Cement majors face valuation roadblock

Mumbai: The country's cement industry, which had witnessed higher valuation transactions in 2008, has now become cautious on acquisitions at the current valuations.

However, major cement manufacturers including ACC Ltd, Ambuja Cement and Grasim are scouting for acquisitions to maintain their current market share along with organic expansion.

According to experts, firms are not willing to sell at low valuations due to high expectations. At present, the target companies are available at a premium which Indian firms with sizeable position will not go for it. Currently, brownfield or greenfield expansion in the sector will cost about $100-120 per tonne whereas firms are demanding more than $150 per tonne.

According to an ICICI Securities report, Ambuja Cement Ltd is scouting for acquisition in the range of 1.5 to 2 million tonne capacity cement plants, but valuations remain the key hindrance for the company. ACC MD Sumit Banerjee told FE, "There are not too many targets currently. Also we don't see too many acquisition deals in the next one or two years. People have experienced good returns in the last few years and they can hold on as they clearly see 2013 as a good market."

In January, ACC Ltd acquired 100% stake in Encore Cements and Additives Pvt Ltd and will buy 45% stake in Asian Cement and Concrete, which operates a 3,00,000 tonne cement grinding unit at Himachal Pradesh. The value of the deals was not disclosed.

"Both the buys are small but interesting from the point of view of distribution cost, logistic cost and market rational," Banerjee said. Aditya Birla Group's Grasim Industries needs to add 25 million tonne of capacity to maintain its 20% market share. This will require an investment of Rs 15,000 crore over 5 years period. Grasim Industries CFO Adesh Gupta had indicated that the company is evaluating the inorganic route also.

In 2006, the cement industry saw seven high valuation deals, whereas in 2007, the number of deals reduced to two. In 2008, there were three deals, where two MNC's CRH and Vicat entered India by acquiring stake in My Home Industries ($462 mn) and Sagar Cement (Rs 70 crore) respectively. In RMC space Lafarge acquired L&T concrete's RMC business ($349 mn) that pitched Lafarge ahead in the fast growing RMC business.

Experts believe players like Reliance, Holcim, Lafarge are waiting for an appropriate time to consolidate. It is also under stood that...