Rapid consolidation over the past five years has boosted cement sector

Early this month, ACC Limited, a subsidiary of Ambuja Cements Limited and a leading entity in the cement and building materials sector, which was holding 45 per cent stake in Asian Concretes and Cements Private Limited (ACCPL), announced the successful acquisition of the remaining 55 per cent stake in ACCPL from its existing promoter at anenterprise value of Rs. 775 crore. ACCPL has 1.3 MTPA cement capacity in Nalagarh (Himachal Pradesh), while its subsidiary Asian Fine Cements Pvt Limited (AFCPL) has 1.5 MTPA cement capacity in Rajpura (Punjab).

The acquisition reinforced Ambuja and ACC’s market leadership, elevating Adani Group’s overall cement capacity to 77.40 MTPA. Industry analysts think that this is not just a one-off development and may mark the beginning of a new trend of simultaneous organic and inorganic growth simultaneously. If the latest report by Crisil Market Intelligence and Analytics is anything to go by, then the Indian cement sector will add 150-160 million tonne per annum (MTPA) capacity in the next five years starting this fiscal, through both organic and inorganic routes, with an eye on the anticipated demand growth in infrastructure and housing and in a bid to capture market share in a highly fragmented and competitive industry. In the last five fiscals, the industry had added 119 MTPA to reach a total of 595 MTPA.

Around 70-75 MT of the capacity addition is expected to be commissioned next fiscal, with 50-55 per cent concentrated in the eastern and central regions. Large players will account for 50-55 per cent of the planned capacity addition. The robust demand in the past two fiscals has bolstered the balance sheets of large players and some mid-sized ones with strong market presence, prompting them to expand capacity on the back of healthy cash accrual and credit profile.

This fiscal, the demand is projected to grow 10-12 per cent, driven by government push to affordable housing and pre-election spending on infrastructure. That said, incremental supply and heightened competition will limit price growth to 0-1 per cent, maintaining prices at Rs. 390-395 per 50 kg bag, and keep utilisation at 70-75 per cent. Crisil has projected that in the next fiscal, demand for cement would grow at a moderate 4-6 per cent on a high base of the previous three fiscals. Also, rising raw material cost and a flat base will lead to an uptick of 1-3 per cent in prices to Rs. 400-405 per 50 kg bag.

Although there will be inorganic growth in the cement sector, one has to keep in mind that the cement business in the country has witnessed rapid consolidation over the past five years. Hence, the next wave of acquisitions would be slower due to the paucity of assets available and the unwillingness of promoters to sell. As the business consolidates, the top 4-5 players will account for over two-thirds of installed capacity of 510 million tonne. Sector analysts opine that the cement sector should have consolidated even more but for the small players, who often want a huge premium. Even as companies scout for the next acquisition target they are lining up greenfield and brownfield expansion plans. As regards the large industry sectors, this will certainly be one interesting space to watch.