Corporate: Cementing battlegrounds

The spate of recent M&As in the cement industry is likely to leave a handful of transnationals and Indian giants jostling for market dominance.

Take a shovelful of a fragmented industry, mix with it a booming market, and pour on top of it millions of eager transnational dollars. What do you have? An unglamourous sector making over into an acquisition-led transnational industry.

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French giant Lafarge set the ball rolling by acquiring, last year, Tata Steel's plant at Singhbhum (Bihar), followed by Raymond's plant at Bilaspur. Italian major Italcementi followed suit by setting up a 50:50 joint venture (JV) with the K.K. Birla group to take over the cement business of Zuari Industries. It now admits to being in talks with other cement companies for JVs or outright acquisitions. British company Blue Circle is on the prowl for B.k. Birla-owned Century Textile's cement facility, besides G.P. Birla and C.K. Birla's Orient Cement and the S.K. Birla-owned Mysore Cements.

There could be more deals in the offing. Cemex of Mexico is reportedly in talks with Jaiprakash Industries for 26 per cent equity in its cement business. The M.P. Birla group is hawking its four cement units with 3.9 million tpa capacity. The suitors could once again be one of the transnationals.

If all the reported transnational deals materialise, an estimated 35 million tpa of capacity-worth Rs 12,040 crore-would have passed from the hands of Indian promoters into that of the MNC's.

''The churning of the industry is truly happening now,'' says the 63-year-old Suresh Neotia, chairman of Gujarat Ambuja Cements.

The growing MNC interest in India's cement industry comes at a time when large-scale internal restructuring is in full swing. It was triggered by the acquisition of Raasi Cement and Sri Vishnu Cement by south-based India Cements, and sustained by Gujarat Ambuja, which--with Modi Cement and DLF Cement already in its kitty-has acquired a 10.5 per cent stake in acc from the Tatas, with 3.5 per cent more to come. Somewhere along the way, Grasim of A.V. Birla Group acquired Dharani Cement, Indian Rayon's cement business and Shree Digvijay Cement; and Larsen & Toubro acquired Narmada Cement.

The industry overhaul is hardly surprising. Cement prices have been softening over the years, and to boost margins, manufacturers are having to ramp up volumes. Bigger is better for another reason as well: the enormous potential for growth in consumption. Data for 1990s show that India's per capita cement consumption was less than 100 kg compared to the world average of 250 kg. At present, the total cement demand in India is lower than the total capacity. That scenario could soon be a thing of the past. The Cement Manufacturers Association of India projects a demand of 101 million tpa in 2000-01 versus 93 million tpa last year. Against this, the total installed capacity is 109 million tonnes. However, seven million tonnes of Cement Corporation of India and two million tonnes of up Cement are lying idle. A 8-10 per cent growth is projected in the coming years, which will take the demand to 200 million tonnes in 10 years.

The correction in the demand-supply mismatch is being aided by the fact that not many existing players or new entrants plan to set up fresh capacity. Transnationals searching for a toehold in India, as well as Indians, have chosen the M&A route.

Gujarat Ambuja is perhaps the only company which is mulling fresh capacity, besides acquisitions. The argument in favour of acquisition is that a new plant suffers from a three-year gestation and the cost of setting it up is about $110-120 per tonne versus $80 per tonne for a brownfield capacity. ''Also, it offers the benefit of hitting the market straightaway,'' says Ashish Guha, 42, COO, Lazard India, which advised Italcementi in the Zuari deal.

Another reason weighing against greenfield projects is that cement technology globally has not changed much in recent years. Ergo, brand new facilities do not yield any significant competitive benefits. Agrees Michel Lefebvre, 53, member of the executive committee of Italcementi Group: ''You are better off with a good existing plant.''

The multinationals have had to look at countries like India also because cement consumption has plateaued in the developed countries. India, in contrast, is not only a long way off from the plateau, but also set to make large investments in infrastructure.

India presents just the right climate for acquisitions, with its highly-fragmented cement industry. Thus, cement plants appear to be easily available for sale, as many multi-product companies which had diversified into cement in the pre-1991 license-permit era are restructuring for focus. ''There are too many tiny players,'' says Lefebvre.

India has as many as 40 players with installed capacities of up to one lakh tonnes per annum-with the lowest capacity being a minscule 15,000 tpa-and no less than 30 players with capacities of up to a million tpa. There are 32 more players with capacities of over a million tpa.

In contrast, the minimum size needed for a player after the M&A shoot-out will be 2-8 million tonnes, depending on the location and cost-efficiency. Thus, the industry has India Cement, Associated Cement Companies, Gujarat Ambuja, Larsen & Toubro, the A.V. Birla Group and the B.K. Birla Group, controlling nearly 70 per cent of the industry's capacity.

Large capacities alone won't ensure survival. The reasons: cement is transport-intensive and the country's transport network poor. Freight expenses constitute as much as 45 per cent of the ex-factory prices. ''The valuation of a plant can vary by 20-30 per cent subject to the market's location and limestone reserves,'' says Neotia.

Following the consolidation, players will likely be very strong in their own region, but have little or no market in the next. Signs of such demarcations are already visible. Lafarge-with the cement facilities of Tata Steel and Raymond in its bag-is growing in the east. India Cements-having acquired Raasi Cement and Sri Vishnu Cement-is very strong in the south, but doesn't have much of a market up north. Gujarat Ambuja has a presence in the north through dlf and has a gateway to the east through Modi Cement. But its stronghold lies in the west, and it is virtually non-existent in the south. ''Transporting cement from north to south is next to impossible. There has to be regional consolidation,'' says Sidharth Birla, 42, who may put his Mysore Cements on the block.

The survival criteria do not end at that. Since the commodity is largely undifferentiated in terms of technology, premia are difficult to command. Competitiveness is almost entirely based on cost-control, the key to which will be keeping the transport expenditure and energy costs on a tight leash. ''The survivors will be those who optimise production and distribution costs,'' says Lefebvre.

Already, there are reports that B.K. Birla, C.K. Birla and S.K. Birla-with a combined capacity of nine million tonnes-are looking to jointly hawk their cement businesses to get a better valuation.

Jaiprakash Industries has for long been looking to sell its cement business-this time around to Cemex of Malaysia. The industry is abuzz with rumours that the A.V. Birla group wants to dispose of its Raipur plant, which would be an excellent buy for Lafarge, which has already acquired some units near-by.

L&T, under a recast scheme mapped by Boston Consulting Group, has identified cement as a non-core business and is looking for either a buyer or a partner who can take care of the business. L&T's second option fits in well with Italcementi's plans of growing in India through joint ventures.

Besides, companies with small, strategically located plants-like Chettinad, Dalmia or Madras Cements-make ideal candidates for acquisitions. For the long-term players, gains from the consolidation will be, well, concrete.