As UltraTech Cement and Ambuja Cements look to broaden organically and undertake main buyouts, the sector is ready for a dramatic change. What lies forward?
Images By: BANDEEP SINGH
The upending of India’s cement market in Might 2022 might have been foretold in November 2021 when Switzerland’s Holcim introduced its ‘Technique 2025’. For Holcim, the world’s largest cement producer then, there appeared nothing uncommon within the catchline ‘Accelerating Inexperienced Development’ since making cement is a grimy enterprise carbon-wise, and inexperienced initiatives are welcome.
However Holcim had figured that its India enterprise, which it created with a bang in 2005 by shopping for Ambuja Cements and ACC, wouldn’t match into its way forward for changing into a frontrunner in manufacturing low-carbon cement. Cement is the important thing factor in concrete, the second-most broadly used materials in its manufacturing after water.
Holcim’s 2022 announcement that it was promoting its India enterprise to the Adani Group for $10.5 billion was one other Massive Bang. It created a cement big out of a no person within the enterprise: Adani had no cement capability, though it was a conglomerate spanning ports, energy, airports, edible oil, mining and pure gasoline.
“ There’s a sharp deal with our provide chain administration, particularly logistics operations. We should proceed to optimise prices and guarantee improved buyer response time ”
Ok.C. JHANWAR
Managing Director
Ultratech Cement
Since its Indian gambit, which added to monopoly troubles spawned after it acquired France’s Lafarge, Holcim had been gradual in including or increasing capability at the same time as feisty opponents moved forward. By 2022, Holcim was a distant No. 2 with half the put in capability of market chief Aditya Birla Group’s UltraTech Cement. Holcim had grown from 32 million tonnes every year (mtpa) in 2005 to only 67 mtpa, whereas UltraTech had moved from 31 mtpa to 120 mtpa.
Since that 2022 Massive Bang second, Adani has invested cash, made acquisitions, and set itself an formidable goal of getting a capability of 140 mtpa by 2028. UltraTech, the opposite massive boy with a capability of 155 mtpa, shouldn’t be sitting idle. Kumar Mangalam Birla, Chairman of the Aditya Birla Group, advised shareholders on the cement firm’s annual common assembly final yr that his goal was 200 mtpa. UltraTech, he stated, needed to “reinforce its place as one of many largest cement firms on the earth”.
Adani and UltraTech are anticipated to spend over Rs 1 lakh crore on natural and inorganic enlargement between them. However this race for capability is just one a part of the story. Each intention to maintain out the competitors. It’s a battle for dominance.
Drawing up a Technique
From 2004, for nearly a decade, UltraTech was all about natural progress, barring the buyout of Jaypee’s Gujarat plant that gave it 4.8 mtpa. That script modified fairly considerably quickly after. Between 2016 and 2018, it acquired three property—yet one more from Jaypee, adopted by Century and Binani—giving it a stronger presence throughout areas and extra capability of over 42 mtpa. A dormant Holcim made issues simpler for everybody within the enterprise, together with UltraTech. That part additionally noticed spectacular progress from Shree Cement, which has reached 53.5 mtpa, and Dalmia Bharat, which has 45.6 mtpa. Shree Cement and Dalmia Bharat dominate the North and East, respectively.
Mangesh Bhadang, Senior VP of Centrum Broking, says UltraTech leveraged its steadiness sheet well to make use of it for strategic acquisitions. “A number of the property purchased had been previous, and cash was put in the place wanted,” he explains. UltraTech’s “measured aggression” has continued, he provides, with the corporate accounting for a 3rd of incremental nationwide capability in FY24. “It is usually about placing cash into waste warmth restoration and photo voltaic capability. Over 29% of their energy requirement comes from renewable power,” he says.
Cement has challenges as a commodity, comparable to heterogeneous regional markets and pricing pressures.
“ Sanghi’s plant has one billion tonnes of limestone reserves that may assist in capability enlargement. Plus, there’s a jetty and port, giving us a crucial benefit to move cement ”
KARAN ADANI
Director
Ambuja Cements*
In an interplay in February this yr, UltraTech MD Ok.C. Jhanwar advised Enterprise Right now that the corporate’s philosophy is to work on a long-term imaginative and prescient that will increase shareholder worth. He stated that UltraTech strives for operational excellence and doesn’t miss out on new product improvement, particularly inexperienced merchandise.
Birla advised shareholders final yr that the corporate astutely anticipated and capitalised on India’s progress alternatives and that it “is now strategically positioned to amplify its progress trajectory”.
