UltraTech and Ambuja are rushing to expand cement capacity. What lies ahead?

The upending of India’s cement market in May 2022 could have been foretold in November 2021 when Switzerland’s Holcim announced its ‘Strategy 2025’. For Holcim, the world’s largest cement producer then, there seemed nothing unusual in the catchline ‘Accelerating Green Growth’ since making cement is a dirty business carbon-wise, and green initiatives are welcome. But Holcim had figured that its India business, which it created with a bang in 2005 by buying Ambuja Cements and ACC, would not fit into its future of becoming a leader in manufacturing low-carbon cement. Cement is the key element in concrete, the second-most widely used material in its production after water. Holcim’s 2022 announcement that it was selling its India business to the Adani Group for $10.5 billion was another Big Bang. It created a cement giant out of a nobody in the business: Adani had no cement capacity, although it was a conglomerate spanning ports, power, airports, edible oil, mining and natural gas. “ There is a sharp focus on our supply chain management, specifically logistics operations. We must continue to optimise costs and ensure improved customer response time ”K.C. JHANWARManaging DirectorUltratech Cement Since its Indian gambit, which added to monopoly troubles spawned after it acquired France’s Lafarge, Holcim had been slow in adding or expanding capacity even as feisty competitors moved ahead. By 2022, Holcim was a distant No. 2 with half the installed capacity of market leader Aditya Birla Group’s UltraTech Cement. Holcim had grown from 32 million tonnes per annum (mtpa) in 2005 to just 67 mtpa, while UltraTech had moved from 31 mtpa to 120 mtpa. Since that 2022 Big Bang moment, Adani has invested money, made acquisitions, and set itself an ambitious target of having a capacity of 140 mtpa by 2028. UltraTech, the other big boy with a capacity of 155 mtpa, is not sitting idle. Kumar Mangalam Birla, Chairman of the Aditya Birla Group, told shareholders at the cement company’s annual general meeting last year that his target was 200 mtpa. UltraTech, he said, wanted to “reinforce its position as one of the largest cement companies in the world”. Adani and UltraTech are expected to spend over Rs 1 lakh crore on organic and inorganic expansion between them. But this race for capacity is only one part of the story. Both aim to keep out the competition. It is a battle for dominance. Drawing up a Strategy From 2004, for almost a decade, UltraTech was all about organic growth, barring the buyout of Jaypee’s Gujarat plant that gave it 4.8 mtpa. That script changed quite significantly soon after. Between 2016 and 2018, it acquired three assets—one more from Jaypee, followed by Century and Binani—giving it a stronger presence across regions and additional capacity of over 42 mtpa. A dormant Holcim made things easier for everyone in the business, including UltraTech. That phase also saw impressive growth from Shree Cement, which has reached 53.5 mtpa, and Dalmia Bharat, which has 45.6 mtpa. Shree Cement and Dalmia Bharat dominate the North and East, respectively. Mangesh Bhadang, Senior VP of Centrum Broking, says UltraTech leveraged its balance sheet smartly to use it for strategic acquisitions. “Some of the assets bought were old, and money was put in where needed,” he explains. UltraTech’s “measured aggression” has continued, he adds, with the company accounting for a third of incremental national capacity in FY24. “It is also about putting money into waste heat recovery and solar capacity. Over 29% of their power requirement comes from renewable energy,” he says. Cement has challenges as a commodity, such as heterogeneous regional markets and pricing pressures. “ Sanghi’s plant has one billion tonnes of limestone reserves that will help in capacity expansion. Plus, there is a jetty and port, giving us a critical advantage to transport cement ”KARAN ADANIDirectorAmbuja Cements* In an interaction in February this year, UltraTech MD K.C. Jhanwar told Business Today that the company’s philosophy is to work on a long-term vision that increases shareholder value. He said that UltraTech strives for operational excellence and does not miss out on new product development, especially green products. Birla told shareholders last year that the company astutely anticipated and capitalised on India’s growth opportunities and that it “is now strategically positioned to amplify its growth trajectory”. Adani is playing to its strengths. Most of its existing businesses need cement and concrete, and it owns coal mines to power cement manufacturing. “It is an attractive adjacency given that we are in areas such as ports, green energy and e-commerce. It gives us a significant competitive advantage and unmatched scale,” Gautam Adani, Chairman of the group, had said at the time of concluding the Ambuja-ACC buyout. He emphasised the Adani Group’s ability to drive operational efficiency and learn from its earlier buyouts. “We expect