Lead Story

Future Tense

UltraTech will have to up the ante in its bid to retain supremacy over the domestic cement market

It is not easy to pin down S Mahadev for a conversation. He is constantly on the phone and is low on patience. His answers are to the point and interspersed with words in colloquial Hindi, jargon from the construction business. Based in Gulbarga, Karnataka, Mahadev has been an UltraTech Cement distributor for over a decade now. Gulbarga district isn’t just a cement manufacturing hub with seven large plants spread over 16,000 sq km, but is also a big consumer. Of the 50,000 tonne that exchanges hands here every month, UltraTech accounts for the largest share at over 14,000 tonne. Vasavadatta Cement sells about 9,000 tonne, while ACC clocks 7,000 tonne. “UltraTech is very big here and everyone knows the brand,” says Mahadev.

The rewards for being associated with the biggest brand are plentiful: along with another 45 distributors in the region, Mahadev was taken for a 10-day incentive trip to Europe last year and to Australia the year before that. Clearly, UltraTech knows how to keep its distributors happy. Its biggest rival, the Holcim-owned ACC, is a relatively smaller player in Gulbarga and unlike UltraTech’s distributors, ACC’s team isn’t assured of an annual incentive trip — Gulbarga distributor Gopal Raghavji’s last such trip was two years ago, to nearby Mauritius. The trips aside, what keeps distributors loyal to UltraTech in the region is its relatively better margin of 4-5% against 3% for other brands. “When you sell a lot more like UltraTech does, it makes a huge difference,” points out Rajesh Lahoti, a distributor with Vasavadatta Cement, owned by Kesoram Industries.

Already home to some of the biggest names in the cement business, Gulbarga is soon going to see more new entrants, with companies such as India Cements, Lafarge and Chettinad Cements slated to set up operations here over the next two to three years. The big attraction is the massive availability of limestone, the most important resource for manufacturing cement. Even in such a competitive backdrop, UltraTech has a reputation of not undercutting prices and offering reasonable credit cycles to its distributors. The company is known to handpick its distributors and Lahoti himself has tried in vain for over a decade to become an UltraTech distributor. “The district has 200 distributors of which only 45 work with UltraTech. They are choosy about who they want to work with,” he explains. Clearly, with size comes the ability to control and that is quite evident here. And remember, this is when the ₹21,443-crore (FY14) UltraTech generates just 20% of its sales from south India, with its bread-and-butter markets — north and west — accounting for over 60% of sales.

Concrete hold

The cement business is the second-biggest contributor to group profits

In an industry as commoditised as cement, the Aditya Birla Group company has managed to create a strong brand pull for UltraTech since 2004, when it brought the erstwhile Larsen & Toubro brand into its fold. Today, the cement business is a key revenue driver for the group, accounting for 11% of the group’s ₹1.78 lakh crore revenue (listed companies), but more importantly is a significant contributor to group profits at 25% (see: Concrete hold). According to OP Puranmalka, wholetime director, UltraTech, the company’s growth strategy focused on three critical planks. “Firstly, we pursued organic and inorganic growth to increase UltraTech’s capacity from 14 million tonnes per annum (mtpa) in FY04 to 57 mtpa. Secondly, there was a continuous thrust on cost optimisation and improvement, thirdly logistics efficiency was brought in by setting up grinding units and bulk terminal close to end markets, besides bolstering retail market penetration,” mentions Puranmalka in an e-mail response. So it’s not surprising that chairman Kumar Mangalam Birla’s vision statement, too, articulates his desire to see the company emerge as the biggest cement player with 70 mtpa by FY16. But what is surprising is that despite its grand ambitions of ruling the kingdom of cement, UltraTech’s demeanour in the market place has been far from kingly. 

