Deal makes Mysore second most valuable cement firm

The price that HeidelbergCement will pay to acquire a 51 per cent stake in Mysore Cement shows the phenomenal rise in the valuation of the 150-million-tonne Indian cement industry.

The acquisition cost of $95.53 million (Rs 436.82 crore) for a majority stake in Mysore Cement translates into an enterprise value of $117 per tonne "" $17 more than what Holcim paid for Associated Cement Companies two years ago.

Only Gujarat Ambuja Cements has got more, receiving an enterprise value of $200 a tonne when Holcim bought 14.8 per cent in it in January.

Mysore Cement has fetched the second best valuation in the industry so far despite the fact that it is a sick company with huge financial liabilities. Mysore incurred a loss of Rs 24.78 crore in the year ended March 2005, on gross sale of Rs 486.19 crore. The company's accumulated loss stood at Rs 261.47 crore.

A record of the valuation the cement industry has fetched in the last nine years is revealing.

The list includes Gujarat Ambuja's acquisition of Modi Cement ($44 per tonne) in 1997, Lafarge's buyout of Tata Steel in 1998 ($98), India Cement's acquisition of Rasi Cement in 1998 ($ 68), Gujarat Ambuja's acquisition of DLF in 1999 ($108), Lafarge's buyout of Rayond in 2000 ($119), Italcementi's acquisition of Shri Vishnu Cement in 2002 ($80), and Grasim's acquisition of L&T Cement in 2003 ($80).

According to analysts, Mysore Cement would have received a valuation at par with Gujarat Ambuja had it been financially strong. "The ailing company with so much of financial liabilities could not have asked for anything better. From that point of view, the promoters of Mysore Cement did a smart job," they said.

The analysts said the S K Birla group managed to bag a good deal from the German cement major for a variety of reasons. One, the Birla group wanted to hand over the management control to Heidelberg in one go, and, therefore, charged a premium.

Second, the foreign company, which forged a joint venture with Indorama Cement four months ago, was very bullish on India. Third, the Holcim-Gujarat Ambuja deal six months ago has changed the benchmark for the Indian cement industry.

An analyst working with a foreign brokerage said: "In 2006, Swiss major Holcim paid to Gujarat Ambuja exactly double of what it paid to ACC in 2004. On the other hand, in 1997, Gujarat Ambuja paid to Modi Cement one-fifth of what it got from Holcim in 2006. It indicates that the enterprise value of per tonne cement has grown five-fold in nine years. The valuation of the cement industry has got only one way to go: further upwards. And Mysore Cement made good use of this upturn."

The analysts said Heidelberg was quite bullish on the Indian market because of its growth potential. India is the second largest cement consumer, with around 150 million tonne, after China which has a capacity of 800 million tonne.

Since India's per capita consumption of around 125 kg is one of the lowest in Asia, an average growth of 8-9 per cent is expected in the years to come.

In addition, there is huge scope for merger and acquisitions in the industry, which has as many as 45 players, with an average capacity of 3.5 million tonne. In the past ten years, cement consumption in India has grown by approximately 7.5 per cent a year.

"Any global company worth its salt is interested in India," said one analyst. Swiss company Holcim, French giant Lafarge, Italian cement firm Ital Cementi and German company Heidelberg have set up shop here.