India: mergers and acquisitions ahead?
CRH has reportedly emerged as the latest company to enter the foray for a stake in Jaiprakash Associates' cement units in the Indian states of Gujarat and Andhra Pradesh, which could pave the way for the Irish building materials major to increase its presence in a country teeming with long-term potential. Elsewhere, the recent ruling by India's antitrust body on local cement producers could aid increased consolidation in the fragmented Indian cement sector.
Earlier last month, Jaiprakash Associates said it was in talks to sell one of its cement units, which includes four cement plants with 4.8Mta of cement capacity in Gujarat and 5Mta in Andhra Pradesh. Domestic peer UltraTech Cement initially emerged as the frontrunner for the facilities, however, the Economic Times of India now reports that discussions between Jaiprakash and CRH are at an "advanced stage" and executives from both companies are likely to meet by the end of this month to work out details of the deal.
While other suitors were said to be interested only in the Gujarat operations, CRH is reportedly keen to acquire the entire stock since it already has a strong presence in Andhra Pradesh where it is the number two cement producer. CRH's entry into the Indian cement sector came in 2008 through the acquisition of a 50 per cent stake in My Home Industries which operates a cement plant and grinding unit, both situated in Andhra Pradesh with a total cement capacity of 4.2Mta. At its AGM in May, CRH highlighted India and China as medium-to long term growth areas and previously said it is: "keen to replicate its strategy in emerging countries of "identifying entry platforms that have well-located quality operations and good regional market positions and which have the potential to develop further downstream into integrated building materials businesses." In the first half of 2012, CRH reported an investment spend of EUR250m, of which EUR155m was spent in Europe and EUR89m in the Americas. Earlier this year, CRH said it would continue to spend on acquisitions. "Benefits from acquisitions completed in 2011 leads us to expect further progress in the year ahead," CRH chief executive Myles Lee said in February.
Looking at the wider cement sector, some commentators have said that the recent fine US$1.1bn fine imposed by the Competition Commission of India (CCI) on 11 domestic producers may inadvertently encourage further consolidation over the long term. The cement industry in India is unique with 57 per cent of cement capacity being consolidated with the top eight players. The rest of the industry is highly fragmented, with small- to medium-sized companies of mostly uneconomical size of operations. A Fitch Ratings India report released shortly after the CCI verdict stated: "To the extent regulatory intervention limits coordinated supplier actions with respect to price and quantity, smaller firms with uneconomic cost structures would become uncompetitive and face very significant deterioration in their credit profiles. As such the fragmentation level in the industry is expected to reduce and larger and vertically integrated companies are likely to gain market share."
Furthermore, over the last two years the industry has been struggling with excess capacity and has a structural feature of relatively high operating leverage. "Globally, most markets have significant consolidation and this move by CCI may indirectly help the Indian cement industry in correcting this structural imbalance,' said the Fitch report.
As well as overcapacity, Indian producers have also been grappling with subdued demand and higher input costs. However, some positive industry data has been filtering through of late, bringing some long-awaited relief to producers. The sector closed fiscal year 2012 with higher-than-expected sales growth of 6.43 per cent (compared to less than five per cent in FY11). From a total installed capacity of 300Mta, production last year was 223.59Mt, matching demand of 223.02Mta thanks to a more disciplined supply approach. More recently, India's top two cement producers, ACC and UltraTech Cement, are seen posting higher net profits for the first quarter of FY13 partly due to a lower base as well as higher prices through the quarter due to stronger demand. This has given rise to hopes for better times ahead for the Indian sector where low per capita consumption, strong population growth and progressive urbanisation present strong fundamentals for a clear long-term development potential.
