Capacity jostling in cement industry

UltraTech, Dalmia Bharat, CRH and JSW in fray for 42 mt of consolidation opportunity in sector, with PE entities also seeing an unusually profitable opportunity

With the Harsh Lodha-led Birla Corp bagging the 5-MTPA capacity Reliance Cement, the consolidation in cement industry has just gained momentum. With an additional 42 million tonnes per annum (MTPA) capacity on the block, big and small players are in the fray. Also, private equity (PE) entities are looking for opportunities, either for a purchase or a tie-up.

 

A little over a third of the 375-mtpa industry capacity is with two entities, Lafarge-Holcim and UltraTech. They have 36% of industry capapcity between themselves, with respective capacities of 70 mt and 65 mt.

Debt-laden Jaypee Group, the third largest with 31 mt capacity, needs to sell under lenders’ pressure, after defaulting on repayment of a non-convertible bond last year. Beside Lafarge-Holcim, created after the global merger of French and Swiss giants, needs to sell 11 mt capacity of Lafarge India, to overcome local anti-trust laws.

"This is a unique situation. I do not imagine such a large capacity coming on the block again in the foreseeable future. The buyer would eventually become quite a dominant force," says Nitin Gupta, partner at consultancy entity EY.

The Competition Commission of India (CCI) looks at the sectoral market on a regional basis, as transportation is an importart part of pricing. This has given an opportunity to Kumar Mangalam Birla’s UltraTech to become a more forceful player. It has bid for 20 mt capacity of Jaypee, whose assets are complementary, on a regional distribution basis.

UltraTech also bagged Jaypee’s five mt capacity in Madhya Pradesh in December 2014. It has since got stuck in regulatory hurdles, after the government changed regulations to prohibit transfer of mining rights in case of an asset sale. On lenders’ request, the government has proposed to amend these, in the coming Parliament session, to facilitate such deals.

Once these two deals are complete, it will bring KM Birla very close to his stated goal of having 100 mt cement capacity for UltraTech.

Smaller players are also jumping on this opportunity. Dalmia Bharat, fourth largest in the market with 24 mt capacity, has also bid for Jaypee’s 20-mt capacity.

"For a new player to come and acquire 20 mt capacity is not likely to recur. Barring the sellers, the top five players would be open to evaluating this opportunity. Given the size of the deals, we expect PEs to tag along with strategic buyers," says a source from EY.

Global PE giant KKR, an investor in Dalmia Bharat, has also bid for this 20 mt asset.

“PE firms can help situations with appropriate capital structure and managment infusion where necessary to either grow or turn around these assets,” says Sanjay Nayar, chief executive officer, KKR India Advisors.

All this is at a time when the industry is having less than 70% utilisation, lowest in a decade. However, in the long term, the India consumption story would stay intact.  “Over the long run, these assets will create value, given India's infrastructure and growth needs,” says Nayar.

The other large capacity on the block is Lafarge India’s 11 mt business, for which it has applied to CCI. The regulator had earlier asked the company to sell off its five mt capacity in eastern India to complete its global merger. Lafarge India sold it to Birla Corp but the deal fell through due to the change in regulations on transfer of mining rights. With pressure to complete the global merger Lafarge India now plans to sell through a share sale deal.

"We are expecting one or two more serious players to come through consolidation," says Munesh Khanna, partner PWC India. Sajjan Jindal’s JSW Cement has expressed interest in Lafarge’s 11-mt business. Jindal made his fortunes in steel and has been consolidating his position in the power and cement businesses as assets change hands from weaker to stronger promoters, under lenders’ pressure. JSW Cement wants to reach 20 mt capacity in about two years, up from the current six mt, through both organic and inorganic routes.

Dublin-based CRH, the world's third largest building materials company, is also getting into the fray for Lafarge India's cement business. Last year it acquired assets worth $7 billion as Holcim and Lafarge divested assets worldwide to meet anti-trust regulations for completing their global merger.

CRH has presence in the Indian market; it had acquired 50% stake in Hyderabad-based My Home Industries (MHIL) in 2008. MHIL has annual cement capacity of 4.8 mt from two plants; it is the lowest cost producer. In 2013, it acquired South India-based Sree Jayajothi Cements, with annual capacity of 3.2 mt.

PE entities KKR and Blackstone are also keen to bid for Lafarge India’s assets. "PE players might partly fund these consolidators or buy these assets on their own, to sell later on higher valuation when demand picks up and building new capacities become costlier," says Khanna.

There is also another six mt capacity from the Jaypee Group on the block. It includes Jaypee Associates’ joint venture with public sector Steel Authority of India in Bhilai for two mt capacity and the four mt capacity Andhra Cement, owned by Jaypee Development Corporation.

"There is a clear capital market arbitrage opportunity in these acquisitions," says Ashutosh Maheshvari, managing director, Motilal Oswal Investment Advisors. "One or two players can buy large capacities and by combining their respective buyouts, can command a valuation close to top players such as UltraTech and Shree Cement."

Cement M&A Table
Industry capacity and utilisation
Year	Effective Installed Capacity	Consumption Demand	Utilization %
FY-2010	230	199	86.5
FY-2011	276	210	76.1
FY-2012	305	224	73.4
FY-2013	327	234	71.6
FY-2014	342	242	70.8
FY-2015	361	252	69.8
FY-2016P	377	263	69.8

 

 

Top 10 players
Company	Installed Domestic Capacity (MTPA)
Holcim Lafarge*	70
Ultratech	65
Jaypee	31
Shree Cement	26
Dalmia	24
India Cement	16
Chettinad	14
Ramco	14
Century Textiles	13
JK Cement	11
JK Lakshmi	9

(*) Combined capacity in India reported on the basis of global merger of Holcim & Lafarge. Lafarge is currently seeking to divest its entire installed capacity of 11MPTA in India in order to comply with the various statutory directives for consummating this merger in India | Source : EY India

On the Block
Company	Capacity (MT)
Jaiprakash Associates	20
Jaiprakasj Associates' MP block	5
Jaypee Bhilai Cement	2
Andhra Cement	4
Total Jaypee Group	31
Lafarge India	11
Total	42

Source: Investment Banks