True North's learning curve: A failed IBC bid brought cementing of deals

Losing a bid For Binani Cement led the PE firm to other wins in cement

When private equity (PE) investor True North threw its hat into the ring to bid for Binani Cement as part of a consortium that included JSW Group, it had no idea the process would become as convoluted as it finally did.

Effectively, Kumar Birla-led UltraTech Cement was the highest bidder but its late submissions caused Binani -- one of the more coveted assets referred to the National Company Law Tribunal under the new Insolvency and Bankruptcy Code -- to be referred to the Supreme Court. The law eventually upheld the sale to Birla and True North lost the deal.

However, what it gained in exchange was priceless -- a view into the cement setor which gave it an edge in understanding the sector. In the past decade, True North has invested a little over $100 million in four different businesses in the construction material category. The latest one, Shree Digvijay Cement Company, was owned by Brazil-based Votorantim Cimentos, one of the largest global producers in the segment in terms of annual installed capacity. As for UltraTech, Ambuja, ACC and Shree Cement, the extra brand driver that is achieved through brand power or customer-stickiness had the same resonance for Kamal, the brand retailed by Shree Digvijay.

Kamal as a brand connects with smaller buyers at the retail level that includes masons. And, hence, commands as good a premium as any other, say analysts tracking the space. In most operating models for PE players, the ideal is to attract high calibre leaders with equity-linked incentives, and allow for the enabling of a top-notch team. Which was already in place at Shree Digvijaya, with former executives from cement giant ACC.

True North already had a decade's experience with construction and building materials. It started with two prominent businesses in the space -- RDC Concrete, a read-mix maker, and Robo Silicon, a maker of construction aggregates. Even so, what it learnt from pursuing Binani Cement enhanced its insights. The distance between a plant and its source of limestone, fly ash and gypsum is as relevant to cement manufacture as the cost of power. All of that was in place for Shree Digvijay.

"The rule of thumb is to keep distances within 300 km at a maximum for low margin, low-value businesses," says Srikrishna Dwaran, partner with True North. Critics might point to the emergence of new building materials and the threat of disruption in construction but those trends are unlikely to impact India anytime soon. "There is no Do-It-Yourself culture for homes and residences yet here," he points out, referring to prefabricated homes that come in a box.

Even so, with national capacity of 405 million tonnes and demand at 270 mt a year, there is a gap between supply and demand. Equally, cement is not a "sexy" investment like a digital platform or an emerging financial service gateway. It is long-term and slow in its returns but is steady.

The clincher for True North was being able to snap up Digvijay for four times its annual operating earnings. Which made all the difference; they might not have gone for the deal if it was six or seven times, Dwaran adds.

Where is cement most in demand? With a share of 64 per cent, housing drives the majority of its consumption, followed by infrastructure at 19 per cent and industrial and commercial usage at 18 per cent, according to industry research. Ultimately, cement is a commodity but it's the execution of how a plant is run that leads to high returns, Dwaran says. Sectors growing in India include housing, offices and infrastructure (that includes bridges, ports, airports and highways). Even so, was it not daunting to enter a space dominated by a handful of towering market leaders that include ACC, Birla, Ambuja Cement and more?

Dwaran says there is "a value creation strategy that can be achieved without having to tussle with incumbents and there is room for everyone to thrive and grow". Across India, there are at least 20 players with annual capacity of between a million and two million tonnes. While True North is not looking to snap up all of these, it's open to similar transactions, if the mix is right.