 "Birla guns for pole position in cement")
UltraTech has since aggressively scaled up its capacity to become India's largest cement maker. Today, it ranks among the world's top eight cement giants. But Birla's thirst to become the leader in the sector remains unquenched as is evident from UltraTech's two major acquisitions within a span of 16 months. The most recent is the acquisition of two cement plants of Jaiprakash Associates in Madhya Pradesh. With this, the company has added another 4.9 million tonnes to its capacity at a cost of Rs 5,400 crore. The two integrated plants in Bela (Satna district) and Sidhi are located in the famous Satna cement cluster. Before this, the group had acquired the 4.8-million tonnes unit of Jaiprakash Associates in Gujarat for Rs 3,800 crore in September 2013. The recent acquisition has taken UltraTech's overall capacity to 65 million tonnes - more than a sixth of the industry's total capacity of 360 million tonnes.
"At these two units, the clinker capacity is more than the grinding capacity," says O P Puranmalka, managing director, UltraTech, explaining the logic of the latest buyout. "This gives us room to augment the cement manufacturing capacity by 1.8-2.5 million tonnes by having an adjacent grinding unit," he explains. The market saw the wisdom in the acquisition: UltraTech traded 3.5 per cent higher the day after the deal was announced at above Rs 2,600 even as the broader market remained subdued. The brokerages have upped the target price for the stock to Rs 2,900- Rs 3,200.
For speedy growth
Inked at a time when expansion in India's cement space is critical, the two deals augur well for UltraTech. Issues such as cost escalation, land acquisition and environment clearances for new projects have collectively impacted companies' plans for expansion through the green-field route. There was a time when the commissioning of a new project would take not more than three years. However, as things stand today, this period can extend to seven years. This has forced cement makers to either opt for brown-field expansion or go for acquisitions.
UltraTech realised the advantages of acquisitions much ahead of its peers. It has been intelligently targeting units that are either in high growth markets or in regions where the company does not have a dominant presence. The acquisition of Jaiprakash Associates' Gujarat unit has helped UltraTech counter Ambuja Cements in the state, while the Madhya Pradesh acquisitions will help it grow in central India as well as in regions of eastern Uttar Pradesh, Bihar and Jharkhand. Historically, the region has commanded higher cement prices than the rest of the country because of fewer production units located there. Moreover, Prime Minister Narendra Modi's focus on eastern India, which is rich in minerals and metal ores but poor in infrastructure, could cause cement consumption in the region to rise sharply. Overall, the cement sector, according to optimistic projections, could return to sustained 10-11 per cent growth in the coming years.
The transaction has taken UltraTech a step ahead of its closest competitor, Holcim. The Swiss cement giant operates in India through ACC (which has an annual production capacity of 30 million tonnes) and Ambuja Cement (27.5 million tonnes). However, there's a catch. The global merger of Holcim and Lafarge poses a threat to UltraTech in India. Lafarge has a capacity of about 11 million tonnes. Post the merger, which is expected by mid-2015, the new entity, LafargeHolcim, will have a capacity of 68.5 million tonnes. And with ACC's plans to expand its capacity by another 5 million tonnes, the overall capacity of LafargeHolcim will surpass 73 million tonnes in India, which will relegate UltraTech (65 million tonnes) to the second slot again. UltraTech also plans to expand its capacity to 71 million tonnes a year later, in 2016. UltraTech can get back to the top if Birla goes for the acquisition of Lafarge's units in India or taps into existing units of other cement makers. Several reports have indicated that the group may be eyeing the Holcim-Lafarge assets globally.
Birla knows the cement business well. He predicted in 2004 that India's cement consumption will reach 200 million tonnes by the end of 2010. This turned out to be true. "The rise in per capita consumption (for cement) would be fuelled by strong growth in the housing sector and the government's thrust on infrastructure development. This will propel robust volume growth. I see a great future ahead," Birla had said back then. In the last 10 years, India's cement consumption has grown from 120 million tonnes to 275 million tonnes, with per capita cement consumption reaching nearly 200 kg from 110 kg. Like in any other growing commodity business, market dominance matters in cement.
Investors have given a thumbs-up to Birla's vision. During the October-December quarter of 2004, as the brand name was being changed from L&T Cement to UltraTech, shares of UltraTech had traded around Rs 265 on the bourses. Currently, they are trading at around Rs 2,600 - a ten-fold jump. In 2004-05, its first year of operations after the acquisition, UltraTech had clocked net profit of Rs 2.85 crore. This jumped to Rs 2,145 crore in 2013-14. So far during this financial year, the company's profit has surpassed Rs 1,000 crore.