Concerns in the south over Adani’s cement foray | News Bharat

Union Home Minister Amit Shah was the chief guest.

“Our relationship is not official,” Shah told the audience during his address. “It’s a friendship that has blossomed over the years through our involvement in sport – first chess and then cricket.”

Shah was talking about N Srinivasan, vice-chairman and managing director of the company. In the past, Shah and Srinivasan headed the Gujarat and Tamil Nadu Chess and Cricket Associations respectively.

Under normal circumstances, this feature would be dismissed as such when a company celebrates an important milestone, its 75 years of existence. But on the other hand, these are nerve-wracking times for the cement industry – the takeover scare has gripped many companies. Media reports suggest that India Cements is a prime target for larger cement players looking to consolidate the market.

In May this year, billionaire Gautam Adani, chairman of conglomerate Adani Group, entered the cement business by acquiring Holcim AG’s Swiss cement operations (Ambuja Cements Ltd and ACC Ltd) in India for $10.5 billion. The buyout gave the group about 70 million tonnes (mt) of capacity and overnight made it the country’s second largest cement producer. Aditya Birla group’s UltraTech Cement Ltd is the largest player with an output of 115mt.

Adani didn’t stop there. In a speech on September 17 to mark the closing of the Holcim deal, he laid out his vision. “While India is the second largest producer of cement in the world, our per capita consumption is only 250 kg compared to China’s 1,600 kg. There is almost 7 times more room for growth,” he said as he announced a plan to double the group’s cement capacity to 140 mt over the next five years. This was not empty rhetoric. The group immediately said it would infuse ₹20,000 crore in the business, which along with existing funds will create a huge war chest of ₹30,000 crores.

These movements place the cat among the pigeons. The current players – big, medium and small – rushed to the drawing board and began drawing scenarios for how the future would play out. Companies in South India, especially, fear that they will bear the brunt of the consolidation.

Through the celebrations, Srinivasan may have meant that he too is well connected. At least that’s what people close to the cement industry took away from the event – any hostile takeover attempt could be both difficult and expensive.

Head south for growth

Adani’s ambition to double capacity in just five years cannot happen organically. Setting up greenfield plants is both time-consuming and labor-intensive, taking into account approvals and other requirements. Ensuring the availability of limestone – a key input – is another challenge. It is also not lost on other cement players that acquisition has been the preferred mode of growth for the Adani Group in the past.

South India makes sense for Adani for a variety of reasons.

For starters, there isn’t much buying capacity in western, northern or central India. These regions are dominated by big players like UltraTech, Dalmia Bharat Ltd and Shree Cement Ltd – except for Adani now. On the other hand, South India, despite being the largest producer of cement (it accounts for 197 mt of the national capacity of 642 mt), is highly fragmented with as many as 43 players.

Also, of Adani’s 70 mt capacity today, only about 9 million (just over 10%) is in South India. Even this capacity located in North Karnataka feeds the South Maharashtra market. Thus, South India offers a huge scope for growth.

There is another reason. “Competition Commission of India (CCI) market share thresholds will be a key determinant of who expands and how much in a given market,” says Hetal Gandhi, Director – Research, CRISIL Market Intelligence and Analytics. In other words, it will be easier for Adani to acquire capacity in the south than in other regions without raising regulatory red flags.

For Adani, capacity in the south is also attractive as many players here are financially strapped. They have been struggling with a huge surplus for the past decade. The operational capacity of the region is 150 mt, but consumption is only about 80 mt with an average capacity utilization of 60%. This, after sending 15 mt to Maharashtra and Eastern region.

Therefore, cement is sold at a discount in the northern, eastern or western regions. Attempts to increase the price are often made, but they rarely stick as players fight for market share. Srinivasan hinted at this on a recent earnings call. “Cement is a product where you can choose volume or price. If you choose volume over price, you’re going to have a problem,” he said.

Things have only gotten worse with the recent geopolitical tensions that have seen coal and fuel prices skyrocket. India Cements posted a net loss of ₹113.26 crore in the second quarter of 2022-23. “The loss is the largest ever,” Srinivasan said. He blamed this on the inability to raise prices to recoup higher costs. Ramco Cements Ltd reported a 98% drop in net profits despite a 19% rise in revenue. managing director PR Venketrama Raja told analysts that EBITDA (earnings before interest, tax, depreciation and amortization) per tonne ₹582 is one of the lowest in eight years. The story is the same with other companies and almost all of them have stretched balance sheets.

