Cement Restructuring Mantra |
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Business strategies of Indian companies have been evolving over the last four-five years in response to the changing and more competitive environment. Unlike the past, when companies’ business strategies were largely driven by revenue growth, now companies focus only on those lines in which they enjoy sustainable competitive advantage either capitalizing on their existing core competencies or by achieving it via Joint ventures. Sample this. The Tatas and Birlas, for whom diversification was a mantra till some years back, started looking inward for core competency and focus. They initiated the exercise with the sale of cement plant of Tisco and restructuring amongst Indian Rayon and Grasim. Same, is the case with companies, which have gone into unrelated diversification in the past and are hurt today. Restructuring is the buzzword. It would be interesting to look at one such industry, which is on a restructuring spree and know where it is heading. Cement industry is one, which is in a state of flux with restructuring moves across the board.Although the restructuring exercise in cement industry has gathered momentum now, the whole process started way back in 1996-97 when the state of Indian economy suffered a set back. The general perception of liquidity crisis, the high cost of money, political uncertainty, and inadequate expenditure on infrastructure led to the fall in demand for cement. Adding to the woe, the costs of inputs for cement production were on the rise. And not to forget the South East Asian crisis. This left India, a dumping ground for foreign countries forcing the domestic producers to be left worst affected. Profitability narrowed leaving smaller and marginal players struggle for survival. While the larger ones withstood the pressure of lower profitability, smaller ones closed down or merged with other big players or left themselves favorable for a take-over. Over the years, though there were some signs of recovery now and then, the situation continued leading to the restructuring of the industry. As a result today, six major players account for nearly 52% of the total cement capacity of 110million ton.
It would be engaging to look at the facilitators of this restructuring exercise. One is that the foreign companies have become increasingly aggressive and are on a look out to enlarge their market share in this subcontinent. To make it easy for them, Indian companies break bread with them at the high table. Chennai-based India Cements is learnt to have held talks with atleast two MNCs- Blue Circle and Cemex, to set up a joint venture company. Venturing like this with an Indian Company carries a strategic importance for it would make the entry easier for the foreign company than it would if it bid by itself. And given the fierce consolidation phase that the Indian cement industry is running through, survival means not missing opportunities. Some of the other latest happenings involving international cement majors include Lafarge's buyout of Raymond's cement division and Italcementi's 50% stake in Zuari Industries’s cement division. Other cement majors like Blue Circle and HolderBank are also scouting for lucrative opportunities.
Further, the newfound interest by foreign heavyweights has a simple reason: excellent growth prospects in the long term. Just to put the performance of the cement sector in perspective, production grew 15% to touch 94 million tonnes in FY2000 and demand grew 14.7% at 93.8 million tonnes. It is anticipated that by 2002, demand in the cement sector will exceed supply. The interest shown by international cement majors seems to be more than justified on these grounds. In the months to come, you can expect a couple of deals to fall through.
The other facilitator is quite interesting. Valuation of the cement companies. Sounds strange? Check this out. Today if you want to set up a cement plant of 1 million tonne capacity, the investment required is Rs. 3 - 3.5 bn. This is based on the replacement cost, which generally hovers between Rs. 3000 - 3500 per tonne. But what if it costs lesser to takeover a company? (Valuation of many cement companies is lower than their replacement cost.) The choice is obvious. That exactly is what is happening. Besides, the factors that decide the success of the cement business like location, availability of raw material etc, makes the choice of acquisition better. If this is from the acquiring companies’ perspective, the deal seems to work well even for the companies being acquired. After adding capacity in the early 1990s, anticipating a surge in demand, the sector was hit, instead, by a recession-driven glut. Hence, many Indian players now want to get out of the game at the earliest opportunity as long as the price offered is good enough.
Eventually, where is the industry heading? There are two things happening. One, weaker companies are falling by the wayside and only large players are to remain. Two, peculiar to the cement industry, the consolidation would leave these players concentrated regionally. India Cements will continue to dominate the South while Gujarat Ambuja, ACC combine will hold on to the North. A similar situation could be envisioned for eastern and western regions. Grasim and Century, along with L&T, are expected to command this region. The trend is reflected even among foreign players. Among them, Lafarge seems to be keen in securing a foothold in the east. Cement Francais, on the other hand, is concentrating on the southern market. To be sure, consolidation is still on a nascent stage. Its just a matter of time things would become clear. You got to wait and watch.
Karthik Raj