Cementing the Gujarat-Ambuja deal

Updated: Feb 4 2006, 05:30am hrs
On January 30, when Swiss cement giant Holcim picked up a 14.8% stake in Gujarat Ambuja Cements Ltd (GACL) for Rs 2,100 crore, the move came as a surprise to many of the industry observers. The promoters, Sekhsaria-Neotia family, have always maintained that cement is their core business.

Despite market rumours on the possible sell-out of GACL stake by promoters, industry insiders seldom thought that the third largest player would do so. It is only a logical step, after bringing in a foreign company to India and selling them their stake in ACC. In fact, GACL officials have gone on record a few times, saying that if they got a good price they would sell off the company, says an industry analyst.

So, what does a good price mean In 2003, when Larsen & Toubro (L&T), sold its UltraTech Cement Company to the Aditya Birla group, the price paid on a per tonne basis was $80 per tonne capacity of UltraTech. Even last year when GACL sold its stake in ACC to Holcim, the price paid was $100 per tonne. But within a span of a year, when GACL hived off its stake to Holcim, the price per tonne had more than doubled to $212 per tonne. In fact, this is the highest price paid per tonne of cement globally, in a buy-out, according to industry experts.

So why should Holcim pay such a huge price for a company in India. It is the huge construction boom and the enormous scope for growth in the Indian market, point out analysts. With a total capacity of 152 million tonnes, India is the second largest producer of cement in the world, next only to China. But the per capita consumption is 125 kg per year and is one of the lowest in the world.

With a range of infrastructure activities announced by the government and the current real estate boom in the country, experts predict a minimum of 8-9% growth in the industry in the next few years.

The government has planned an investment of Rs 1,700 billion over the next seven years (2005-2012) for development of national highways, bypasses and roads connecting ports. This would provide a major fillip for cement consumption.

Apart from serving the needs of the domestic market, immense scope exists for Indian cement companies to export cement to the Gulf region, where a large number of construction activities are being undertaken. The markets in which global majors like Holcim and Lafarge operate are saturated and the real scope of growth is in markets like India.

Holcim first entered India in January 2005, by acquiring Gujarat Ambujas stake in ACC through an investment arm called Ambuja Cements India Ltd (ACIL). Later it went on to acquire Ambuja Cements Eastern Ltd (ACEL). A company like Holcim would not be satisfied with a small stake in a cement company. They would want to play a larger role in an emerging market like India, analysts explain. Despite paying a high price, Holcim, within a span of a year, controls a 33-million tonner per year cement business in the country.

Globally, Holcim and Lafarge are rivals with one tipping over the other in becoming the largest in the world, depending on their acquisitons and expansions. But Lafarge in India has been less than lucky compared to Holcim, despite being an early bird. The French cement major acquired Tata Steels cement division in 1999 and picked up Raymonds cement division in 2000. After that, for close to five years, there has not been much buzz from the company. With a capacity of 5 million tonnes, Lafarge is still a small player in India.

Apart from the good price, analysts also suggest another reason why promoters decided to sell off GACL. As per the deal signed by GACL with Holcim, the latter had the right to buy GACLs stake in ACIL, thereby gaining full control of ACC, by January 2008. If Holcim exercises the right, GACL would not be in a position to muscle competition from the Grasim-Ultratech combine and a MNC like Holcim, which is why selloff was the best option, they say.

So what is the future course of action for Sekhsaria-Neotia families, with a cool Rs 2,100 crore in their kitty GACL has real estate interest in projects along with the West Bengal government undertakings. Sources say they are actively seeking real estate investment opportunities in the hospitality and real estate segments.

GACL had also picked up a 14.8% stake in the insurance company ING Vysya for around Rs 60 crore last year.

So insurance could also be their new area of interest, experts say.

What does the deal mean for the Indian cement industry With the acquisition, the Indian cement market has two major entities, the Holcim-ACC-Gujarat Ambuja combine and the Grasim- UltraTech combine, that control over 50% of the industry. The rest of the industry is dominated by many small regional makers and unorganised players.

Analysts predict a top-down approach in consolidation of the industry. Following the acquisition at the top level, the behemoths will only hunt for more buy-outs. The smaller cement companies will try to gain advantage from the benchmark $212 per tonne, paid by Holcim for GACL.

GACL has already said that it is looking at acquisitions in the domestic space. Holcim has already parked funds of around $400 million with ACIL. We are keenly looking at acquisition of small efficient cement companies with 1-2 million tonnes capacity in the northern and western region, said Jayesh Doshi, assistant vice-president (treasury), GACL. Going by the plans of the industry leaders it would not be too long before another round of buy-out and stake- sell takes place.