BOMBAY, 10 December — The Indian cement industry is once again undergoing very rapid and sudden consolidation. This is mainly thanks to the selling off of the 10 percent stake held by Reliance Industries (RIL) in Larsen & Toubro (L&T) to Aditya Birla group flagship company, Grasim Industries, for a total consideration of Rs.7.67 billion in a negotiated deal.
This is touted to be the “deal of the year” and the suddenness with which it happened took all by surprise. Grasim, India’s third-largest cement-maker, bought the stake in L&T, the country’s largest cement producer, from Reliance Industries for Rs.7.66 billion.
It brings to end the long running speculation of the Ambani’s of Reliance taking over L&T completely. In fact, the Ambanis had made an attempt to acquire control of L&T in April 1990. But, the financial institutions, the largest shareholders of L&T, had blocked the move. Naturally, after that, Reliance did the smartest thing by getting out of L&T and thus ended up making some decent profits out of it. The deal will result in capital gains of Rs.3.60 billion to RIL and will be reflected in its third quarter results.
The sale price for the 25 million L&T shares has been fixed at Rs.306.60 per share, representing a 47 percent premium over the last traded price of Rs.208.50 when the deal was announced. The two nominees of Reliance, Mukesh Ambani and Anil Ambani, are expected to shortly resign from L&T board. In their places, AV Birla Group nominees are expected to enter. Reliance has justified its move out of L&T by stating that this was mainly in consonance with its objective of unlocking value from unrelated investments, in the interest of shareholders.
And why did Grasim get into L&T? The Aditya Birla group has identified cement and knowledge-intensive businesses as significant growth opportunities and keeping that in mind, the company has stated that L&T’s portfolio of businesses was a perfect fit. And the company has stated categorically that it had no plans to increase its stake or seek management control of L&T.
The Indian stock markets have not been very happy with Grasim after this deal as there is now concern over the amount paid and the effect the cash outflow would have on it’s own operations. L&T’s shares were also down, reflecting concern that the Grasim acquisition may delay the cement division demerger.
This concern does not hold much water. Logically, if Grasim were to put a grassroot cement unit today, the replacement value of a one million TPA. cement plant would be around Rs.3.50 billion-4.00 billion. And based on this, L&T’s cement capacity would be worth around Rs.60.00 billion. And as against that, Grasim has paid just over Rs.7.00 billion and in turn got tremendous bargaining clout in the industry.
The best for Grasim is that this 10 percent stake in L&T implies an entry and a possible control in markets that were previously led by L&T, mainly in Andhra Pradesh, Gujarat and Maharashtra.
This takeover by Grasim is now expected to trigger off consolidation in the Indian cement industry through other acquisitions. Mid size cement units like Mangalam Cement, Kesoram, Orient Paper, Shree Cement, Mysore Cement, Prism Cement, Ramco and DLF Cement have turned out to be the new darlings on the bourses. The general perception about the sector is that smaller cement companies would now take center stage in the next phase of consolidation when the biggies, domestic as well as global, scrounge around for more capacities.
Globally, top five cement companies control more than 80-85 percent of the total cement market. In India, Grasim-L&T-Gujarat Ambuja-ACC together control only 55 percent, showing there is scope for more consolidation in the near future.
India is the world’s third-largest cement producer and second-largest cement market after China. These have been tough times for the industry, what with overcapacity and unprofitable prices. Annual production capacity totals about 115 million tons, about 25 percent more than demand, which in 2000-01 totaled 93 million tons.
With this current consolidation, the Grasim-L&T combine will be the largest player in the Indian cement industry, followed by Gujarat Ambuja ACC combine. These two entities will now control more than 50 percent of the market. The Grasim-L&T combine will bring together a capacity of 30 million tons per annum (mtpa), catapulting it to the largest player in the industry. Many expect this to lead to cartel-like ability to fix prices, especially in the south and west, thereby leading to a stronger bottom-line for all players. It will also give a tremendous boost to their collective bargaining power with suppliers, as well as possible efficiencies arising out of shared distribution and logistics.
And another very good news for the Indian cement industry through this deal is that it has for now, put a stop to the entry of foreign players like Italcementi, Holderbank and Cemex. What is more likely is that, these foreign majors may now start looking at acquiring smaller players.
