Will UltraTech’s stake in Star Cement evolve into a larger play in the Northeast market?

The Indian cement industry has been abuzz with mergers and acquisitions (M&As). Ever since the Gautam Adani-led Adani Group acquired cement companies ACC and Ambuja Cements from Swiss cement major Holcim in 2022 for $10.5 billion, there has been a string of acquisitions. Adani acquired cement companies like Sanghi, Penna and Orient, while Aditya Birla Group-owned UltraTech bought over Kesoram Industries’ cement business and India Cements.

The M&A story in the cement sector has primarily revolved around South and West India. Now, UltraTech Cement has made a significant move in Northeast India by picking up an 8.69% non-controlling minority stake in listed company Star Cement for an outgo of Rs 851 crore or at Rs 235 per share. The target company is the largest in the region with a 26% share in terms of sales volume and has an installed capacity of 7.7 million tonnes per annum (mtpa).

The deal follows news reports last month that Ambuja Cements was eyeing Star Cement-claims later denied by the target company. The interest in the Northeast is not surprising given the region’s increasing infrastructure outlay in recent years. A report by Antique Stock Broking shows that investment in the Northeast amounted to Rs 5 lakh crore between 2014 and 2024, and is projected to rise to Rs 11 lakh crore for the period starting in 2024, over the next five to six years.

From a market perspective, the Northeast offers higher pricing and margins. Logistical constraints, primarily due to the hilly terrain, have led to higher pricing of Rs 1,000-1,200 per tonne, boosting profitability. A report by Antique Stock Broking last November highlighted that cement demand in the region grew at a compounded annual growth rate (CAGR) of 8-9% between FY19 and FY24, compared to 5-6% nationally.

Advantage UltraTech

On the deal, Sanjay Moorjani, an independent analyst, suggests that acquiring a non-controlling stake could be UltraTech’s way of “getting a foot in the door” and pre-emptively keeping Adani out. This approach has precedence. In June 2024, UltraTech acquired a 23% stake in South-based India Cements from billionaire investor Radhakishan Damani. A month later, the promoter group led by N. Srinivasan exited their 32.72% holding, followed by a 26% mandatory open offer. A similar situation seems to be unfolding in the UltraTech-Star Cement transaction as well.

In Star Cement’s case, the promoter group comprises four families holding a combined 67% stake. The Bhajanka family is the largest stakeholder, while the Chamarias have sold their 8.7% stake to UltraTech. In a letter to his team, Star Cement Chairman Sajjan Bhajanka clarified that the Chamarias’ decision to sell was independent. He emphasised that the other promoters remain committed, stating, “There is no intention of selling our stake to anyone.” The reason behind the decision by the Chamarias to their sell stake is not yet known.

Upping stake in the northeast

Star Cement originated as a subsidiary of Century Plywood, later demerged to focus solely on cement production. Today, it operates grinding units in West Bengal and Assam, and an integrated unit in Meghalaya. “The proposed capacity addition by new entrants is likely to take three to four years before commissioning, keeping the Northeast’s profitability relatively strong in the near term,” Antique’s report states. New plants in the Northeast often face challenges related to land acquisition and legal complexities around mining, making inorganic growth more attractive.

Moorjani notes that UltraTech lacks a significant foothold in Northeast India. Its target of increasing capacity from 155 mtpa to 200 mtpa makes Star Cement a strategic addition. In recent years, UltraTech has acquired Kesoram Industries’ cement business and India Cements. “Acquiring Star Cement would enhance logistical efficiency, reduce transportation costs, and boost overall operational performance,” says Moorjani. Meanwhile, Ambuja-ACC’s combined capacity remains just under 100 mtpa. Both UltraTech and Ambuja-ACC are expected to look at a combination of organic and inorganic strategies to hit their respective targets, which is 140 mtpa for Ambuja-ACC and 200 mtpa for UltraTech.

What the future holds

Strategically, Star Cement is well-positioned. According to Moorjani, the company recorded 7% growth in the first half of FY25, despite the industry seeing a 4% de-growth. It also expects 100% capacity utilisation in Q4FY25.

The UltraTech-Star Cement deal, valued at $117 per tonne, aligns with recent transactions such as UltraTech-India Cements and Ambuja-Orient Cement, with valuations in the $100-120 per tonne range. Not surprisingly, all eyes are now on how and when UltraTech will increase its stake in Star Cement.

A Centrum note following the transaction said, “UltraTech will have to pay more for a controlling stake given Star Cement’s geographical advantage.”

If it increases its stake and simultaneously increases capacity, the ability to keep competition out will be higher and that will lead to more pricing power. Clearly, the consolidation story in India’s cement industry is far from over.

@krishnagopalan