India Ratings and Research (Ind-Ra) expects the cement sector to witness further consolidation in the near-to-medium term, given the aggressive medium-term capacity targets of leading players that are unlikely to be fully achieved organically. Khushbu Lakhotia, Director, Large Corporates, commented, “Besides, Ind-Ra expects the capacity share of top five players to cross 55 per cent in FY 2025 and 65 per cent in FY 2026 (FY 2020: 53 per cent) with the planned capex. The agency also opines that the sector is likely to witness an increase in the competitive intensity and some pricing pressure due to which the gap between leading and small players could continue to widen given the wider presence and better cost efficiencies for large players.”
The cement industry has seen a significant rise in inorganic expansions over the past 1 to 1.5 years with almost 10 deals comprising around 60 million tonnes (mt) capacity announced, mostly by the market leaders. The Indian cement industry had witnessed its largest M&A deal in FY 2023 with 67.5 mt of domestic cement capacity changing hands from Holcim Limited to the Adani Group. The industry has seen around 25 deals since 2016 with over 200 mt of capacity changing ownership over the period. While the valuation of cement units is linked to various factors such as cost efficiency of plants, extent of clinker integration, limestone reserves and brand and distribution strength of the target, the average valuation of integrated units in the recent past has been $70 to 90 per mt, which is lower than the cost of constructing a greenfield, integrated plant. While the valuations often also consider additional cost likely to be incurred for plant improvisation, particularly for stressed assets that may not have undergone all necessary maintenance, an acquisition helps the acquirer with immediate access to markets or synergies in lead distance along with access to limestone reserves along with economies of scale.
While India is the second-largest cement producer in the world after China, the per capita consumption is substantially below the world average. Given the demand potential emanating from the likely development in infrastructure and housing, significant investments have been planned over the next five years, with many leading players aiming at increasing capacities by 50 per cent to 200 per cent over FY 2023 to FY 2030. Ind-Ra believes that this proportion of expansion (even after factoring some delay) may not be possible completely organically, as the capacity would not be absorbed by the market and resource constraints could impede expansion in some regions. Availability of adequate limestone reserves would also determine the fructification of these plans, given that reserve availability could be limited in geographies such as North and East, in addition to a massive increase in the royalty of limestone won through auctions. This is in addition to an increase in the capital cost of setting up greenfield integrated plants to $110 to 120 per mt (up 15 per cent to 20 per cent year on year (YoY) post covid), which coupled with the subdued pricing environment could result in a low return on capital employed. These factors, in addition to the widening gap between the performance of large and small-to-mid sized players, make the market ripe for further consolidation.
The top five players witnessed a volume CAGR of around 8 per cent over FY 2016 to FY 2024, higher than the industry CAGR of 5 per cent. The higher volumes along with better profitability have kept the balance sheets of large players healthy despite the expansions. Infact the top five players witnessed a reduction in the net leverage between FY 2020 to FY2024. The sector overall has a strong balance sheet but there have been pockets of stress, particularly in the small-mid-sized space where companies have witnessed deterioration in the credit profile led by weak profitability typically coinciding with capex.
The capacity share of top five players, which had increased only 100 bp to 53 per cent between FY 2011 to FY 2020, rose over 100 bp between FY 2020 to FY 2024. Ind-Ra expects the share to increase further to 56 per cent to 57 per cent by FY 2025 and by another 1,000 business points (bp) by FY 2030 in view of the announced plans.
Of Ind-Ra’s estimated high inorganic potential assets across India at the beginning of 2023, around 35 per cent have been acquired or signed an agreement to that effect in the past 1.5 years. The agency opines that given the high fragmentation and presence of several small-to-mid sized players, the southern market still offers high potential for inorganic expansion, followed by the west.