Grinding its way through

The Aditya Birla Group’s interest in cement goes back to the early 1980s, led primarily by Grasim Industries. Through a combination of setting up its own plants and acquiring assets, the cement business grew gradually. But it wasn’t until the turn of the millennium that the story took a dramatic turn. In 2001, in what has been viewed as a turning point, Grasim acquired a 10.45% stake in Larsen & Toubro (L&T) from Reliance Industries. In a vintage corporate battle, complete with allegations of insider trading and investigation by a Joint Parliamentary Committee, L&T, finally, demerged its cement business and sold it to Grasim in 2004. This entity, CemCo, had a capacity of 17 mtpa, in which Grasim acquired a majority stake for ₹2,200 crore, taking the AV Birla Group’s cement business capacity from 14 mtpa to 31 mtpa. In time, all the cement businesses of the group came to be housed in a new company, UltraTech, which is today a subsidiary of Grasim Industries.

To most people, this aggression was ample proof that Kumar Birla was looking to strengthen and grow his cement business. But as it turns out, UltraTech was the only buyout the group made in the cement business for almost a decade, even as its local peers and MNCs made the most of the M&A spree.

Starting from the late 1990s, foreign players had been making their desire to be part of the India growth story evident. Big bang investments in the cement industry started in 1999 when Lafarge bought out Tata Steel’s cement business for ₹550 crore and followed that up with taking over Raymond’s cement division for ₹785 crore. The same year, Italcementi acquired a 50% stake in Zuari Cement and in 2006, HeidelbergCement bought 51% of Mysore Cement. But all these were topped in early 2005 when Swiss cement giant Holcim acquired significant stakes in Gujarat Ambuja Cements and ACC for $800 million (₹3,500 crore then). 

At the time, Gujarat Ambuja, now rechristened Ambuja Cements, and ACC had a capacity of 35 mtpa. UltraTech had 31 mtpa under its belt. Investment bankers insist that the Gujarat Ambuja-ACC combine was first shown to UltraTech, but the homegrown cement major turned down the deal for reasons best known only to it. If this had gone through, the combined entity would have controlled 66 mtpa, which would have been over 40% of India’s cement capacity at the time. 

Today, the pecking order places UltraTech at 53.95 mtpa, while the Holcim-owned Ambuja-ACC combine is ahead at 58.05 mtpa. Of this, ACC accounts for 30.1 mtpa, while Ambuja has 27.95 mtpa. What has changed the plot dramatically is the decision of Lafarge and Holcim to combine their operations globally to create a $44 billion entity. In India, this will mean that the merged company will have a total capacity of 68.65 mtpa (including 10.6 mtpa of Lafarge), placing it far ahead of UltraTech, despite an additional 4.8 mtpa coming through for the latter, following the acquisition of Jaypee Cement’s Gujarat operations last year for $590 million (₹3,812 crore). Ambuja Cements-ACC, Lafarge and Holcim did not respond to detailed e-mail questionnaires sent by Outlook Business.  


For industry veteran Anil Singhvi, the strategy of the biggest domestic producer is nothing short of baffling. Singhvi has spent to close to 22 years in the cement industry, for a good part with Ambuja Cements and later with Reliance Cement, and currently runs Ican Investment Advisors, a corporate advisory firm. He finds it surprising that UltraTech, with an unlevered balance sheet and healthy cash flows, has had just one major buyout in the past 10 years. The company currently generates over ₹2,200 crore in profit and has a leverage of less than 0.41 times (FY14). “One would have expected UltraTech to be much more aggressive in the M&A game,” he points out. Incidentally, in late 2007, UltraTech sold its 53.63% stake in Shree Digvijay Cement, which had a 1.07 mtpa plant in Gujarat, to Cimpor-Cimentos De Portugal for ₹322 crore. Six years later, it had to buy Jaypee’s plant in the same territory. 

Since 2000, players such as DLF, the Tatas and Raymond have exited the business by selling out to international and domestic companies. It is now well known that at least two — Zuari Cement and Mysore Cement — came Birla’s way, though neither deal fructified. In fact, in many cases, UltraTech has taken an unduly long time when it came to wrapping up a deal. Take the case of its only acquisition post the L&T deal. UltraTech began negotiations with Jaypee in mid-2012 but the formal announcement was made only in September 2013. In the midst of it, the deal was called off at least once before it finally saw the light of day. And all this over one small plant with a capacity of just 4.8 mtpa.

