Holcim and Lafarge SA are considering a merger, given “strong complementarities of portfolio and cultural proximity”. If this comes to fruition, the merged entity would become the largest cement company (c69 mt net capacity) in India, significantly higher than UltraTech (c58 mt as of end-2013), giving it a market share of c20% (vs c17% for UltraTech).
In our view, other synergy drivers would include improvement in the geographic mix, potential brand consolidation, and lower capital costs for the combined entity.
The capacities of Lafarge India are attractively located with 50% in the eastern market, where utilisation remains high. Lafarge India also commissioned a 2.6 mt integrated cement plant in Rajasthan in Q4CY13 — North India continues to be an attractive regional market given supply-demand dynamics. After this potential merger, the new entity could emerge as the clear leader in the eastern and northern markets in India and a close second to current regional leader, UltraTech, in the western market.
Potential brand consolidation could be positive for Lafarge. ACC and Ambuja (subsidiaries of Holcim India) are older and more established brands in India, while Lafarge is a relatively new entrant. Post the merger, there could be a consideration for brand consolidation leading to better margins for Lafarge India's product offering. Lafarge could also benefit from lower financing costs as Holcim currently has a better credit rating than Lafarge. However, anti-competitive clearances are critical for the deal.