Holcim's capacities are now spread across three different companies - ACC, Gujarat Ambuja and Ambuja Eastern. The group may look at consolidating them into a single entity for better synergy and improving logistics efficiency. Based on the current shareholding pattern and assuming that it would acquire a further 20 per cent in GACL, Holcim would hold around 35 per cent of the merged entity.

The Aditya Birla Group's cement interests are now under Grasim and UltraTech. While UltraTech is a focused cement company, Grasim is a diversified entity with cement contributing more than 50 per cent of revenues.

Similarly, the Aditya Birla Group can be expected to consolidate all its cement assets under a single entity, especially since it now has one major competitor in Holcim. If the cement assets of the BK Birla Group also come under the Aditya Birla fold as expected, such a move would be all the more relevant.