Why UltraTech has chosen not to acquire Jaypee’s cement assets in Himachal Pradesh and Andhra Pradesh with a combined capacity of 10 mtpa is unclear. Remember, the Jaypee Group has a consolidated debt of over ₹45,000 crore and, therefore, isn’t likely to drag its heels on negotiations. “In an industry like cement, speed of execution is often the game changer,” mentions Singhvi.

Forces to reckon

Over the past decade, local players have gained enough clout to counter the big two players: UltraTech and Holcim

Today, the industry with over 360 mtpa capacity pan-India, has well over 60 players, including seven MNCs. Just 10 years back, it was a very different story. Cement was a 160 mtpa industry ruled by just a handful of players. What has changed is how fringe players such as Dalmia Cement, Shree Cement and Chettinad Cement have grown to become formidable entities that the industry can no longer ignore. Over the last seven or eight years, Dalmia’s capacity has moved from 6 mtpa to 19 mtpa; Shree Cement has gone up from 2.6 mtpa to 13.5 mtpa and Chettinad Cement from 2 mtpa to 11.5 mtpa. During the same period, even as smaller players doubled and tripled capacities, UltraTech’s capacity moved from 31 mtpa to around 54 mtpa. “Over the past decade, several smaller players have grown impressively. It is entirely possible that they will only get larger in the time to come,” points out Singhvi. 

In several ways, Holcim’s deal to acquire Ambuja and ACC in 2005 remains the most interesting deal in the cement market. From a capacity of 35 mtpa at the time of the acquisition, the entity today has around 58.05 mtpa capacity. Most of this was capacity expansion that had already been commissioned; Ambuja-ACC has chosen to stay out of the inorganic growth route. India is Holcim’s biggest market globally and there is no attempt to do anything extraordinary here. “Holcim is likely to be satisfied with the kind of growth it is showing in India. They aren’t seeing 3-4% growth in any other part of the world but they are experiencing it here, their largest cement market globally,” points out Singhvi. Besides, the new combine won’t be looking at M&As, being keener on organic growth. Says Alok Agarwal, former head of M&A in Lafarge India and ex-director of Holcim Indonesia, “With the integration taking some time, the combine will not be in a position to acquire anything.”

Problem of plenty

Capacity build-up has not peaked yet. 67 mtpa of new capacity addition are lined up over FY14-FY17

Against such a backdrop, UltraTech will have enough and more options to grow inorganically. In the past five years, the industry has almost doubled capacity, with the addition of 185 mtpa, and is expected to add another 69 mtpa over the next four years, taking the installed capacity to 429 mtpa by FY16, according to Citi Research. The opportunity lies in smaller cement operations that don’t have the advantage of scale. These are serious buyout opportunities for the nimble-footed. Girish Choudhary, assistant V-P of equity research, Spark Capital Advisors, points out that there is capacity worth 20 million tonne in Andhra Pradesh alone. 

Analysts point out that for a new plant to achieve a normative return with RoCE of 10-12%, the industry today requires cement prices of more than ₹320 a bag against the current ₹275-280 levels. The general view is that asset acquisition would provide a better internal rate of return than asset build-up. According to a Credit Suisse report, greenfield capacities commissioned in FY10-12 are still not breaking even on cost of capital as these capacities are operating at around 70-75% utilisation. “We note that capex for greenfield capacities has increased by 40% in the past three years and, therefore, even at 75% utilisation, these capacities will not break even, unless Ebitda increases to around ₹1,900/t. We note that 60% of capacities commissioning during FY13-15 are greenfield capacities with capex higher than FY10-12,” states the report.

Given that most global cement majors already have a presence in India, and with the balance sheets of most parents stretched, it’s an opportunity for UltraTech to force the pace. Puranmalka is noncommittal: “In the current scenario, organic growth is increasingly becoming very challenging, when you look at the cost and time factor. We evaluate both the inorganic and organic route to expand in a meaningful way. Stakeholder value creation is the epicentre of our growth strategy.”

