If there is one word that can describe the strategic moves of the Indian cement industry in recent times, it is this: consolidation. The latest example of this strategy saw Swiss cement giant Holcim exit India, and the Adani Group, which had no presence in space before, became the country’s second-largest cement maker overnight. The exit of Holcim significantly changed the shape and dynamics of the cement industry in India. After almost two decades of existence, the international major deemed it wise to focus instead on markets where the opportunities for solutions and products were more attractive. In this scenario, India was at the bottom of the pecking order, with Holcim already calling for it to leave Brazil, Northern Ireland, Sri Lanka, Malaysia and Russia.
In a $10.5 billion deal, the Adani Group took over two well-known companies – Ambuja Cement and ACC – from Holcim. They are strong brands across all geographies and together they are a formidable force spanning the Indian landscape. These two brands together have an installed capacity of 70 million tonnes per annum (mtpa). This, however, is quite far behind UltraTech, which has an installed capacity of 120 mtpa and is the largest cement producer in the country. While Holcim had a tight leash on quality, it did very little capacity expansion or acquisition of any of the companies that entered the bloc through the Insolvency Code and bankruptcy. The competition moved quickly and smartly increased its capabilities to establish a stronger presence in its traditional markets, in addition to entering those with potential, such as eastern India. This could explain why Holcim did not find the Indian market attractive enough to stay there.
From a strategic perspective, there is a lot that Ambuja and ACC bring to the table. This point did not escape Gautam Adani, president of the Adani group. In fact, the acquisition fits very well with his other businesses. For example, it is important in the port sector, builds roads and, like any other cement player, will have access to rakes. On the other hand, it has an energy transmission company, which rejects fly ash, a raw material in the manufacture of cement. In addition, the fact that he can source coal from his mining company in Australia allows him to manage costs at two key levels: logistics and energy. With its foray into renewables – which are known to have a long gestation period – the acquisition opens up another way to cut costs and get well-prepared for the decarbonization story. Since it is not present in the cement, the deal is unlikely to face obstacles from the competition watchdog, the Competition Commission of India.
The transaction sees the Adani Group route the acquisition through a Mauritius-based entity, which will acquire Holcim’s 63.11% stake in Ambuja Cement and 4.48% in ACC, in addition to the indirect stake of 50.5% in ACC. Vishal Periwal, cement and construction analyst at IDBI Capital Markets, explains that the transaction values Ambuja at an enterprise value per ton (a standard measure used in the cement industry) of $178, while it is $127 for VAC. Compared to previous transactions in the space (see table), it is not cheap but should be viewed from the perspective that it gives the buyer an immediate and solid footing. “Through this acquisition, Adani spans all five regions (central included) of India, with the north and east contributing 50% of its capacity,” Periwal explains. The value of the deal assumes that the mandatory 25% open offer is fully realized. Of the $10.5 billion, about $6.5 billion goes to Holcim, which the Swiss company will use to acquire assets in other markets. Responding to a question from Business Today on a media call, the company’s global CEO, Jen Jensich, hinted that the company had been conservative in India. “We could have done more in India, but in our opinion we had a good strategy,” he said.
The race to acquire Holcim’s business in India unfolded with the usual twists and turns. JSW, the other competitor, with its existing cement business and a stake in steel and paints, expected the acquisition to be synergistic. Investment bankers point out that there were two other global steel majors in the fray; the strategic logic was that the slag generated by steelmakers should be used in the manufacture of cement. The Adani Group, however, managed to fend off the competition and acquire the Indian operations of Holcim, thereby catapulting itself into second place in the hierarchy of cement companies in the country. For Periwal, consolidation has been the buzzword in the Indian cement industry and “this transaction further reinforces that”. According to him, Holcim had been less aggressive in capacity additions and “now with a new promoter it could change the outlook for ACC and Ambuja”.
The sale of Holcim marks the exit of a major foreign player, suggesting that India is a terrain with which he is not too comfortable. The space is dominated by local businesses, which continue to look for ways to increase capacity and grab a generous slice of the infrastructure pie. With the push of government infrastructure, things are only going to get more interesting from now on for cement manufacturers.