Holcim's India strategy

Holcim, the world’s second-largest cement manufacturer, is consolidating its grip over Ambuja Cements. It recently announced an open offer to acquire an additional 20 per cent stake from minority shareholders. If it does manage to garner the full amount, it will take its shareholding in the company to over 56 per cent from the current level of 36.25 per cent. Says Markus Akermann, CEO, Holcim: “The strategy to grow inorganically has already brought results and has improved the group’s revenues and profit.”

For the first six months of 2007, Holcim registered a 163 per cent rise in net profit to $2.4 billion (Rs 9,740 crore) compared to $0.9 billion (Rs 3,680 crore) in the corresponding period of the previous year.

During this period, its revenues rose 20 per cent to $11 billion (Rs 44,300 crore) from $9.2 billion (Rs 37,100 crore). “Although construction activity is noticeably levelling off in some markets, the financial results for 2007 are expected to be encouraging thanks to the group’s proven strategy of geographic diversification,” says Akermann. Over the years, Holcim has focussed on growth markets, particularly in Latin America, Asia, Africa and West Asia.

Betting on India

Holcim has already approved an outlay of 3.4 billion Swiss francs (Rs 11,600 crore) to organically increase its capacity by 25 million tonnes by 2010. The bulk of this growth will come from India. Says Akermann: “Our estimate is that the Indian market will grow at 10 per cent annually over the next few years. That’s why we are increasing our total capacity by 15 million tonnes to over 50 million tonnes by the end of 2010.” Holcim is the country’s leading cement manufacturer and has two operating companies—Ambuja Cements (formerly Gujarat Ambuja Cements) and ACC—in this country with a combined capacity of over 35 million tonnes.

But Nilesh Shah, CEO & MD, Envision Capital, a portfolio management services firm says: “About 75-80 million tonnes of fresh capacity is coming up in India, so 15 million tonnes is nothing big. Holcim has to expand here just to maintain its market share.” This, however, is not expected to affect prices in any significant manner. Says Ashish Guha, CEO, Heidelberg Cement India, and MD, Mysore Cement: “The lack of available capacity with equipment manufacturers, delays in land acquisitionand in getting environmental clearances are some factors that will hold back capacity creation. And even though capacity will definitely expand, it will not have a major bearing on realisations.”

Incidentally, the two top players in India— Holcim and the AV Birla Group—account for 40-45 per cent of the country’s total capacity of about 160 million tonnes; the balance 55-60 per cent is divided between 48 companies. And over the past three years, Holcim has acquired control of Ambuja Cements and ACC and the AV Birla Group has taken over UltraTech Cement, the erstwhile cement division of Larsen & Toubro. “There is no doubt that Holcim has played a major part in setting off the consolidation in the Indian cement industry,” says Guha. “Having said that, the consolidation process is far from complete as a large part of the industry remains fragmented. I foresee a second round of consolidation taking place in future.” Incidentally, German cement major Heidelberg acquired a majority stake in Mysore Cement from S.K. Birla in July 2006.

Expensive Buy Holcim’s keenness, even desperation, to strengthen its position in India becomes evident from the premium it paid for purchasing the additional 3.94 per cent stake in Ambuja Cements from erstwhile promoters Narottam Seksaria and Suresh Neotia. The price of Rs 154 per share values the company at m 218 per tonne, compared to m162 when it acquired a 35 per cent stake in January 2006. Analysts say this is expensive. Says Shah: “The last tranche of acquisition may be aggressive, but it had very limited options for increasing its holding in Ambuja Cements. For a long time now, it has been trying to get a stronger grip on the company. It, therefore, grabbed the first opportunity it got.” Adds Promeet Ghosh, Director Investment Banking, DSP Merrill Lynch: “Everything depends on one’s aspiration. No one knows what’s on Holcim’s mind. The Indian cement industry is interestingly poised and both domestic and international players are showing interest in snapping up capacities.”

That’s not at all surprising. The government has announced its intention of investing about $300 billion (Rs 12 lakh crore) on creating world class infrastructure in the country over the next 5-7 years. This will obviously benefit a host of industries, including cement. Result: the valuation of cement firms has jumped four-fold since 2004, from $75 (Rs 3,000) per tonne to $300 (Rs 12,000) per tonne. Says Ambareesh Baliga, Vice President, Karvy Stock Broking: “The next two years will be very bullish for the cement industry. Holcim’s purchase price sets the benchmark for the industry, thus creating an entry barrier for new players.” A senior Holcim executive admits that India is a very attractive market. “If opportunity arises, we will definitely increase our presence here. However, at this point, it will not be appropriate to speculate on our future steps,” he says.

A recent Citigroup report points out that cement demand in India has grown at a compounded annual growth rate of 8.1 per cent. With strong demand from the housing sector and recent demand from IT-related spending and the infrastructure sector, this is expected to rise to 12 per cent by 2008-09. “So, it’s quite natural for Holcim to be interested in the Indian market. It is, after all, second-largest consumer of cement in the world after China,” says Rakesh Valecha, Director, Fitch Ratings.

Holcim’s Global Strategy

Since 2003, Holcim has aggressively expanded into new markets across the world. Of the 12 takeovers completed by the Big Four cement companies worldwide—Lafarge, Holcim, Cemex and Heidelberg —Holcim has been involved in six. This inorganic growth strategy is a function of the stagnant cement market in the developed world and the massive demand for the commodity in Asia. In fact, apart from Holcim, global biggies like Lafarge (Tisco’s cement division and Raymond Cement), Heidelberg (Mysore Cement) and Italcementi (Zuari Cement) have also gained toeholds in the Indian market, while others like Mexico’s Cemex and Russia’s EuroCement are still scouting for opportunities. Holcim’s strategy has to be seen in this context—the plan seems to be to emerge as the dominant player in India before its global rivals get a chance to consolidate here.

Commenting on the relative lull in M&A activity in the sector, Ghosh says: ?gThere is lot of interest in cement companies. But deals aren?ft happening because sellers and buyers cannot seem to agree on the right price, thus slowing M&A activity.?h Adds Guha: ?gThis is a good time to be a seller, and smaller companies should capitalise on this, as their lack of size will result in them getting marginalised in the long-term.?h But with Holcim raising the bar for its rivals, it will be expensive for them to muscle their way into the Indian market. Yes, it is also making it more expensive for itself to buy up new capacities, but it seems to have factored that into the equation as well. "Currently, Holcim seems more focussed on gaining ownership and consolidating its presence here rather than on expansion," says Shah.

And it has effectively ensured that its rivals remain at bay while it does that.