InvestorQ : Is the Indian cement industry consolidating in favour of the large players?
vidhya Laxmi made post

Is the Indian cement industry consolidating in favour of the large players?

sarah Leo answered.
2 months ago

That trend had started quite some time back but in the last few months we have seen the trend of consolidation getting more pronounced. Two major events underline this trend. First was the Adani group paying a whopping $10.5 billion to take control of Gujarat Ambuja and ACC. IN the process, Adani group got 70 million tonnes per annum (MTPA) of cement capacity making it the second largest cement player in India. Soon after that, Ultratech also announced a Rs12,886 crore capacity expansion plan to underline its leadership.

The story of cement consolidation in India is not just about Adani and Ultratech. Many of the big industrial houses have expanded or are having aggressive plans. For example, Nirma group forayed into listed cement space via Nuvoco Vistas IPO. JSW group of the Jindal family, charted aggressive plans to get into cement. Other leaders like Dalmia Bharat are looking to nearly double their cement capacity in next few years. In fact, Dalmia Cement is also planning to cross 100 million TPA capacity by the year 2030.

That is where the smaller cement players are likely to face a challenge. When a large aggressive player enters the market, it puts pressure on small cement manufacturers as the larger players are even willing to adopt a loss leader strategy to boost their top lines. That is likely to result in price wars where only those cement companies with the balance sheet and the staying power are likely to survive. Most of the smaller cement plants and mini cement players are likely to get grossly outpriced in this kind of a market.

The likes of Adani are known to strive for market leadership and they are not going to be satisfied with one acquisition. Adani has already outlined plans to double its capacity to 140 MTPA over next 5 years. Dalmia Bharat will progressively scale up capacity from the current 36 MTPA to 49 MTPA by 2024 and to 130 MTPA by year 2030. Even the most efficient cement manufacturer in India, Shree Cements, has firmed up plans to expand cement manufacturing capacity from 50 MTPA to 80 MPTA by 2030.

To be frank, this is not great news for smaller cement players and likely to be a booster for larger players with the muscle to fight price wars. For one, the capacity boost will certainly create a glut of cement since demand for cement is unlikely to outpace supply. With 80% of the capacity additions happening in the top 5 cement manufacturers, smaller players will face the music of the new paradigm where a few winners will take it all. Larger players will leverage their brand value and deep pockets, something smaller players cannot do.

What is the bottom line? Firstly, prices of cement is likely to come down and secondly the ROE of the cement companies will also fall sharply as they operate at lower capacity utilization levels. Amidst these challenges, input costs will still remain a challenge.