The big players in the cement sector got bigger, thanks to a spate of acquisitions in recent years. This trend may continue as larger companies, with strong balance sheets, seek to boost or maintain their market share through inorganic growth. In contrast, smaller companies that are struggling to compete due to high debt or low profitability will likely exit the market, further driving consolidation.
According to recent media reports, UltraTech Cement Ltd is likely to acquire Kesoram Industries Ltd, which has a cement capacity of 10.75 million tonne per annum (mtpa) as per its website.
Antique Stock Broking pointed out that the combined volume market share of the top four companies – UltraTech, Ambuja Cements plus ACC, Shree Cement, and Dalmia Bharat — is expected to rise to around 58% by FY27 from around 53% in FY23. This is because these companies plan to add more than 70% of their capacity over FY24-27. This market share is likely to further increase to around 65% by FY27 even if a few (half) of the mergers and acquisitions, discussed in various media articles, of 67-92 mtpa actually materialize in favour of the top four.
Lately, many large cement manufacturers have been focusing on increasing their production capacity to achieve higher volume growth. To meet their targets, it would be crucial for the players to engage in strategic and timely merger or acquisition deals.
UltraTech, for example, aims to increase its grey cement capacity from 132.45 mtpa to 159.65 mtpa by June-end (FY25). The unorganized sector has many cement companies, which means there is potential for inorganic expansions. According to analysts, the south and west regions have a relatively higher number of small and mid-sized cement makers, making them potential candidates for mergers or acquisitions.
There have been a few deals in the past where larger companies acquired smaller ones. “Prima facie, this does look like consolidation as larger companies are getting higher market share,” said Mangesh Bhadang, senior vice-president, Centrum Broking Ltd.
With more capacities set to come on stream, the pace of consolidation would have a bearing on the sector’s pricing trends. Theoretically, increased consolidation should lead to better pricing discipline among cement makers, aiding profitability outlook. However, with the changing competitive landscape and aggressive new entrants, it may be difficult to gauge the pricing outlook. The real competition could well be among larger cement companies themselves which may lead to longer periods of pricing pressures.
For example, the recent deal of Sanghi Industries Ltd could lead to increased competition between Adani group cement companies (ACC and Ambuja) and UltraTech in western region, given the strong foothold of the latter in that region, Bhadang added.
Dalmia Bharat’s acquisition of Jaiprakash Associates’ cement assets in central India will also intensify competition as Dalmia is a new entrant in that market. Moreover, the likely impact on pricing would depend on the kind of assets being acquired– whether they are fully operational or operating at lower utilization levels.
Amid this, to absorb the new supply, it is important that the ongoing demand momentum must sustain. The cement industry is expected to close FY24 with double-digit volume growth of over 12%, as per some analysts’ estimates. However, there are concerns that cement demand may taper after the general elections.The government’s spending on infrastructure is estimated to contribute around 30% to the overall demand.
To be sure, the housing sector remains the key demand driver and here, the launch pipelines of listed real estate companies appear to be solid. Even so, waning demand could exert more pressure on medium-term prices if companies prioritize volumes over realizations. As a result, the potential benefit of consolidation may be delayed.