Cement: Too early for the consolidation party

It’s a dog-eat-dog world in the Indian cement industry. The quest for market share gains has meant large companies with strong balance sheets continue to acquire smaller and financially weaker ones. Last week, the industry bellwether UltraTech Cement Ltd announced the acquisition of 23% stake in South-based The India Cements Ltd for ₹1,900 crore. This is a non-controlling financial transaction, but wide-held expectations are that this move would eventually lead to the acquisition of India Cements. For UltraTech, the Southern regions contribute the lowest capacity market share of 11%. The company aims to boost its presence in this region through organic and inorganic routes.

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Nonetheless, a development of this kind often leads to excitement in cement stocks. Shares of both UltraTech and India Cements soared to 52-week highs on Thursday. In another instance, close competitor Adani Group company Ambuja Cements Ltd announced acquisition of Hyderabad-based Penna Cement at an enterprise value of ₹10,422 crore earlier this month. In reaction, Ambuja shares hit a 52-week high on 14 June.

Positive impact of M&A

Moreover, a positive rub-off of news flow on mergers or acquisitions is also seen on many midcap and small-cap cement stocks that are seen as potential acquisition candidates. Among listed companies, this includes Sagar Cement Ltd, Orient Cement Ltd and Mangalam Cement Ltd.

But this excitement may not persist. To be sure, a crucial long-term benefit of increased consolidation in any sector is the anticipated pricing discipline among large companies. For the cement companies, there appears to be no immediate respite on the sector’s Achilles heel of muted prices. In fact, as companies continue to sacrifice on realizations growth for volumes, the near-term pricing outlook is getting bleaker. This could further weigh on the sector’s earnings outlook, triggering more downgrades.

“With acquisition of a controlling stake appearing to be a ‘long shot’ and Street’s misplaced judgment of seeing the deal as a potent positive for pricing outlook (citing odds of rising consolidation), we stay neutral on the deal,” said analysts at ICICI Securities Ltd commenting on the UltraTech-India Cements deal in a report on 28 June.

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Effect of prices

As things stand, dealers channel checks show that an average price hike of ₹8-10/50kg bag was announced in early June across various markets. Given the swift rollbacks seen in April and May, the threat of price hikes being withdrawn remains. Even if the June price hike was to sustain, it is unlikely to move the needle on realizations growth in June quarter (Q1FY25). Plus, the September quarter is usually seasonally weak for the sector, so any improvement in prices is likely only in H2FY25. That said, if larger companies get more aggressive on capacity expansions, then it would weigh on the sector’s medium-term pricing trajectory.

“We expect the impact (on prices) of acquisition-led competition to be seen in West (Sanghi Cement), South (Kesoram Cement) and East (Penna Cement); while North and Central regions are relatively better placed,” said an IIFL Securities Ltd report dated 28 June. South is a highly fragmented market with a large presence of cement companies both listed and unlisted, making it a lucrative option for inorganic growth. On the flipside, it continues to struggle with the problem of over-capacity as demand momentum still lags supply. So, capacity utilization and realizations growth of companies having exposure to south markets is relatively lower than other regional companies.

To conclude, as big companies get bigger with focus on scale, a subdued pricing trend seems to be the new normal for the cement sector.