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CEMENT Cracks In The Empires The cement consolidation has only just begun, but acquirers are already feeling the heat thanks to high financing costs and poor market conditions. By Brian Carvalho
Has it? Of course, you would snort. Already this year, hasn't Lafarge picked up Raymond's cement plant too, hasn't ItalCementi formed a JV with Zuari Agro, and-were you blind-didn't Ambuja recently double its stake in ACC by buying out the Tatas? Of course, cement consolidation is upon us, and if you can't notice it, you are probably the kind not to notice if a Martian landed a few feet in front of you and tapped you on the head. Try telling that to Mohan Karnani, Executive Director at Larsen & Toubro, and chief of the engineering major's cement business. He would, well, beg to differ. ''There is not enough consolidation. The process is slow. If there were 56 players earlier, now we have 46. We need just six.'' There you have it. Despite all the action, the cement industry is still very much the way it used to be-fragmented. As a result, capacity growth is still haphazard, not in line with demand growth, supply still outstrips demand, and manufacturers are unable to dictate prices thanks to cut-throat price wars. What's more, once prices show even the faintest signs of moving up, most of the players start upping capacity. And if demand suddenly slows down-as it has done in the first half of the current year, falling to just 3.5 per cent from last year's 15 per cent-even the best are saddled with lower realisations thanks to excess capacity and the ensuing soft prices. For instance, Gujarat Ambuja's operating margins are down in the July-September quarter, and the net realisations of Grasim's cement operations are down 2 per cent over the previous year's corresponding period. ''The days of 15-17 per cent growth rates are over. Players will now have to be satisfied with rates of 8 per cent now,'' says Ramnath Subramaniam, Research Analyst, Taib Securities. A Dose Of Reality
It's such sobering conditions that make (rapid) consolidation an imperative. For instance, by acquiring ACC's capacities, Ambuja now controls close to 20 per cent of the industry, which should give it the power to dictate prices. Similarly, by consolidating frenetically in the South, India Cements has the muscle to take the lead in hiking prices. That's how it should work in theory. But is it working, or will it ever? Indeed, the consequences of consolidation look alarming on a few of the balance sheets. Although Gujarat Ambuja has parked its ACC holding in a new company, it is Ambuja that has to service the Rs 900 crore it borrowed to fund the ACC 'strategic alliance'. That's why Ambuja's interest costs climbed by 45 per cent last quarter, thanks to its debt soaring to Rs 1,190 crore (including the funds it borrowed to complete the takeover of DLF Cements, now Ambuja Cement Rajasthan). Similarly, India Cements too leveraged its balance sheet to fund its string of acquisitions-Raasi Cements, Visakha Cements, and Cement Corporation of India's Yerraguntla's unit. Result? India Cements had loans worth over Rs 1,600 crore on its last year's balance sheet, taking its debt-equity ratio up to 2.1:1. The high interest costs are eating into the company's profits, which fell by half last year. ''There's little doubt that both Ambuja and India Cements need the capacities they acquired. But they could have explored options to raise cheaper money, without exposing their balance sheets,'' says R. Sankaran, Chairman of investment bank IndGlobal Financial Trust. Sankaran adds that the timing of many of the takeovers could be faulted, and that acquirers might have well misread the market. Ambuja's buyout of ACC at Rs 370 per share looks ridiculous-of course with the benefit of hindsight-when you look at its share price today, which is well under Rs 100. Of course, this also means that Ambuja will have to remain content with the 'strategic alliance' status it has conferred on ACC. For, whatever the Ambuja brass may say (they were unavailable for comment), making an open offer for another 20 per cent could well sound the death knell for this one-time cement outperformer. If you go by cost per tonne, Ambuja's acquisition of 7.2 per cent in ACC ranks as the most expensive cement deal in the country so far, at Rs 5,455, which works out to $130 per tonne. Analysts point out that any acquisition over $80 per tonne is on tricky ground. D.D. Rathi, CFO of Grasim, says that his buyout of Digvijay was one of the most economical acquisitions, which worked out to just $41 per tonne. What's more, Grasim also got a jetty along with the plant for that price. Similarly, Karnani of L&T points out that he acquired Narmada Cements for under $50 per tonne. But let's not forget the sea of red that almost all of these units came with. If you add the losses of DLF and Modi Cements, they should be large enough to wipe out most of the second-half profit of Gujarat Ambuja, point out analysts (and this anyway fell 50 per cent in the last quarter). And, of course, most of ACC's units are losing money. Then, Digvijay Cement has piled up losses of Rs 120 crore as of September, 2000, which is almost half of Grasim's entire profit for 1999-2000. Narmada has losses of Rs 26 crore, which Karnani says has come down from Rs 32 crore. But, for L&T's cement division, which is anyway losing money, Narmada's red ink doesn't help matters much. ''One has to take a long-term view. You need to have the ability to sustain a zero per cent return,'' says L&T's Karnani. Fixing The Future
Clearly, it's going to be a long haul. Subramaniam of Taib says it will take Ambuja 24 months to bring down ACC's high cost structure. For instance, if Ambuja's power costs work out to Rs 92MW per tonne, ACC's would come to almost Rs 130. ''Then Ambuja can benefit by strategically pricing ACC products along with its own,'' he adds. By then Ambuja might also have to rope in a strategic partner to reduce its financial burden. Even as the existing acquirers try to put their newly-created houses in order, another question springs up: who will be responsible for the rest of the consolidation that's waiting to happen? ''The acquirers have first got to digest what they've taken over,'' says Sankaran. The transnationals may appear the only answer. Other than Lafarge, the others are still waiting and watching. Either Holderbank or Cemex may partner L&T, but the MNCs are clearly not interested in picking up piecemeal capacities. Many of the bit players, for their part, are still not keen to sell, and are in fact expanding capacities. The consolidation process has begun, but it will be many many years before there are just a handful of players who can dictate prices and grow the industry in a methodical manner. |
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One of the
more popular mantras in Indian industry for the past two years- other than
'New Economy', 'ice', and its myriad manifestations-has been
'consolidation'. And if 'consolidation' has been the buzzword, could
cement be far behind? After all, it was the time when cement acquisitions
were happening all over the place, right from Lafarge's buy out of Tisco's
cement unit, to India Cements' acquisition of Raasi and Visakha, to
Grasim's, of Digvijay and Dharani. And when Gujarat Ambuja brought the
house down by picking up a 7.2 per cent stake in ACC late last year, it
was time to make those 'make no mistake' statements: the era of
consolidation in cement has arrived.