Being the most vulnerable, what worries the southern players is Adani’s ability to raise funds. An entrepreneur, who did not want to be identified, joked that Adani has a genie that provides him with unlimited funds. He points to the acquisition of Holcim. JSW Group was initially the highest bidder, offering $7 billion compared to Adani’s $6.4 billion. But the speed with which Adani raised the funds secured it the deal, he added.

Adani is also willing to pay a significant premium to acquire the capacity it wants. Its payment of $161 a tonne for Holcim is much higher than the $90 that Nirma Group paid for Emami Cement Ltd in 2020 and the $100 that UltraTech paid for Century Textiles and Industries Ltd’s cement business in 2018.

Survival mode

So how are the Southern players preparing for what lies ahead?

Those who are weak and without a clear succession plan want to sell themselves. They are hoping that the upcoming consolidation boom in the cement sector will give them a good valuation. Adani isn’t the only one lurking. UltraTech is, too. Atul Daga, CEO and CFO of UltraTech, clarified this in a recent earnings call. “…The geography is wide open for UltraTech to consolidate through inorganic avenues as well. As and when an opportunity arises in any part of the country, we will explore it,” he said.

Dalmia Bharat and Shree Cement have also talked about a similar strategy.

Smaller players who want to stay in business are aggressively cutting debt and cleaning up their balance sheets. They want to be liquid enough to see them through these challenging times.

Medium-sized enterprises are also reducing their debt. India Cements recently sold its Madhya Pradesh assets (mining leases and limestone-bearing land) to JSW for ₹600 crores. This money will be used to pay down debt and meet working capital needs. Srinivasan has stated that the company is open to selling non-core and other assets if necessary.

Players like Ramco Cements are trying to improve margins by selling their premium branded cement. Almost all companies are redesigning their distribution strategies to reduce time to market. This was necessary because of high fuel prices. They are also desperate to raise prices. But success here is elusive.

Long winter?

Meanwhile, there are some doubts whether Adani will go ahead with its expansion plans right now.

Under normal circumstances, it made perfect sense to acquire Holcim and then expand capacity by adding even more capacity, particularly in the south. After all, demand was good in North, West and East India – plants were operating at 80% capacity. High retail prices ensured good margins and strong cash flows. The South, on the other hand, struggled with overcapacity.

But market conditions quickly turned unfavorable. Geopolitical tensions unleashed by Russia’s invasion of Ukraine have pushed up coal and fuel prices. Coal prices have jumped from $100 a ton last year to $220 a ton now. Add to this a 10% depreciation in the value of the rupee.

Adani is not spared from this shock. ACC ended the September quarter with a loss of ₹87.32 crore against a profit of ₹450.21 crore in the corresponding period last year. Ambuja Cements’ profit plunged 95% to ₹51 crores.

Understandably, the focus of Adani’s management has shifted to cutting costs. According to various analysts, the mandate given to ACC and the Ambuja teams is to reduce the price per tonne. They say the opportunities for this are less at the Ambuja plants as it is one of the most efficient companies. The range exists in ACC because the plants are of different vintages. This, they add, will require investment in waste heat recovery systems. These systems capture the waste heat available from the preheater exhaust and the clinker cooler exhaust of the cement kilns. The captured heat is then used to generate electrical energy, reducing the energy consumption of the cement unit.

Analysts also say Adani should focus on regaining the price premium its Ambuja Cements and ACC brands enjoy in their core markets. Brands have lost out to UltraTech in many markets over the past few years. All of this will consume bandwidth to manage.

While available capacity in southern India is attractive, any capacity acquired now will take a long time to generate cash, analysts warn.

There are also concerns about Adani Group’s debt-financed growth plans. In August this year, credit rating agency CreditSights, a subsidiary of Fitch Ratings, said the group was “severely over-indebted” and warned that in a worst-case scenario it could fall into a debt trap and default.

So what if Adani puts its expansion plans on hold under these circumstances? Things can still go south for southern players.

Other major cement manufacturers have announced large-scale greenfield expansions to ensure that they retain their influence in the market. UltraTech plans 200 mt capacity by 2030; Dalmia Bharat and Shree Cements plan to add 35 mt each by 2027. A fair share of this capacity will be in the south, given that the region holds 40% of the country’s limestone reserves. This would worsen an already dire surplus situation and put further pressure on prices.

Some analysts even fear a price war. Ramco’s Venketrama Raja, in an earnings call, did speak of “increased appetite for market share among players” as new capacity gradually enters the market.

No wonder cement players in the south are bracing for a long winter.