The 207-million tonne Indian cement industry may witness M&A activity again by the end of 2009, say industry watchers. However, this time, valuations will be low and deals will be driven by a strategic desire to exit rather than financial compulsion to restructure, they opine.

Sourav Mallik, executive director, Kotak Investment Bank, said, “Large players or MNCs will make acquisitions when new entrants and small companies start feeling margin pressures.” Apart from issues relating to oversupply, small companies may have made expansions at high costs and will have to spend on brand building; hence, returns may not be up to their expectations and they will look to be acquired, he noted.

Experts believe companies like Reliance, Holcim and Lafarge are waiting for an appropriate time to consolidate. It is also understood that Gujarat Sidhee, Saurashtra Cement and Andhra Cement are waiting for a good valuation to get acquired.

“Many sellers are not willing to sell at low valuations. Also, no cement company is running into losses as yet, though they may have reported de-growth in their top line and bottom line,” said an investment banker on condition of anonymity.

The cement industry witnessed 7 high valuation M&A deals in 2006, which reduced to 2 in 2007. In 2008, however, the number of deals increased to 3; two MNCs, CRH and Vicat, entered India by acquiring stakes in My Home Industries ($462 mn) and Sagar Cement (Rs 70 crore) respectively. The third deal in 2008 was in the RMC space, where Lafarge acquired L&T concrete?s RMC business ($349 mn).

Valuations have dipped to $75-100 per tonne now, from the peak level of $300 per tonne. Incidentally, French cement maker Vicat bought stake in Sagar Cements for half the value of what a rival had paid a year earlier. Among the large global players in the cement industry, Cemex is the only company that is not present in India.

India figures prominently in the plans of all large cement companies. The importance of India, for instance, is apparent in the valuation at which Holcim struck deals in the last three years.

In 2005, Holcim acquired a stake in ACC at an enterprise value (Ev) of $111per tonne; in 2006, it acquired a stake in Ambuja cement at an Ev of $193 per tonne and in 2007, it increased its stake in Ambuja Cements at an Ev of $301 per tonne. The valuations during all the three years were higher compared to other deals in the space.