Cement M&As run into price barrier

The Indian cement industry, the second-largest in the world, is flooded with buyout offers from international companies seeking a pie of the sector which is poised to grow at 8% this year.

Recently Kohlberg Kravis Roberts & Co, the US-based private equity firm, bought a 20% stake in Avnija Properties, the cement arm of Dalmia Cements, French cement major Vicat SA bought a controlling stake in Hyderabad-based Bharathi Cement and Cemex, the second-largest cement player in the world, is in talks with Prathap Reddy-promoted Penna Cements.

The global players are paying a high premium to enter the Indian market and most of the deals are happening in the southern region.

Though the international players are upping their bids, the average amount paid for deals between 2005 and 2008 was around $168 per tonne as against $121 per tonne a decade before.

A recent report by Elara Capital notes that unlike in the past, a few mid-sized companies especially in South India are now willing to sell their cement assets at 75-125% premium to their replacement cost.

Ravi Sodah, analyst with Elara Capital, says, “It will take around 8 years for these international players to break even. These mid-sized domestic companies have strong balance sheet and very high expectations for exit.”

Another analyst said, “These high-cost buyouts are not viable. There was news of Murli Agro trying to sell its Chandrapur plant at close to $200 per tonne, which is madness. The expectations of the domestic players which want to sell off may come down in next few quarters as they may face some worse liquidity crisis due to the falling cement prices. It wouldn’t be a surprise if some of them post single-digit losses.”

Also, close to 10.8 million tonnes per annum of oversupply is expected to be added this quarter.

But some agree with the premium demanded by these cement manufacturers.

An analyst with a domestic brokerage said, “International companies are ready to pay a premium because it will be difficult for them to execute a project on their own as there are a lot of bureaucratic hurdles like acquiring land, getting limestone, environment clearances, etc. It will take around 5 years to set up a plant and then commission it. So it’s better to buy a running plant. They are looking at longer term and even if we take 8% growth it goes well with their appetite.”

The world average cement consumption growth is close to 5% whereas in India it is 8%. Also, the developed countries are stagnating. The Elara Capital report states, “Major developed markets have been in stagnation for years now while a few are fast degenerating.”

Another analyst said, “But going forward deals wouldn’t happen like the earlier ones. Cemex wants to pay $150.3 per tonne to Penna; even Murli was turned down by Ambuja because it asked around $250 per tonne. The reason why domestic players are not looking at these companies because they know they can set up and break even before time than buying at these valuations.”