Consolidating the Cement Industry – Brick by Brick

It was recently announced that Irish specialist CRH is to acquire a controlling 51% stake in the two 2.4 MT plants in Gujarat of the Jaypee Group, the country’s third-largest cement producer, the deal reportedly valued at an enterprise value of Rs 4,200 crore. CRH had earlier acquired MyHome Industries in 2008. This foreign direct investment signals renewed consolidation in the Indian cement industry which had reached its peak in the last decade. This is a fresh respite from the ongoing concerns among global buyout firms about investing in India since returns have gone down due to rupee depreciation, increasing costs of production and policy paralysis and hence the prospects of the Indian cement sector were on the verge of a downtrend.

Indian cement industry – an overview

Driven by domestic GDP, cement demand in India has grown at a CAGR of ~9% in the past decade. Demand for cement is closely driven by the construction sector which in turn is correlated to growth in GDP. With growing Indian GDP, there has been an increased focus on infrastructure development along with a growth in demand in the housing and industrial sector.


Demand-supply is typically balanced in all regions of India i.e. North, South, East, West and Central. The West is a net importer of cement followed by East which imports some cement. South and North are the both the biggest consumers and producers of cement. They account for 49% of the total consumption and 55% of the total production of cement in India.

The Budget this year removed a 5% duty on coal imports (cement makers import 25% of their coal); there is no import duty on cement. Cement will gain from rationalization of taxes and duties and a simpler excise duty regime. There is increased pressure on the government to completely remove the import duty on gypsum which is an essential product for the cement industry.

Consolidation – History

Globally, most cement markets have witnessed significant consolidation. After the dismantling of government controls for the cement industry in 1989, the rate of growth in capacity addition in the cement industry increased. Due to the increased production and the lack of matching consumption, there was excess capacity in the market which resulted in companies struggling to remain viable. Entry of foreign players resulted in the consolidation of the fragmented industry. Though the industry has seen consolidation by domestic players starting in the mid-1990s, it was only in the late 1990s that foreign players entered the market. Holcim entered India by investing in Kalyanpur Cements in 1990 and Lafarge commenced its Indian operations by acquiring Tisco’s cement plants in 1999.

Consolidation – Last decade

In the past decade, there was a wave of consolidation in the Indian cement industry. A number of large mergers and acquisitions were witnessed. In most cases, global companies have acquired regional players. In the period of high growth, large players, in order to increase their market share and establish pan-India presence, have followed the inorganic route of acquiring small and regional players. Grasim as a part of Aditya Birla Group (ABG) acquired a controlling stake in Ultratech Cement from L&T in 2004. In the same year, Holcim acquired 40-45% stake in Gujarat Ambuja Cements and ACC. Recently, Grasim merged into Ultratech to create a single entity. Other than these major mergers and acquisitions, Heidelberg cement acquired Mysore cements (2006), Italcementi acquired Zuari Cement (2006) and Vicat acquired Sagar Cements (2008).

As a result, currently, there are only 2 pan-India players – ABG & Holcim, together accounting for ~38% of the capacity. Top 19 players account for 87% of the capacity. The Eastern reagion enjoys the highest level of consolidation in the industry with the top 5 players occupying over two-thirds of the total market share.

In spite of the rupee depreciation, Indian cement industry is an attractive option for FDI primarily due to its size and growth prospects. India is the second largest cement producing country in the world. During 2007-12, the cement capacity in India almost doubled to around 300 MTPA. As per projections in the 12th Five Year Plan, the cement sector would need to raise its capacities to 470 million tonnes by 2017 to meet the rising requirement for the commodity. Entry into the market is relatively easy since there are some loss-making companies which can benefit from the infusion of funds.

The advantages of consolidation have been witnessed for over a decade now since sustained merger and acquisition activity in cement has led to much improvement in profitability and valuations in the sector. First of all, consolidation reduces sprinkling of capacities and boost competitive pressures. There is a better opportunity to tap in economies of scale which is likely to control cement prices. With the demand in the cement sector poised to grow over 9% in the next two years, increase in prices is a huge concern. Thus, consolidation amy help in stabilizing prices.