Adani is taking part in to its strengths. Most of its present companies want cement and concrete, and it owns coal mines to energy cement manufacturing. “It’s a beautiful adjacency provided that we’re in areas comparable to ports, inexperienced power and e-commerce. It provides us a big aggressive benefit and unmatched scale,” Gautam Adani, Chairman of the group, had stated on the time of concluding the Ambuja-ACC buyout. He emphasised the Adani Group’s potential to drive operational effectivity and study from its earlier buyouts. “We count on important margin enlargement and wish to turn out to be essentially the most worthwhile cement producer,” he had stated.
What obtained Adani into the acquisition? Chandresh Ruparel, MD & India Head of Rothschild & Co, says scale is vital for any cement participant as it might probably drive distribution, pricing and dealing capital. “Scale can enable for advertising and marketing and model spends. It must be appreciated that cement is virtually a commodity with little to no differentiation in product specs and {that a} model can result in wholesome distribution and pricing energy,” he says. Like another enterprise, scale provides you management over pricing, a useful technique to disrupt the market at any level.
Adani’s presence in ports, actual property, highway development, and energy crops provides the cement enterprise a ready-made buyer base and entry to railway rakes. The facility enterprise throws up fly ash, which is added to sure varieties of cement. The energy-intensive cement enterprise additionally will get coal from Adani’s mines in Australia. Adani’s current entry into renewable power will assist optimise prices.
Adani’s ports will assist the logistics of the three cement firms it has purchased: Sanghi Industries in 2023, MyHome Industries’s grinding unit in April 2024 and Penna Cement in June 2024.
Karan Adani, Director of Ambuja Cements (of which ACC is a subsidiary), whereas saying the Sanghi deal (the asset additionally got here with one billion tonnes of limestone), stated the ocean route shall be used to maneuver cement from the plant in Gujarat’s Kutch area to different components of the state along with Maharashtra, Karnataka and Kerala. “There’s a clear synergy right here, and we wish to be the lowest-cost cement provider in these markets.”
Taking over The Chief
Adani’s aggression within the sector is unsurprising, given that he’s coming from behind. Organising a enterprise from scratch would have taken time (the thumb rule is Rs 750-800 crore for a a million tonne plant), elevated provide, and put stress on costs. Plus, he’s coping with a participant who has been round for over 4 many years.
Uttamkumar Srimal, Senior Analysis Analyst (Cement & Infra) at Axis Securities, says UltraTech is well-positioned from the views of {industry} consolidation and rising cement demand. “It’s the largest cement producer in India, with an estimated market share of 24-25%. The present capability enlargement will solely solidify its place as an {industry} chief.”
“ Although UltraTech’s capability is twice as a lot as that of Ambuja-ACC, there may be an elevated aggression in M&A requirement for gamers with wholesome capacities ”
CHANDRESH RUPAREL
Managing Director and India Head
Rothschild & Co
UltraTech has been versatile about its progress choices. If the sooner buyouts had been about full management, it took a special tack in June by first buying a 23% stake in South-based India Cements from DMart Founder Radhakishan Damani at Rs 267 per share. Then on July 28, its board accepted the acquisition of one other 32.72% stake from the promoters of India Cements—led by N. Srinivasan—and affiliate firms at Rs 390 per share, taking the entire holding to shut to 56%. UltraTech will now have to make a 26% obligatory open supply and if that’s utterly subscribed, it’s going to personal 82% in India Cements. The acquisition brings in 14.45 mtpa of capability to UltraTech, of which 12.95 mtpa is within the South (most of that is in Tamil Nadu) and the steadiness 1.5 mtpa in Rajasthan.
A report by Emkay World proper after the deal was introduced stated UltraTech is considerably strengthening its place and expects the corporate to greater than double capability market share within the South to round 25% by FY27. “UltraTech’s [national] capability is prone to cross 200 mtpa by FY27 and that may assist it obtain industry-leading quantity progress, regardless of its massive scale, with decrease opex/capex ratios boosting return ratios,” the report stated.
UltraTech’s inherent benefits usually are not simple to copy. Centrum’s Bhadang identifies scale and a powerful model identify as the important thing ones. “These have helped them to develop even on a excessive base. UltraTech will proceed to be the No. 1 participant, and we might even see a narrowing hole between them and Ambuja.”
The Aditya Birla Group’s current entry into the paints enterprise—from exterior and inside paints to wooden finishes—underneath the Birla Opus model is one other profit since it might probably complement its robust presence in cement.
The Race Will Intensify
Beneath Ambuja’s new proprietor, the M&A narrative has been strong. Up towards a extra aggressive UltraTech, many property are being checked out for potential offers. Each the large teams are wanting on the South as a key searching floor.
