Adani-holcim deal may cement consolidation

The Adani-holcim deal may trigger a wave of consolidation in the cement industry, say industry insiders and experts.

Most of the larger players have major expansion plans lined up, even as major markets are in surplus. Add to it, the cost pressure on account of rising fuel prices and resistance from the market to absorb the higher cost and there may be a case for weaker players to look at an exit.

The domestic cement industry has witnessed significant consolidation over the past decade, pointed out Hetal Gandhi, director, CRISIL Research.

“Four of the largest players outside Holcim Group, namely Ultratech Cement, Shree Cement, Dalmia Cement (including group companies OCL and Dalmia Bharat East), as well as Nuvoco Vistas (erstwhile Lafarge India), used the inorganic route to expand capacities and increase market share from 26-27 per cent to 38-39 per cent between 2015 and 2022,” said Gandhi.

“With the entry of a new aggressive player in the market, the industry might see the next wave of consolidation. While there is over 25 million tonnes per annum (mtpa) of stressed assets in the domestic cement industry, we are likely to witness capacity acquisition beyond the same as well,” said Gandhi.

It’s all about valuation, said a major cement player.

“Some of the smaller units may come up for sale if the pricing is along the lines of Adani-holcim,” he said.

According to an IIFL Securities report, the deal has been consummated at a premium to past deals. Its calculations suggest an enterprise value of $170-180 per tonne for the Ambuja stake versus past average ranging between $100 per tonne and $170 per tonne.

Ravinder Reddy, director at Bharathi Cement, pointed out that the South India market is having surplus capacity, with an average capacity utilisation of 50-60 per cent. “If they opt for inorganic growth through acquisitions, it will not create a difference. However, any greenfield expansion may affect existing market dynamics,” said Reddy. Bharathi has a capacity of 5 mt.

Vishal Kanodia, managing director (MD), Kanodia Cement, said that the acquisition of Holcim by Adani Group will consolidate the Indian cement industry in the future. Kanodia has a 2.8 mtpa capacity.

“With ACC being a strong brand in the South too, the move is going to see an aggressive marketing battle, making life difficult for smaller players,” said a major cement player.

Another major cement player also expressed concern about Adani’s proposed expansion plan.

“It is looking at doubling capacity in five years. If it is through greenfield plants, there will be surplus in the market,” he said.