Can Shree Cement defend its market share amid Adani-Birla faceoff?

Shree Cement Managing Director HM Bangur.

“When elephants fight, the grass gets trampled,” goes the African proverb. That could well describe what is shaping up to be a bruising battle in corporate India. The opening salvo came from first-generation entrepreneur Gautam Adani-led Adani group, which made an open offer to acquire a stake in ACC and Ambuja Cements. This prompted the Kumar Mangalam Birla-led UltraTech Cement, part of one of India’s oldest conglomerates, the Aditya Birla Group, to announce an aggressive expansion plan. As the two industry majors gird for the fight, Shree Cement, currently the third largest player in the market, is planning its strategy on the side-lines to fight for its turf.

Shree Cement managing director HM Bangur, in an interview with Moneycontrol after reporting earnings on July 29, said, that the company wouldn’t change its strategy “for a new entrant and other companies’ expansion plans but is open for inorganic expansion and could take over a capacity of around 10 mtpa (million tonnes per annum) with a cash pile of Rs 5,000 crore and acquire some debt on books”.

This would be a break from the past, at least as far as the company’s record in India is concerned.

Rakesh Arora, managing partner, Go India Advisors, said, “Though Shree Cement has acquired a company in UAE, inorganic expansion isn’t in the company’s DNA, and with the current situation it (the company) would have a hard time clinching any asset which is available for acquisition as its race would be against the Adanis and Birlas.”

In a July 29 report, Macquarie Research said that it expects Shree Cements to see a compound annual growth rate (CAGR) of 6-7 percent in its capacity over FY22-25E to 56 mt even as the company targets to increase capacity to 80 mt by FY30.

Geography for likely acquisition:

Shree Cement is a north India-focused company.  Bangur told Moneycontrol that he would prefer new capacity in central and south India. He added that the company will look more aggressively at central India due to major expansions and challenges in the south. It pegged the replacement cost or the enterprise value (EV) per tonne at $120 for potential acquisition in central India. EV/tonne is how cement companies are conventionally valued. This suggests roughly how much it would take for someone to set up a tonne of cement capacity.

Though the managing director declined to name potential candidates, saying the hunt for a target is still at an early stage, he added that “substantial” progress has been made. Going by his criteria, Moneycontrol has curated a list of capacities available in central and south India with a capacity of more or around 10 mtpa.

Can India Cements be a potential candidate?

Media reports have suggested Chennai-based India Cements as the potential takeover candidate, but Bangur in an interview to CNBC TV18 on August 4 denied the possibility of any hostile takeover. Despite his denial at this stage, experts tracking the sector are still evaluating a potential takeover.

Moneycontrol reached out to both Shree Cement and India Cements for a response through an email query. Shree Cement declined to talk specifically about any company, while India Cements denied speculations over a potential takeover.

Then why is the market still speculating on a possibility of India Cement emerging as a potential acquisition target?

India Cements, headed by former International Cricket Council chairman N. Srinivasan, has a capacity of over 15 mt. It has eight integrated cement plants in Tamil Nadu, Telangana, Andhra Pradesh and Rajasthan, and two grinding units, one each in Tamil Nadu and Maharashtra, according to the company’s website.

There has been speculation about India Cements being a takeover target for close to two years, which has been denied by the management. A Bloomberg report dated June 17, 2020, suggested the possibility of billionaire Radhakishnan Damani considering an acquisition of a controlling stake in India Cements. Subsequently, Damani increased his stake in India Cements, adding fuel to fire. (Add hyperlink: https://www.moneycontrol.com/news/business/rk-damani-increases-stake-in-india-cements-to-22-76-7850821.html)

If Shree Cement were to acquire India Cements, this would lead to geographical diversification given that the former has a predominant presence in the north and India Cements is essentially a south-focused company.

According to an analyst, who asked not to be identified, this move may lead to further consolidation in the industry as a big player will integrate a small player. It will be a win-win situation for both since India Cements’ profits have been the lowest in the industry for the last three quarters, which can be improved drastically, while Shree Cement will have access to southern markers and would be able to fight for market share. The analyst added that Shree Cement has enough cash on its books to take over India Cements’ debt but may refrain from outbidding peers for acquisition.

Cement sector buzzing with M&A activity

UltraTech Cement thus far has been a torchbearer in terms of inorganic expansion. But the biggest acquisition in terms of capacity so far has been done by the Adani group, which has disrupted the dynamic of the entire industry and triggered a market share war among the top players.

Adani’s acquisition saw an aggressive response from the industry leader UltraTech, which moved forward its capacity expansion targets by five years.