Kumar Mangalam Birla is exploring ways to bid for Holcim’s India cement assets and compete against JSW’s Sajjan Jindal and Gautam Adani who are already in hot pursuit, said multiple sources aware of the matter.
Birla’s flagship UltraTech is the leading cement player in the country and any bid will face scrutiny from India’s anti-trust watchdog. UltraTech’s capacity, combined with that of Ambuja Cement and ACC Ltd, the two listed arms of The Holcim Group in India, will reach dominant market share in some states.
Of India’s 540 million tonnes per annum (MTPA) capacity, UltraTech has 117 MTPA while ACC and Ambuja together are at 66 MTPA.
Senior Birla Group officials are believed to have sought legal opinion from at least two law firms and have discussed financing options with multiple global financial institutions and banks to prepare for a bid. However, the names of the law firms could not be independently verified.
They are also believed to have also sent feelers to the Holcim brass in Europe about their interest, the sources mentioned above said. It is not clear yet if Holcim has formally engaged with the Birlas as they have with the other two contenders.
ET in its April 14 edition had reported that Holcim Group, the world’s largest cement maker, was looking to exit India 17 years after it bought Ambuja Cements as well as 50.01% of ACC.
‘Size of Assets a Big Constraint’
Mails sent to the AV Birla Group spokesperson did not get a response till press time Sunday.
Sources said one way UltraTech can possibly deal with the market dominance issue is by divesting some of its legacy assets. This is because in Gujarat, Punjab, Maharashtra, the issue of market dominance could become acute, analysts said.
The Competition Commission of India (CCI) in 2015-16 forced Lafarge to sell 11 MTPA of capacity in eastern India, including three cement plants and two grinding stations, as a remedy to local market dominance issues, raised by its proposed global merger with Holcim. Nirma Cement, later renamed Nuvoco Cement, bought them for ₹9,400 crore.
Cement industry watchers feel incumbent players like UltraTech and Shree Cement have enjoyed market share gains at the expense of ACC and Ambuja. The entry of an aggressive challenger with deep pockets who would straight away become the second-largest player and challenge the dominance of UltraTech is bound to have impact on the latter.
Past Year’s Strong Trend
“M&A buyouts like these provide instant access to markets vs gestation period of 5-7 years via greenfield plants,” said Pinakin Parikh of JP Morgan. This would mean the growth rates for UltraTech or even a Shree Cement will decline from historical levels. Ambuja and ACC have been outperforming UltraTech and Shree Cement only since the past year (FY22). This trend can continue post the acquisition too. “But given the total cost of the transaction (~$10b), we believe only a handful of Indian business houses have the capacity to be the buyer of Holcim’s stake,” Parikh added.
UltraTech’s management had said its expansion projects are on track and it expects to complete the commissioning of 19.5 MTPA grinding and 11.1 MTPA clinker capacity expansions by end of FY23.
“It will be foolhardy to think that some of the other established players like UltraTech, Shree Cement and Dalmia would not be making a beeline to have a pie of these assets. The big constraint here is the size of the assets,” said Rakesh Arora, managing partner, Go India Advisors.
Mergers and acquisitions (M&As) have been prevalent in the space as players pursue larger scale, even as weaker players are weeded out. UltraTech has been a torchbearer for consolidation, lapping up assets of JPA, Binani, and Century Cement. Dalmia Bharat has added smaller capacities via M&A. Nirma Group carried out large acquisitions of Lafarge India and Emami Cement in a bid to become a large player in a short time. Birla Corp acquired large assets of Reliance Cement.
Birla Group watchers feel the $45-billion conglomerate has enough financial firepower to pull off a large transaction. UltraTech posted Rs 43,977 crore in revenue and Rs 5,342 crore net profit in FY21. The cement business alone accounted for 77 % of the combined net profit of the group’s listed companies in FY21, up from 72% a year ago. As on September 2021, between UltraTech Cement and Grasim Industries, which owns 57% of the cement flagship, there is also Rs 4,948 crore of cash and reserves as per ETIG estimates.
The current market cap of UltraTech is ₹1.94 lakh crore.
Cement industry executives feel FY24 is expected to witness robust demand being a pre-election year much like the ~13% surge in cement demand in FY19. With ~19.5 MTPA capacity on track for completion within FY23, UltraTech believes it is well poised to capitalise on the expected demand uptick.
“Net debt to Ebitda basis declined in 3QFY22 to 0.5X. Incrementally, the cash generation will be employed for investment in growth opportunities (grey cement, white cement and construction chemicals) and for the shareholder’s returns without taking on debt,” wrote Sandeep Tulsyan, cement analyst at JM Financial.