significant margin expansion and want to become the most profitable cement manufacturer,” he had said. What got Adani into the acquisition? Chandresh Ruparel, MD &amp; India Head of Rothschild &amp; Co, says scale is important for any cement player as it can drive distribution, pricing and working capital. “Scale can allow for marketing and brand spends. It needs to be appreciated that cement is practically a commodity with little to no differentiation in product specs and that a brand can lead to healthy distribution and pricing power,” he says. Like any other business, scale gives you control over pricing, a handy way to disrupt the market at any point. Adani’s presence in ports, real estate, road construction, and power plants gives the cement business a ready-made customer base and access to railway rakes. The power business throws up fly ash, which is added to certain types of cement. The energy-intensive cement business also gets coal from Adani’s mines in Australia. Adani’s recent entry into renewable energy will help optimise costs. Adani’s ports will help the logistics of the three cement companies it has bought: Sanghi Industries in 2023, MyHome Industries’s grinding unit in April 2024 and Penna Cement in June 2024. Karan Adani, Director of Ambuja Cements (of which ACC is a subsidiary), while announcing the Sanghi deal (the asset also came with one billion tonnes of limestone), said the sea route will be used to move cement from the plant in Gujarat’s Kutch region to other parts of the state in addition to Maharashtra, Karnataka and Kerala. “There is a clear synergy here, and we want to be the lowest-cost cement supplier in these markets.” “ Though UltraTech’s capacity is twice as much as that of Ambuja-ACC, there is an increased aggression in M&amp;A demand for players with healthy capacities ”CHANDRESH RUPARELManaging Director and India HeadRothschild &amp; Co Taking on The Leader Adani’s aggression in the sector is unsurprising, given that he is coming from behind. Setting up a business from scratch would have taken time (the thumb rule is Rs 750-800 crore for a one million tonne plant), increased supply, and put pressure on prices. Plus, he is dealing with a player who has been around for over four decades. Uttamkumar Srimal, Senior Research Analyst (Cement &amp; Infra) at Axis Securities, says UltraTech is well-positioned from the perspectives of industry consolidation and increasing cement demand. “It is the largest cement producer in India, with an estimated market share of 24-25%. The current capacity expansion will only solidify its position as an industry leader.” UltraTech has been flexible about its growth options. If the earlier buyouts were about complete control, it took a different tack in June by first acquiring a 23% stake in South-based India Cements from DMart Founder Radhakishan Damani at Rs 267 per share. Then on July 28, its board approved the purchase of another 32.72% stake from the promoters of India Cements—led by N. Srinivasan—and associate companies at Rs 390 per share, taking the total holding to close to 56%. UltraTech will now need to make a 26% mandatory open offer and if that is completely subscribed, it will own 82% in India Cements. The acquisition brings in 14.45 mtpa of capacity to UltraTech, of which 12.95 mtpa is in the South (most of this is in Tamil Nadu) and the balance 1.5 mtpa in Rajasthan. A report by Emkay Global right after the deal was announced said UltraTech is significantly strengthening its position and expects the company to more than double capacity market share in the South to around 25% by FY27. “UltraTech’s [national] capacity is likely to cross 200 mtpa by FY27 and that will help it achieve industry-leading volume growth, despite its large scale, with lower opexcapex ratios boosting return ratios,” the report said. UltraTech’s inherent advantages are not easy to replicate. Centrum’s Bhadang identifies scale and a strong brand name as the key ones. “These have helped them to grow even on a high base. UltraTech will continue to be the No. 1 player, and we may see a narrowing gap between them and Ambuja.” The Aditya Birla Group’s recent entry into the paints business—from exterior and interior paints to wood finishes—under the Birla Opus brand is another benefit since it can complement its strong presence in cement. The Race Will Intensify Under Ambuja’s new owner, the M&amp;A story has been robust. Up against a more aggressive UltraTech, many assets are being looked at for potential deals. Both the big groups are looking at the South as a key hunting ground. Rothschild’s Ruparel points out that the sector follows a virtuous development cycle. Demand outstrips supply, giving manufacturers pricing power. Then follows a concentrated investment in capacity, which creates an oversupply. Fringe players are eased out, and there is a burst of M&amp;A or mergers and acquisitions. The market consolidates at higher prices. “M&amp;A or consolidation is cyclical and tends to cluster depending on the state