India: consolidation and market growth on the rise?

India: consolidation and market growth on the rise?
Published: 08 January 2016


Corporate consolidation in the Indian cement industry has been hitting the headlines recently, with local press reporting on potential deals in the pipeline. Meanwhile, with construction activity showing greenshoots, a revival in cement demand could be ahead.

Consolidation has been on the rise in India and most recently local press have reported that Jaypee Group is said to be looking to offload the remainder of its cement business to retire a part of its ~INR612.85m (US$9.18m) debt held in FY14-15. Disposals are expected to be concluded by March. Latest reports suggest that Jaiprakash Associates Ltd (JAL) has signed an agreement with Shree Cement to divest its 74 per cent stake in the 2.1Mta Bhilai Jaypee Cement (BJCL), a joint venture with the Steel Authority of India Ltd (SAIL). However, neither JAL or Shree have commented on the rumours. JAL has in recent times sold its stake in the Bokaro cement unit to Dalmia Cement, the Panipat grinding facility to Shree Cement and two Madhya Pradesh-based plants and associated assets to UltraTech Cement.

Meanwhile, it appears that Indian mining regulations could mean that Lafarge may need to divest more assets in the country than originally planned to satisfy competition regulators with regards to its merger with Holcim. The Competition Commission of India (CCI) had stipulated that Lafarge sell 5.15Mta of cement capacity in eastern India to grant merger approval. In August, Lafarge said it had entered a letter agreement with Birla Corp for the disposals to the tune of INR50bn. However, Business Standard of India reported on Wednesday that Birla is facing challenges in securing limestone mining rights for the two units. As a consequence, Lafarge India has submitted a revised proposal to the CCI to sell its entire 11Mta of assets in the country, according to investment bankers familiar with the situation.

Reliance Cement is also looking to exit the cement business as it plans to focus on the defence sector. The company has short-listed seven potential buyers from a total of 15 parties that submitted preliminary expressions of interest. According to an official directly involved in the deal, JSW Cement, JK Lakshmi Cement and a few private equity firms are among the bidders.

Demand growth recovery ahead?
In terms of market developments, the domestic demand environment has been weak, with relatively low growth rates seen over recent years. The current fiscal year (ending March 2016), is expected see a rise similar to that of FY14-15 (+3.5 per cent). However, there are strong expectations going forward, with lead indicators supporting the forecast for a turnaround in the post-2015 monsoon season. JP Morgan's research team has reported some greenshoots, especially in the roads sector, as well as some traction around new state creation in the south (Andhra Pradesh), providing it with confidence of a demand revival ahead.

Pent-up demand in the residential sector over the past few years, along with improving affordability on the back of lower mortgage rates, reduced unit sizes and stable pricing will also help drive strong demand recovery. In the non-residential sector, investment activity is likely to see improvements as economic growth picks up. A key long-term engine for cement demand is set to be urbanisation, resulting in a focus  on concrete roads and housing for all by 2022, as well as the development of hundreds of 'Smart Cities' and dedicated freight corridors, linking cities such as Mumbai and New Delhi.

Furthermore, analysts have noted that capacity additions are expected to ease and utilisation rates anticipated to improve. In JP Morgan's view, India is entering a phase where incremental demand will exceed supply addition over the next few years. This would lead to capacity utilisation levels rising after seven years. It expects India's demand CAGR at eight per cent versus supply CAGR of <4 per cent over the next two years.