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India Cements' share price has risen by 0.6 percent as of 12.45 pm while UltraTech Cement’s price is up by 1.4 percent. That signals the deal was already priced in and it was well known after UltraTech picked up a significant stake in India Cements, with RK Damani selling the stake he had accumulated over time.
My colleague Sachin Pal has an incisive analysis in today’s edition on the transaction and what it means for UltraTech. The acquisition gives UltraTech a strong foothold in the southern cement market as India Cements is a large player with cement capacity of 14.5 million tonnes. UltraTech’s market share in the South is under-indexed to its national market share of around 23 percent, which this acquisition will help rectify.
Last year, it had acquired Kesoram Industries’ cement assets to add to its share. The transaction itself is at a premium, which means while UltraTech has cemented its southern footprint, the promoters of India Cements have got a good exit for themselves, and the open offer gives willing shareholders the opportunity to exit at the same price. Do read Pal’s analysis to know more about how this transaction values India Cements and what it means for UltraTech.
While the deal economics is one aspect, the bigger implication in this transaction is the vacuum left by N Srinivasan’s exit from the cement industry. While it may have been an expected one, it is by no means an event whose implications have been fully absorbed. He was the elder statesman of the industry, playing a crucial role in plugging the critical weakness of an oversupplied market.
He is believed to have played an instrumental role in bringing various industry players to the table and ensuring there is ‘pricing discipline’. This is the industry euphemism for a cartel. In cement, what matters more for profitability is not the volume you sell but the price at which it is sold. Pricing wars have typically left companies reeling under weak profitability and loaded balance sheets, given that this approach also means companies end up investing in more capacity or buying out players.
But despite all these efforts, all’s not well on the southern front. The performance of companies has been under pressure and this is evident in the performance of companies such as Ramco Cements in the June quarter. The market has also shifted from one that was mainly a regional one in character, with lead distance from the plant being an important factor, to a more national one. The big players are looking at synergistic acquisitions and focusing on using efficiency, scale, technology and energy mix to grow their operations in the country.
On top of this, the Adani group’s appetite for acquisitions meant that in the South where performance has been weak, companies such as UltraTech have little choice but to take countermeasures.
What next in the southern market? My colleague Vatsala Kamat, who has studied the southern cement market closely, believes that it will set the ball rolling for more consolidation. It’s likely that these two companies will go about acquiring market share, with pricing discipline taking a backseat of sorts. That will put pressure on the smaller players. A Motilal Oswal note on the acquisition also points to Ambuja Cements and UltraTech as companies that will benefit from consolidation as it will lead to higher cement prices in the long term.
Lastly, the handsome price UltraTech paid for India Cements will also set a benchmark that can provide an attractive exit opportunity for the smaller southern market players. That could be Srinivasan’s final act of benevolence for his peers who have looked up to him all these years.
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Vatsala Kamat
Moneycontrol Pro
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