The big news item of today in M&A has been the acquisition of Holcim’s stake in Ambuja and ACC by Adani Cement. This development really puts in focus the whole cycle that the industry has gone through in last 25 years.
Late 1990s/2000s, the Indian cement went through a very lean patch with plummeting sales prices, rising cost and high interest cost. The profitability parameters and credit metrics had completely deteriorated and that bought many in the Industry to a sell out situation. Ambuja cement was most profitable player and had ability to raise both debt and equity capital. It consolidated its position by aggressive organic growth and combined it with acquisitions like Modi Cement and DLF Cement to emerge pan-India player in quick time. Nearly the same time, Lafarge made an entry into Indian market by acquisition of Tata Steel’s and Raymond’s cement plants in eastern India, and Heidelberg entered through acquisition in north & south India. India was fast changing and the push on infrastructure and industrialization had put cement demand and profitability in a good zone. Holcim acquired the controlling stake from the family in Gujarat Ambuja to hit the ground running. Possibly inspired, CRH entered at peak of cement market through a JV with Myhome and subsequently Vicat through another JV with Sagar Cement. So, within a period of 10 years of 2000-2010, we had all global cement majors into Indian market nearly controlling 40 to 50% of the market.
Indian market fundamentals for cement demand growth have never been in doubt and earlier models of its growth used to be made on 1.5x to 2x of GDP growth rate. For the period 2010-2020, the GDP growth in itself tapered down and that too was driven more by service sector which didn’t really result in commensurate cement demand growth. Coal is a critical raw material for cement production and the policy on its availability/usage went from one extreme to another in this period. The industry as a whole, mainly focussed on maximising its clinker usage by creating hub and spoke of mother clinker and feeder grinding plants to reduce logistics cost in servicing the market. Other areas of focus were increased waste heat recovery, increased rail logistics, better fuel mix and larger size clinker kilns. The cost of setting up new capacity steadily went up while realisations have been/were near stagnant. Therefore, the cost controls and investment in it helped manage the profitability parameters to near stable but overall RoE of the business did suffer a lot and still remains relatively low.
Also, limestone, the starting raw material is scarce, and every cement company needs to continuously keep securing more of it for their growth. We already have a situation in Tamil Nadu (TN) where limestone mines are near to their bottom and supplies to TN have moved from units in TN to that of neighbouring Andhra state.
Need for decarbonisation of cement production is a possible new cost element which can impact the business in near to medium term. Globally environmental factors are driving producers to reduce reliance on high energy building materials and hence realign their portfolio.
The summary and interesting part is that MNC cement companies were in forefront of adopting all possible cost improvement factors and that did drive others in the industry to move in same direction. Holcim’s merger with Lafarge at global level triggered Lafarge to first make an exit about 5 years back, incidentally it was the most profitable cement company in India at that time. Soon followed was CRH’s decision to exit their JV with Myhome driven by their decision to concentrate on European growth. And now we have Holcim making an exit from Ambuja and ACC. In all, from a zero percent holding of MNCs in Indian Cement market in 2000, it reached a peak of about 40% and we are now back to less than 5% with only Heidelberg and Vicat in the play. Some in domestic market like Ultratech, Shree, Dalmia and Nirma have aggressively consolidated their position in this period.
Moving forward, the action in the sector is far from over. Limestone security will be the main driver and the grinding plants which have mushroomed all over may consolidate. If cost pressures continue, small-mid market may further consolidate as already a low RoE may not sustain shareholder’s interest for too long. It’s been some ride as a M&A banker over last 20 years for the sector in showcasing Indian cement assets to MNCs and then the opposite.