India heads for more consolidation

India heads for more consolidation
Published: 20 May 2008

After a flurry of mergers and acquisitions – CRH acquiring My Home Industries for $462 million, Lafarge buying L&T Concrete’s RMC business for $349 million and Heidelberg consolidating its business with Mysore Cement and Indorama – the cement industry is moving towards consolidation, according to experts. The period 2005–2008 had seen a slew of M&A activity in the industry, with recent ones being of very high valuations. Cash flows are at an all-time high and this year looks to be a very active one. But whether this will continue with more M&A activity is a big question.

Commenting on the Rs 1,480 crore L&T Concrete deal which seems to be highly valued, Bradley Mulroney, regional president, Asia and Middle East, Lafarge told reporters, “The most important thing to understand is what are we buying. We are buying the market leader in ready-mix segment in India with pan-India presence which is a fabulous platform to take advantage of the growth of the RMC market in India.”

Lafarge realised it had been left behind by Swiss major Holcim, which acquired Gujarat Ambuja and ACC’s cement business. Lafarge acquired L&T Concrete to catapult itself ahead in the fast growing RMC business, say experts. The Holcim transaction and valuation number indicate the extent to which investors and strategic players view the India growth story. In 2005, Holcim acquired stake in ACC at an enterprise value (Ev) of $111per tonne and the next year Holcim acquired stake in Ambuja Cement at Ev of $193 per tonne. In 2007, Holcim again increased its stake in Ambuja Cements at Ev of $301 per tonne.

In another deal, Italcementi, bought balance 50% stake in Zuari Cement in 2006, thus attaining complete control of all its India operations (100% in Zauri and 95% in Shree Vishnu).  Top Indian players as well as global majors operating in India are looking to consolidate and international firms not present may now seek a foothold in India. The industry might thus enter the final phase of consolidation soon. “However, the cement industry is witnessing a fall in earnings and valuations and M&As in the sector will now be driven by strategic desire to exit rather than financial compulsion to restructure,” say analysts.