Exactly a month after it acquired a 23 per cent stake from DMart founder, Radhakishan Damani, UltraTech Cement, a part of the Aditya Birla Group and the largest player in the sector, announced that it would pick another 32.72 per cent stake in South-based India Cements at Rs 390 per share. This will be followed by the mandatory 26 per cent open offer and if that is fully subscribed, UltraTech will hold 81 per cent in India Cements. It will mark the exit of the India Cements’ promoter group led by N Srinivasan. The price paid for this deal is 46 per cent more than the Rs 267 that Damani sold his holding at.
From a strategic point of view, it gives the buyer a key foothold in the South market, one that is fragmented with over 45 players. Supply today is estimated to exceed capacity easily by 2X, making the region the lowest in terms of capacity utilisation – it is at 60-65 per cent compared to around 7 per cent nationally. Of course, the move is also to pre-empt the Adani Group-owned Ambuja Cements, that has already picked up Sanghi, MyHome’s grinding unit and Penna – to acquire India Cements, a company with a capacity of 14.45 million tonnes per annum (mtpa), of which close to 13 mtpa is in the South (largely in Tamil Nadu) and 1.5 mtpa in Rajasthan.
Talks of India Cements looking to exit the business has been around for a while. It operates on lower operating margins and high costs, implying UltraTech will need to spend time in turning the operations around. “With the game being all about scale, it would have been difficult for a player like India Cements to have a say going forward. Larger capacity means more pricing power and this puts UltraTech in a strong position,” points out Deven R Choksey, Chairman and MD of wealth management and investment advisory firm DRChoksey Finserv.
With this buyout, UltraTech’s total installed capacity, that stands at over 150 mtpa, will move well past 165 mtpa, followed by Ambuja at close to 80 mtpa. Aditya Birla Group Chairman, Kumar Mangalam Birla, told company shareholders that the ambition was to hit a capacity of 200 mtpa. In a statement following the acquisition of India Cements, he said, “UltraTech Cement’s investments over the years, both organic and inorganic, have been designed to propel India to become a building solutions champion globally. The India Cements opportunity is an exciting one as it enables UltraTech to serve the southern markets more effectively.”
A report by Emkay Global, put out right after UltraTech’s announcement yesterday, gave a buy call for the company (the target price is Rs 12,800) and said, “It is significantly strengthening its position, and we expect its capacity market share to more than double in the South, to around 25 per cent by FY27.” On the play in the South, Choksey thinks it is an important market both on account of limestone availability and development across the region. “Post the Union Budget 2024, we will see a lot of investments coming into Andhra Pradesh and setting up industrial corridors is a huge plus for the cement industry. Being in the commodity business is all about scale and the India Cements buyout is a big move for UltraTech.”