IMAP India team has been an active participant in the Private Credit and M&A solution for Indian Cement industry on a regular basis over the past 20 years and there are some interesting takeaways.
Cement industry in India is regionally organised driven by freight cost in moving cement as an important factor. At same time, the clinker producing units are centred around limited limestone mining areas. Hence the interplay of limestone and regional market share results in strategic transactions in industry on an ongoing basis. The industry structure is skewed, with top 4 players controlling over 60% of the market and top 10 controlling over 85% of the market and then there is long tail of more than 25 standalone single plant companies across India. Due to possibility of consolidation at all point, the value of the integrated cement businesses has remained unaffected by any short-medium term profitability of the players. This particular aspect of the industry has had a big impact on availability of private credit in the sector and their eventual exit from these cases in the recent times. The cement industry has short WC cycle and reasonably stable EBIDTA margin, the cash conversion of business is high, hence the credit worthiness of the sector as whole is high. Probably, the only industry in India which has more than 90% of the capacity bearing credit rating of AA- and above. Private Credit situations arise sporadically in the sector, to part finance equity buyouts or to address some prolonged cost factor.
The cement industry saw a financial crisis in the period 2001-04, as cement prices plummeted to nearly Rs 80 per bag and that continued pressure on profitability or half finished capex situation resulted in series of private credit period transactions in that period to fund debt settlements. The demand and profitability boom from 2005 onwards repaid these high cost interim transactions successfully from refinancing or equity raise by respective borrowers. Then there was nearly no high-yield private credit trade in the sector from 2006-2016 as almost all cement players had healthy accruals and focus was on consolidation. Certain CDR based cases too successfully refinanced out and exited the CDR by paying premium. Then the period of Covid and continued burden of high coal cost resulted in mismatches for a few, and private credit deals were back, notable borrower this time being Kesoram Industries and Sanghi Cement. This time around the private credit funds achieved a quick successful exit but it hasn’t been from refinancing but strategic exit in both cases. At this juncture, the RoE of cement business in general is low, profitability hasn’t kept pace with investment and traction of public markets for sector is also weak. So high yield credit isn’t a sustainable solution but works well as bridge to negotiating a strategic exit option.
