UltraTech Cement board approves acquisition of 23% stake in India Cements

Mumbai: Kumar Mangalam Birla-led UltraTech Cement snapped up a big chunk of struggling rival India Cements Ltd, at a time the Adani group pursues a breakneck expansion in cement after entering the space barely two years ago.

UltraTech, India’s largest cement maker, on Thursday bought 22.77% non-controlling stake in India Cements for ₹1,889 crore via block deals. The acquisition won’t trigger an open offer as per India’s takeover code, but deters a potential rival bid for India Cements, long seen as a takeover target.

That translates to a valuation of $85 per tonne for the 14.5 million tonnes per annum (mtpa) cement manufacturing capacity of India Cements, analysts said. That compares to a cost of $90-100 per tonne of setting up greenfield manufacturing capacity.

Shares of India Cements closed 11.5% higher on the BSE on Thursday at ₹293.15, after touching a 52-week high of ₹299 intraday. UltraTech gained 5%, on a day the benchmark Sensex index closed 0.72% higher.

UltraTech has a consolidated cement making capacity of 152.7 mtpa, far ahead of second-placed Adani’s 77.4 mtpa. The two market leaders are adding capacity at break-neck speed, having set targets of reaching 200 mtpa and 140 mtpa of capacity, respectively, before the turn of the decade.

The bullishness of the market leaders in the cement sector is based on the Indian government’s infrastructure push. Crisil analysts predict India’s cement demand to grow 6-8% in FY25 after two consecutive years of double-digit growth.

A battle set in cement

Earlier this year, UltraTech acquired a 1.1 mtpa cement grinding unit in Maharashtra from India Cements for ₹315 crore. In 2023, it acquired the 10.75 mtpa cement business of Kesoram Industries.

The total cement-making capacity in India is 541 mtpa, according to industry body Cement Manufacturers’ Association.

The Indian cement industry is undergoing significant consolidation since the entry of the Adani Group less two years ago. Adani emerged as India’s second-largest cement maker in September 2022 with the acquisition of Ambuja Cement and its subsidiary ACC Ltd from the Swiss Holcim Group.

Since then, it has acquired listed Sanghi Cement and commissioned multiple capacity expansion plans. Two weeks ago, it announced the acquisition of Hyderabad-based Penna Cement at an enterprise value of ₹10,422 crore.

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The ports-to-edible oil conglomerate has since been aggressively cutting costs, improving operational efficiencies and adding capacity in a bid to become the lowest-cost producer of the crucial commodity.

“There is clearly an acquisition battle going on between the two leaders in the industry with only a handful of sizeable assets left on the block. This is not just a financial investment by UltraTech but a strategic one as it practically eliminates the risk of any other competitor acquiring India Cements,” said Sumangal Nevatia, associate director at Kotak Securities.

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Experts tracking the cement sector said there will be further consolidation ahead as larger players achieve better cost efficiencies due to their scale, pushing smaller players out of business.

Promoters led by N. Srinivasan currently own 28.42% in India Cements. Among public investors, Radhakishan Damani and Gopikishan Damani together own 20.78%. Other large investors include Life Insurance Corp. of India (3.6%), Sri Saradha Logistics Pvt.Ltd (5.04%) and foreign investor ELM Park Fund Ltd (5.58%).

A subdued India Cements

The company has been facing high operating costs and working capital shortages. The company recorded just ₹241 in Ebitda per tonne of cement produced, as against over ₹1,100 for large cement makers such as UltraTech and Ambuja at the end of 31 December, as per Mint’s calculations. Ebitda, or earnings before interest, tax, depreciation and amortization, is a measure of operational efficiency.

“This deal can be mutually beneficial for (UltraTech) and (India Cements) (Ultratech) can work out a strategic cement supply agreement to gain market share in undersupplied AP/Telangana belt and (India Cement’s) financial performance can also improve as volume improves,” said Tushar Chaudhari, Research Analyst, Prabhudas Lilladher.

Also read | India Cements promoters increase share pledge as co finds itself in a tight spot

The subdued operating performance of India Cements stems from the significantly higher power and fuel requirement compared to the industry average and also continued loss in market share in the southern region over the years, Care Ratings noted in a report in February, as it downgraded the company’s long-term credit rating to BB+ with a negative outlook, from BBB- earlier. The company was rated A- with a stable outlook in FY21 by Care Ratings.

The rating agency “believes that owing to the weak operating performance of the company, the net debt to Ebitda will remain stretched and over 6x in FY24 and FY25 unless management resorts to deleveraging by equity infusion or significant sale proceeds from non-core assets as guided earlier.”