It has one big positive in its favour: the days of peak M&A valuations are over and the premium has shrunk double quick. If the Holcim-Ambuja deal was struck at an expensive $200 per tonne, Jaypee’s deal with UltraTech was at a much lower $124 per tonne. Earlier, My Home Group acquired Shree Jayajothi Cement for ₹1,400 crore at an even lower $72 per tonne. In a more recent transaction, Dalmia Cement acquired Jaypee’s stake in its joint venture with SAIL India for ₹1,150 crore at $91 per tonne. “It is clear valuations are a lot lower than what one saw five years ago, which will lead to more consolidation,” admits Madhavkrishna Singhania, special executive, JK Cement, which deals primarily in white cement. His company has a capacity of 7.5 mtpa, which will increase to 10 mtpa in about three months.

The emphasis on capacity is not without reason: it’s critical for flexing your muscles in the market place. According to Puneet Dalmia, MD, Dalmia Bharat Group, higher capacity brings the key advantage of scale. “With that come other benefits related to access to distribution, ability to raise capital at more competitive rates and getting the right talent,” says the 41-year-old. Dalmia believes that a cement firm needs to have capacity of at least 10 mtpa to get the advantages of scale. Today, the Dalmia Bharat Group has 19 mtpa capacity spread across plants in south, east and northeast India.

Cooling off

After hitting a high, valuations for merger and acquisition have come down in the sector

For HM Bangur, MD, Shree Cement, higher capacity is all about pricing power. “Big players set the price, the rest follow,” smiles Bangur. That’s because, he points out, “Typically, higher capacity will translate into higher market share.” Shree Cement has a capacity of 13.5 mtpa and is the biggest player in the north. On the cards is an additional capacity of 8.5 mtpa, to be operational by the end of this year, entailing a capex of ₹1,700 crore. Of this, 4 mtpa will be in the north, the remaining 4.5 mtpa in Chhattisgarh and Bihar. “That will give us an unassailable lead in the north and a presence in the east,” Bangur adds. Compare that with UltraTech’s 11.2 mtpa capacity in the north and it is evident that Shree Cement wants to call the shots in this market.

The way ahead

Even by conservative estimate, the Lafarge-Holcim merger in India will take no less than two years to complete. The merged entity will exceed UltraTech’s capacity by almost 15 mtpa, making it that much stronger. This will make a difference to others in the business and they do not shy away from admitting it. “A big merger like that of Lafarge-Holcim will now compel boards of other cement companies to understand the implications and relook at their own strategy,” says Dalmia.

The merger at the global level is certain to raise fears of a monopoly in the cement business, bringing it to the notice of antitrust authorities. That’s likely to be the case in India as well, especially in the east where the combined entity will control over 40% of the region’s total installed capacity of 50 mtpa. The Competition Commission of India may have objections to the deal, therefore, thinks Singhvi. “In such as scenario, some assets are likely to come up for sale,” he adds.

But sooner rather than later, the Birla company will need to contend with smaller players who will want their share of the growing cement market as a slow recovery starts. Already the top two players, Holcim and UltraTech, have conceded market share in terms of capacity from a peak of around 42% to 30% currently, states an Emkay Research report. Indeed, a large part of FY13 capacity was added by smaller players such as Wonder Cement in the north, JSW Steel in the south, ABG and Reliance in the west, KJS Ahluwalia in the east and Heildelberg in central India.

While thus far UltraTech through its conservative approach has managed to generate better return ratios compared with Holcim (see: Sound numbers), its ability to retain the same will depend on what kind of growth strategy it plays out. It will also feel the heat as and when Lafarge and Holcim merge all the three Indian entities — Ambuja, ACC and Lafarge — to save on distribution costs, logistics, branding and manpower costs. Says Agarwal, “The main challenge for UltraTech will be to maintain leadership in important markets after the Holcim-Lafarge merger and compete with whichever brand in these particular markets that the merged entity may put up.” That is not something that will miss Birla’s attention. The question is, how and when will he make the move to counter this serious challenge? By the looks of it, this cement battle has barely begun. How it plays out, then, is anybody’s guess.