within the cycle. Though UltraTech’s capacity is twice as much as that of Ambuja-ACC, there is an increased aggression in M&amp;A demand for players with healthy capacities and market presence,” he says. Inevitably, valuations take off for good assets aided by money entering the capital markets. Ajay Garg, MD of Equirus Capital, says, “As the growth outlook remains strong, we will see higher valuation metrics being achieved than historical levels.” He reckons the industry will move towards a structure of a few national players, with each region having strong local players. “Each regional cluster will have a structure constituting three to five players as they look to align their strategies.” “ UltraTech leveraged its balance sheet smartly to use it for strategic acquisitions. Some of the assets bought were old, and money was put in where needed ”MANGESH BHADANGSenior VP (Research)Centrum Broking UltraTech and Ambuja have pushed hard for assets (Kesoram, Penna, MyHome, India Cements, see chart on M&amp;A deals) in the fragmented South. A June ICRA report says India has a total installed capacity of 626 mtpa, with the largest chunk, 188 mtpa, in the South. The anomaly in the South is that the Top 5 players account for 47%; contrast this with the North, where the Top 5 account for 83%. Industry officials estimate the South has at least 45 cement brands, which explains the fragmented market share. Supply is often double the demand, leading to lower capacity utilisation; it is around 60-65% in the South compared with a national average of close to 75%, with the North at 85%. The head of a South-based cement maker, who does not wish to be named, points out that it is not evenly distributed even within the southern part of the country. “It could be less than 45% in one part of the region and 90% elsewhere,” he says. For example, around 40 mtpa is located in Karnataka’s Kalaburagi. The cement maker says not all companies in the South are up for sale. Many are known to be extremely efficient. “In this scenario, M&amp;A becomes a challenging proposition. The valuation gap becomes very wide since the seller often has a huge expectation,” the person points out. Of course, for every compact efficient player, some struggle to run a profitable operation. “Large players look to acquire them to consolidate their position and gain market share. The recent acquisition costs have been lower than replacement costs, allowing larger players to acquire these assets at reasonable prices,” says Srimal of Axis Securities. The smaller players don’t always have the best cost structure, leading to margin pressure. Centrum’s Bhadang thinks a plant has to be at least 3 mtpa to make economic sense. “UltraTech and Ambuja will command a premium; the others typically sell at a discount. If the large players drive down costs, it can be very challenging for the smaller ones,” he says. Ambuja has been working hard on its cost structure. The focus has been on reducing operating costs (one of the issues plaguing Holcim) with a stated ambition of reducing it by another Rs 530 per tonne by FY28. Among the more important steps taken include investments in energy (1 GW of solar and wind power with over 300 MW of waste heat recovery system to power 60% of the expanded capacity is the plan). It is also reducing logistics costs. One initiative is a 50 km reduction in lead distance or distance from a plant to the market, which could save Rs 100-150 per tonne. Other steps include long-term agreements to procure fly ash from the group’s power plants and making the most of group synergies such as supplying to captive projects (the upcoming Navi Mumbai airport is one), using the port infrastructure to target coastal markets and moving talent within the group. For UltraTech too, logistics is a key cost component. At the earnings call for the Q1 numbers for the current fiscal, the management spoke of the increased network of plants and a further reduction in the lead distance—it has already been cut from 400 km to 385 km, saving close to Rs 45 per tonne of cement. Jhanwar told BT earlier, “There is a sharp focus on our supply chain management, specifically logistics operations. We must continue to optimise costs and ensure improved customer response time.” The exit of Holcim leaves the cement landscape dominated by the local players. The only multinationals of consequence are Heidelberg (primarily through Zuari and Mysore Cements) and Vicat’s majority holding in Bharathi Cement. Cement is an industry with a long gestation, requiring patience, and has a cyclical nature. This makes managing costs and resources that much more critical. The race between UltraTech and Ambuja will move even more towards strategic expansion as more assets come up for grabs and they grow organically. @krishnagopalan

UltraTech and Ambuja are rushing to expand cement capacity. What lies ahead?

As UltraTech Cement and Ambuja Cements look to expand organically and undertake major buyouts, the sector is set for a dramatic change. What lies ahead?