 "Birla ramps up cement plans")
An opportunity to grow inorganically showed up last month when Holcim and Lafarge of France announced they will merge by the middle of next year. LafargeHolcim, the new company, will have the capacity to make 427 million tonnes of cement, this is way ahead of its nearest rival and current leader, Anhui Conch of China (227 million tonnes). As cement markets are highly localised (the commodity doesn't lend itself to be shipped over long distances), this deal is likely to face the scrutiny of anti-trust watchdogs in several markets. Analysts say if the merger has to happen, the two cement makers will need to shed some capacity.
This is where Birla sees his chance. As soon as the merger was announced, he is believed to have sounded out investment bankers to look for opportunities. A closer look at the capacities of Holcim and Lafarge suggests the opportunities may arise in the east. Lafarge has 11 million tonne capacity in India, out of which 7.8 million tonne, or 70 per cent, is located in the eastern states of Chhattisgarh, Jharkhand and West Bengal. Holcim's ACC and Ambuja have capacities of 6.1 million tonne and 4.6 million tonne in this region, respectively. The merger will take the new company's capacity to 18.5 million tonne, which is over 40 per cent of the estimated 46 million tonnes of total capacity in the region, according to information collated by a domestic brokerage.
Rising in the east
The compulsion to sell will come only if the Competition Commission of India (CCI) believes that the Holcim-Lafarge combine can monopolise the eastern market. "If that happens, then they will be asked to sell the assets in that particular market," says Nitin Gupta, national leader (cement practice), Ernst & Young. "Obviously they will not sell all their assets. If at all, they will sell one or two plants, depending on which is the one leading to a monopoly or that kind of a situation."
Payal Malik, advisor to CCI, says: "We will look at it from all points of view that regulation mandates us to do." The monopoly angle cuts the other way too. UltraTech is also present in the east with factories that can make 8.2 million tonnes of the commodity, which amounts to 17.9 per cent of the region's capacity. If it buys large chunks of capacity from Lafarge-Holcim, this too can raise CCI's eyebrows.
"Cement is one industry which is the punching bag for competition authorities across the world including India," says Amitabh Kumar, partner at corporate law firm J Sagar Associates. That cement is under scrutiny is clear. In June 2012, CCI imposed a penalty of Rs 6,307 crore on 11 leading cement makers for forming a cartel to charge higher prices from consumers. The cement companies moved the Competition Appellate Tribunal which asked them to deposit 10 per cent of the penalty while the hearing went on. The Supreme Court had declined to interfere with the tribunal's order.
What may have interested Birla is that the eastern region is an emerging market, though it's not as big as west and south. Birla's relentless pursuit for scale is evident in the fact that when he took over the reins of the Aditya Birla group 18 years ago, its cement capacity was a mere 3.5 million tonne, way below ACC and Ambuja Cements' combined capacity of 11.5 million tonne. Today, he is close to catching up with them. But there is scope for more capacity addition. India currently has production capacity of 360 million tonne, which is the second largest after China. According to AT Kearney, the demand for cement in India is expected to reach 550 to 600 million tonne by 2025.
"Meeting this demand will require considerable capacity addition and a sharp rise in available resources which could present challenges," says AT Kearney Partner Manish Mathur. Delays in getting land and environment clearances makes setting up additional capacity difficult, hence inorganic growth makes sense for a company like UltraTech.
The company is also believed to be in talks to purchase an incomplete 6.7 million-tonne plant in Gujarat owned by ABG Cement. While the actual contour of the Holcim-Lafarge merger is awaited and so is the clarity on assets to come on the block, what is certain is that Birla would strive for pole position in the market as it helps him drive better profit margins.
HITTING GROWTH TARGETS IN SLOWING ECONOMY
There has been a lot of activity in the group in the last five years after Birla set the goal to more than double revenue to $65 billion by 2014-2015 from $29.2 billion in 2007-08. The economy was on the upswing then, growing at over 9 per cent annually. The group's strategy was to maintain global leadership in what had been its mainstay (viscose staple fibre and carbon black) and gain or retain dominant positions in businesses such as cement, telecom, aluminium and fashion retail in the domestic market.
The group's cement arm, UltraTech, grew its revenues nearly four-fold to Rs 21,652 crore in 2013-14 from Rs 5,626 crore in 2007-08, while its net profit more than doubled to Rs 2,206 core from Rs 1,011 crore during the period.
This growth came even as the global economy went through a meltdown following the collapse of US-based investment bank Lehman Brothers in 2008, and economic growth in India fell to 5 per cent in 2012-13 - the lowest in a decade. But that didn't dampen Birla's ambitions. "We are aiming for the next 20 to 30 years. So, I don't think the aberrations of one or two years will change our ambition," Birla said in an interview earlier.