Cement industry to witness dip in M&A valuation

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India's cement industry, that is currently undergoing a consolidation and market leadership phase, will now witness a fall in the valuations of M&A deals. With cash flows at an all time high and capacity utilisation bursting at the seams, the cement industry, that has witnessed transactions happening at higher valuations, will now see a dip of 15% to 20% in M&A valuations going forward, say experts.

Says Sourav Mallik, associate director- investment banking at Kotak, "The cement industry is witnessing a fall in earnings and valuations. More M&As in the sector will now be driven by a strategic desire to exit rather than a financial compulsion to restructure."

In the year 2006, the cement industry saw seven high valuation deals, whereas in 2007, the number of deals reduced to only two. The latest deal that happened in 2008 was CRH acquiring 50% stake in My Home Industries at an enterprise value of $196 per tonne, whose valuations, according to experts, was also much higher. However, now the M&A scenario in the industry is taking a 'U' turn.

The cement industry cannot be saved from an oversupply situation and sharp correction in prices, where capacity expansion of 20 mtpa was expected to come on stream in FY08 and 80 mtpa in the next three years.

"There is a pull-back of M&A interest globally in the cement sector. Moreover, in the current scenario the pay back time for the investor will be longer, resulting a drop in M&A valuation," said Hitesh Agrawal, head research, Angel Broking.