Rothschild’s Ruparel factors out that the sector follows a virtuous improvement cycle. Demand outstrips provide, giving producers pricing energy. Then follows a concentrated funding in capability, which creates an oversupply. Fringe gamers are eased out, and there’s a burst of M&A or mergers and acquisitions. The market consolidates at greater costs. “M&A or consolidation is cyclical and tends to cluster relying on the state throughout the cycle. Although UltraTech’s capability is twice as a lot as that of Ambuja-ACC, there may be an elevated aggression in M&A requirement for gamers with wholesome capacities and market presence,” he says.
Inevitably, valuations take off for good property aided by cash coming into the capital markets.
Ajay Garg, MD of Equirus Capital, says, “As the expansion outlook stays robust, we are going to see greater valuation metrics being achieved than historic ranges.” He reckons the {industry} will transfer in direction of a construction of some nationwide gamers, with every area having robust native gamers. “Every regional cluster can have a construction constituting three to 5 gamers as they appear to align their methods.”
“ UltraTech leveraged its steadiness sheet well to make use of it for strategic acquisitions. A number of the property purchased had been previous, and cash was put in the place wanted ”
MANGESH BHADANG
Senior VP (Analysis)
Centrum Broking
UltraTech and Ambuja have pushed onerous for property (Kesoram, Penna, MyHome, India Cements, see chart on M&A offers) within the fragmented South. A June ICRA report says India has a complete put in capability of 626 mtpa, with the most important chunk, 188 mtpa, within the South. The anomaly within the South is that the High 5 gamers account for 47%; distinction this with the North, the place the High 5 account for 83%. Business officers estimate the South has at the very least 45 cement manufacturers, which explains the fragmented market share. Provide is usually double the demand, resulting in decrease capability utilisation; it’s round 60-65% within the South in contrast with a nationwide common of near 75%, with the North at 85%.
The top of a South-based cement maker, who doesn’t want to be named, factors out that it’s not evenly distributed even throughout the southern a part of the nation. “It might be lower than 45% in a single a part of the area and 90% elsewhere,” he says. For instance, round 40 mtpa is positioned in Karnataka’s Kalaburagi.
The cement maker says not all firms within the South are up on the market. Many are identified to be extraordinarily environment friendly. “On this state of affairs, M&A turns into a difficult proposition. The valuation hole turns into very extensive for the reason that vendor usually has an enormous expectation,” the individual factors out.
After all, for each compact environment friendly participant, some battle to run a worthwhile operation. “Giant gamers look to accumulate them to consolidate their place and achieve market share. The current acquisition prices have been decrease than substitute prices, permitting bigger gamers to accumulate these property at cheap costs,” says Srimal of Axis Securities.
The smaller gamers don’t at all times have the very best price construction, resulting in margin stress. Centrum’s Bhadang thinks a plant needs to be at the very least 3 mtpa to make financial sense. “UltraTech and Ambuja will command a premium; the others usually promote at a reduction. If the massive gamers drive down prices, it may be very difficult for the smaller ones,” he says.
Ambuja has been working onerous on its price construction. The main focus has been on decreasing working prices (one of many points plaguing Holcim) with a said ambition of decreasing it by one other Rs 530 per tonne by FY28. Among the many extra vital steps taken embrace investments in power (1 GW of photo voltaic and wind energy with over 300 MW of waste warmth restoration system to energy 60% of the expanded capability is the plan). It is usually decreasing logistics prices. One initiative is a 50 km discount in lead distance or distance from a plant to the market, which might save Rs 100-150 per tonne. Different steps embrace long-term agreements to obtain fly ash from the group’s energy crops and taking advantage of group synergies comparable to supplying to captive initiatives (the upcoming Navi Mumbai airport is one), utilizing the port infrastructure to focus on coastal markets and shifting expertise throughout the group.
For UltraTech too, logistics is a key price part. On the earnings name for the Q1 numbers for the present fiscal, the administration spoke of the elevated community of crops and an additional discount within the lead distance—it has already been minimize from 400 km to 385 km, saving near Rs 45 per tonne of cement. Jhanwar advised BT earlier, “There’s a sharp deal with our provide chain administration, particularly logistics operations. We should proceed to optimise prices and guarantee improved buyer response time.”
The exit of Holcim leaves the cement panorama dominated by the native gamers. The one multinationals of consequence are Heidelberg (primarily by Zuari and Mysore Cements) and Vicat’s majority holding in Bharathi Cement.
Cement is an {industry} with a protracted gestation, requiring endurance, and has a cyclical nature. This makes managing prices and assets that rather more crucial. The race between UltraTech and Ambuja will transfer much more in direction of strategic enlargement as extra property come up for grabs they usually develop organically.
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