Price woes damp M&As in cement sector, India

Price woes damp M&As in cement sector, India
Published: 28 March 2011

Global cement majors, who have been looking to strike M&A deals in India, are increasingly finding the existing high valuations in the 280Mt Indian cement industry a dampener.

According to industry sources, despite an oversupply situation taking a hit on margins of cement companies, sellers are unwilling to lower their valuations and are still looking at a minimum enterprise value (EV) of $180 per tonne, whereas the replacement cost (cost of setting up a plant) is only about $100-120 per tonne.

These high valuations would be a major deterrent for potential buyers. "With these high valuations prevailing, M&A is not expected in the sector for another two years or so," said Ravindra Deshpande, an analyst with Elara Securities.

Experts say Murli Cement, Shree Jayajyoti Cement, Penna Cement and Andhra Cement, among others, who are waiting to get acquired at good valuations, will have to wait a little longer. According to banking sources, sellers are demanding an enterprise value (EV) of about $170-220 per tonne, due to which many domestic players have backed out of potential deals.

Indian cement companies, meanwhile, are staying away from acquisitions and are currently concentrating on organic growth, given the lower replacement cost. Foreign players like Italcementi, Cemex, Heidelberg and Lafarge are eyeing the Indian cement market are negotiating an EV of $140-150 per tonne to grab a share of the pie in the sector, where the long-term growth story is intact.