For cement cos, it’s the right time to scale up

The constantly increasing cement prices seem to prove one thing, that the demand for the construction material shows no sign of flagging.

And it’s not just the big ticket cement companies that are expanding to meet this demand, smaller players, besides the big five, are also working on adding to their capacities. Between them, the small and medium sized cement companies are looking at adding around 15-20m tonnes of capacity per annum in the next two years.

A few of these companies have made their plans public — Binani Cement is likely to add 2.2m tonnes in ’07-08, Dalmia Cement is expected to add 2.3m tonnes, the cement division of century textiles is to add 1.5m tonnes, Jaiprakash Associates is expected to add 4.2m tonnes in this fiscal, JK Cements will add 3.5m tonnes by ’08-09, Kesoram has announced plans to add another 1,7m tonnes, Birla Corp is looking at an additional capacity of 1.5m tonnes, Madras Cements will add another 4m tonnes, Mangalam Cement is expected to add another 1m tonnes, OCL is looking at a capacity addition of 2.5m tonnes this fiscal and Shree Cement is expected to add 4.5m tonnes in Rajasthan.

But even this expansion may be insufficient to meet the growing demand, which is expected to go up to 182m tonnes by FY09 and 200m tonnes by FY10. “It’s not just the road projects. Demand from the housing sector and big infrastructure projects like SEZs will be huge in the next two years. The Reliance SEZ in Navi Mumbai is expected to create a demand for 2.6m tonnes of cement,” said a cement industry analyst.

The consistent good performance of cement stocks has been one of the redeeming factors in the lacklustre show of the mid-caps on the Bombay Stock Exchange (BSE). The overall positive sentiment in the sector, owing to strong demand from infrastructure projects, has reflected well on the performance of small and medium sized cement companies, both on the bourses as well as in their account books.

The Indian cement industry’s good run in the last year has attracted foreign players like Holcim, Heidelberg and Italcementi to set up base here. These companies have already garnered significant capacities, especially Holcim, through the inorganic route, and are now on the prowl for more acquisitions. The highly fragmented cement industry, with over 40 listed small and mid-sized companies and over 300 unlisted ones, offers many exciting opportunities to MNCs with deep pockets.

However, small average capacities, a times as low as 1-2m tonnes per annum, make these facilities unattractive as acquisition targets. “The cement business is all about economies of scale. MNC cement makers are looking for substantial capacities and don’t want to make a number of small acquisitions as integrating the different operations will require huge resources in terms of time and management bandwidth. Also, not scaling up capacities will be detrimental to the small companies, as their valuations and business will take a beating when cement prices fall in FY09,” said an industry expert.

Also, a constant increase in the price of the construction material and the beginning of a consolidation trend in the industry has caused the valuations of cement companies to shoot through the roof in the past few months. So buyouts in the cement sector have not happened at the pace at which it was predicted. But, with industry biggies keen on ramping up their business as quickly as possible, analysts say the next few quarters will see a lot more acquisitions in the cement sector.
Mumbai