UltraTech Cement's announcement that it would snap up a controlling stake in India Cements may only be a sign of more to come.
In the wake of one of the country’s most expensive deals in recent times, cement majors may slug it out to add smaller firms from the region to their portfolio.
UltraTech’s buy is the latest in the four deals the southern market has seen in less than a year, with Adani Cement being the other buyer.
These deals combined, industry experts say, could spur consolidation.
Ravindra Reddy, director, Bharathi Cement, notes the impact of consolidation, and says more is expected on this front.
“The south market still has more than 20 brands and there is a lot of scope for consolidation left,” Reddy said.
Analysts with Emkay Securities list Chettinad Cement, Zuari Industries, Bharthi Vicat, My Home Industries, Vadraj Cement, Deccan Cement, and Orient Cement as potential acquisition candidates in this market, with a combined capacity of more than 55 million tonnes per annum.
However, the jury is out on which way cement prices will move.
Last week, UltraTech said it would pick up a 32.7 per cent stake in India Cements, which will trigger an open offer for up to 26 per cent, putting the deal value at up to Rs 7,100 crore.
According to analyst estimates, this values the deal at $121 per tonne as enterprise value (EV), second only to $143 per tonne that Adani paid for the ACC-Ambuja Cements deal.
Divestment in the Indian cement industry has averaged an EV of $100 a tonne in the past decade, analysts with Emkay Research noted.
In return for that high price, along with the Kesoram Industries deal underway and other expansions, UltraTech Cement is expected to dominate more than a quarter of the south India market by FY27.
Industry analysts such as Ravleen Sethi, director, Large Corporate Ratings, CareEdge, however, remain apprehensive whether this consolidation will have a positive ruboff on prices.
“Even after the deal, the south continues to remain the most fragmented market with top five players commanding a 55-57 per cent capacity share and also there is no change in the capacity overhang situation on the ground in that market,” Sethi said.
N Srinivasan, the outgoing promoter for India Cements, has highlighted price war as a major concern for the industry in the south.
The southern market, with an estimated capacity of 186-200 million tonnes and utilisation of 60-65 per cent, is the most fragmented and over-supplied.
Analysts with Elara Securities noted the region might need a price increase of Rs 100 per bag (30 per cent) over the current prevailing price level as in July, to earn a return on capital employed (ROCE) of 11 per cent. This comes against the backdrop of a weak April-June period.
Reddy added: “After the elections, we are still struggling with demand. Profitability is coming down due to competition and less demand.
"Regional players are still suffering.”
UltraTech, in its post-earnings presentation in July, said volumes in the southern market saw a decline across segments owing to labour shortage, an early onset of monsoon across regions except in Karnataka and Tamil Nadu, and a decline in infrastructure demand due to funding issues.
Dealers in the south are optimistic.
“With UltraTech’s entry, we anticipate a smoother and more professional handling of this market, allowing for better management of both demand and pricing,” said Deepak Navandar, a distributor for Hyderabad.
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