India: Asset sales point to consolidation in cement sector

Byszheng

Updated Tue, 01 Dec 2015 09:36:25 GMT

Anil Ambani-led Reliance Infrastructure Ltd will sell its cement business by next March, joining a string of conglomerates that dabbled in the cement business over the years but eventually chose to exit. The ones that did not, such as the Aditya Birla Group, count cement among their core business lines.

“Cement has to be a very engaging business. It is a very indulging industry and you have to look at its dynamics. Unless you have complete commitment and the mindset to run a cement business, it will not make sense,” said Anil Singhvi, chairman, Ican Investments Advisors Pvt. Ltd and former managing director of Ambuja Cements Ltd.

“Over a period of time, it has excited various people, the fact that it is a brick-and-mortar business. Unless they scale the business, unless they understand the nuances of the business on a day-to-day basis, you cannot (succeed),” said Singhvi, adding that cement cannot be run as an ancillary business.

Over the past two decades, engineering conglomerate Larsen and Toubro Ltd (L&T), the Tata group and Gautam Singhania-promoted Raymond Ltd have moved out of cement. The sector, which has continued to consolidate over the years, has seen capacities concentrating in the hands of the Aditya Birla Group’s Ultratech Cement Ltd and LafargeHolcim, which controls ACC Ltd, Ambuja Cements Ltd and Lafarge India.

Ultratech Cement’s India capacity stands at 64.7 million tonnes; LafargeHolcim’s combined capacity is 5 million tonnes. Both companies together hold roughly 33% of the current market size of 390 million tonnes. LafargeHolcim’s capacity does not include the 5.15 million tonnes it is in the process of selling to Birla Corp., and Ultratech’s capacity is set to rise further as it does not include the Madhya Pradesh assets it will acquire from the Jaypee Group.

Apart from these two groups, Jaiprakash Associates Ltd holds 26.65 million tonnes, or 6.8% of the total market share.

Most other conglomerates have exited the business.

One such early exit was when Tata Steel Ltd, then Tata Iron and Steel Co. Ltd, sold its cement business to Lafarge SA in 1999 for Rs.550 crore. The deal marked Lafarge’s entry into India. To be sure, the Tata group continues to have a small exposure to the sector. Tata Chemicals still has 0.5 million tonnes of cement capacity, which it once planned to sell. “That plant was so integrated it was difficult to sell it to anyone; the limestone and the power was all shared with the other businesses,” said Singhvi. The business has not been expanded since 2000 and contributes 1% to Tata Chemicals’ consolidated revenue.

As conglomerates chose to exit the cement business, the likes of Lafarge jumped in to buy. In 2001, the firm also bought out Raymond group’s cement business, further strengthening its presence in India. Raymond decided to sell its cement business for Rs.785 crore to focus on its core businesses—textiles and retailing—and to retire debt.

In 2003, L&T sold a majority stake in its cement business to Aditya Birla Group’s Grasim Industries Ltd. The deal, executed through a complex transaction, was valued atRs.2,200 crore. The deal also helped L&T thwart an overall takeover threat from Grasim.

“Most cement division sales are for the same reason that it did not contribute much to the profitability. For L&T, they were clear they wanted to be a pure engineering company and cement was not contributing much to the bottom line anyways,” said a cement analyst with a domestic brokerage firm who did not wish to be identified.

The cement divisions have not been able to contribute significantly to the overall profits of conglomerates due to inability to scale up operations, said Ican Investments’ Singhvi. “Cement, otherwise, is a high-margin business compared to textile and engineering,” he explained.

Spokespersons for the Tata group and L&T declined to comment on the story. Email queries sent to Raymond and Reliance Group on Thursday remained unanswered.

In a 5 November filing to the exchanges, Reliance Infrastructure said it had shortlisted seven out of 15 potential buyers who submitted a preliminary expression of interest to buy its cement business. Reliance Infrastructure will dispose of the 5.6 million tonnes per annum cement business and related assets through a formal process, the company had said in a BSE filing.

“The plan was to benefit from its (Reliance Infrastructure’s) Sasan power project with cheap power and fly ash sourced from the power plant for cement manufacturing. The plan obviously was flawed and never worked out,” said the cement analyst cited earlier.

Singhvi, who was spearheading Reliance Cement’s foray into cement for a brief period, disagrees. “It was one of the reasons. But the idea was to set up a large-scale cement capacity. They had an ambition to scale up to 25 million tonnes, but with the debt situation, that would not have been possible. It does not make sense to hold on to a 5 million tonne capacity; so why struggle?” he said.

As of September 2015, Reliance Infrastructure had a total co nsolidated debt of Rs.24,645.41 crore.

Harish H.V., partner at Grant Thornton India Llp adds that with capacities consolidating in the hands of a few firms, it may not make sense for other business groups to stay in the business. “Could be it does not make sense to operate in an industry which is dominated by three to four large companies. The other reason could be they, as a group, have borrowed too much and there are always buyers for a cement business,” said Harish.