Shree breaks into its first international market

This week, Shree Cement made a bold move to buy a 93 per cent stake in Union Cement Co PSC (UCC) for an enterprise value of US$305.24m. It is a major transaction for the Indian company and sets it on a course for expansion overseas, which will give the cement producer additional revenue streams and room to grow outside its Indian heartland.

Initial analyist comments on the acquisition have been mixed. The Economic Times notes the deal will give Shree Cement a financial lift: "Besides several operational advantages, the acquisition is expected to boost the company's earnings per share by 5-7 per cent in the very first year."

Meanwhile, Motilal Oswal Securities Ltd warned that, while the acquisition is in line with Shree Cement's strategy of adding production capacity at low cost, the management’s "execution capabilities" in a new market are "yet to be tested".

Moreover, Edelweiss Research commented: "In our view, asset creation in India would have generated far higher returns for the amount invested and, hence, find it a sentimental negative in the immediate term."

The acquisition adds a further 3.3Mta of clinker and 4Mta of cement capacity to Shree Cement, which currently has a domestic cement capacity of 29.3Mta. The price paid by Shree Cement for the additional output potential amounts to US$76/t and gives the company about 10 per cent of the UAE's cement capacity and more than 15 per cent of the country's clinker capacity. Shree Cement will also be aware that UCC has been operating at a profit margin of 22-23 per cent in the past four years, despite the overcapacity in the domestic market. The UCC plants are located close to Ras Al-Khaimah’s port, so the export markets of east Africa and the Middle East are easily served.

With the move, Shree Cement is following in the footsteps of other Indian cement producers who have looked at the UAE as the best route to make their initial bid into overseas cement operations. Star Cement, a subsidiary of UltraTech Cement, operates a clinker plant in Fujairah while the Ajman cement plant, operated by Arabian Gulf Cement Co, is also part of UltraTech Middle East Investment Ltd. UltraTech paid US$290m for Star Cement in April 2020. Another Indian company, JK Cement also operates a swing plant for grey and white cement in Fujairah, which was a greenfield plant built in 2013. Binani Cement similarly operates a 1Mta grinding plant in Dubai and owns a limestone deposit in Fujairah.

Foreign ownership in the UAE market place has certainly been rising since the Global Economic Crisis in 2008-9. The market has readjusted to cement demand by slashing production, closing plants and cutting costs in subsequent years, but it has led to domestic producers being more vulnerable to mergers, and with overcapacity remaining in the market, Shree Cement's transaction may not be the last acquisition. Binani Cement is currently being pursued by fellow Indian player, JSW Cement, and this could mean that Binani's UAE facility also changes hands soon.

Current UAE cement demand is estimated at around 11.2Mt. The domestic cement market has been refreshed as Expo 2020 in Dubai edges nearer and as UAE exporters look to cash in on cement demand for the FIFA World Cup in Qatar in 2022.

There is currently a surplus of about 14Mt for exports. The main export destinations include Bahrain, Iraq, Oman and east Africa.

Cemtech Middle East, taking place between 17-20 February 2018 in Dubai, will put delegates in front row seats to hear what leading experts Syed Hasan of HSBC and Hettish Karmani of Ubhar-Capital forecast for the UAE and GCC cement markets in the short- to medium-term. To reserve your place, book now at Cemtech MEA 2018.