Secondly, the top 5 players after consolidation enjoy a better cost structure, driven by higher level of vertical integration and locational advantage with respect to sourcing of raw materials and market access. Most other players have a weaker cost structure and moderately high leverage levels.

Thirdly, the financial strengths of the acquiring companies could help rescue assets which are loss making at present.

However, cartelization remains a possibility since the top five players control half the total capacity. Recently, the Competition Commission of India (CCI) has slapped 11 cement companies with a fine of Rs. 6,304 crore for price cartelization, the highest penalty ever imposed by the fledgling, but increasingly assertive, anti-trust regulator. It is predicted that the levy of penalty will lead to further consolidation in the industry. Considering the long term growth story, fair valuations, fragmented structure of the industry and low gearing, another wave of consolidation would not come as a surprise.

– by Kirtika Sharma

Kirtika is a PGP-1 student at IIM, Ahmedabad and a member of the Consult Club. She graduated from IIT, Delhi in 2011 with a B.Tech in Textile Engineering and has worked for AT Kearney as a Business Analyst for an year


A snapshot of the Real Estate sector

The real estate industry in India is currently estimated to be worth approximately US$ 16 billion with a CAGR of 30%. Growth in this sector is driven primarily by IT/ITeS, growing presence of foreign businesses in India, the globalization of Indian corporates and the rapidly growing middle class. The high growth curve in the real estate sector also owes some credit to the liberalized Foreign Direct Investments (FDI) regime in the real estate sector.
Role of FDIs in real estate
The Government of India in March 2005 amended existing norms to allow 100 per cent FDI in the construction business. This liberalization cleared the path for foreign investment to meet the demand for development of the commercial and residential real estate sectors. It has also encouraged several large financial firms and private equity funds to launch exclusive funds targeting the Indian real estate sector.

In 2003-04, India received total FDI inflow of US$ 2.70 billion, of which only 4.5% was committed to real estate sector. However, in 2005-06, post the liberalization, this figure went up dramatically. While total FDIs in India were estimated at US$ 5.46 billion, the real estate share in them was around 16%. The sector emerged as the recipient of the highest levels of FDI equity inflows in 2007-08, with a near five-fold increase over FY07.
India attracted FDI equity inflows of US$ 2,214 million in April 2010. The cumulative amount of FDI equity inflows from August 1991 to April 2010 stood at US$ 134,642 million, according to the data released by the Department of Industrial Policy and Promotion (DIPP). Better to put numbers in billions itself as done above
India will continue to remain among the top five attractive destinations for international investors during 2010-11, according to United Nations Conference on Trade and Development (UNCTAD).
Recent Developments
A recent joint report by Ernst and Young has urged the government to improve the regulatory environment to facilitate real estate development in order to stay ahead in the economic race. Some of the salient proposals of the report are:
  • Creation of a regulatory body for real estate: The ministry of housing had issued a draft Model Real Estate Act in September 2009; the purpose of which was to establish a regulatory authority for the sector. The report has suggested that the role of the body should be purely advisory, and should not serve as a hurdle to growth.
  • Infrastructure status to housing: Foreign direct investment norms of minimum area and minimum capitalization should be relaxed in case of affordable housing. At present, foreign investors are restricted by a minimum capitalisation requirement of $10 million (around Rs 45 crore) for wholly-owned subsidiaries and $5 million (around Rs 22.5 crore) for joint ventures with Indian partners; and a minimum area of 50,000 sq metres.
  • Greater flexibility to foreign investors: According to the report, the three-year lock-in period for Foreign Direct Investment (FDI) in the real estate sector has been dubbed as too tough a restriction to allow the smooth flow of foreign funds. Currently while the original money invested cannot be repatriated before a period of three years from the completion of minimum capitalisation, investors can exit earlier with prior approval of the government through the Foreign Investment Promotion Board (FIPB). This approval is very difficult to obtain, and cases of investors exiting before three years have been very rare. It has also been proposed that greater leeway be given to foreign investors in cases of dispute between residents and non-residents, and the non-resident wishes to exit the project; or where the project could not be initiated due to lack of statutory clearances.
Government Decisions
In September, this year, the government announced that foreign investors in the country’s real estate sector will have to remain invested for a minimum of three years and rejected industry claims about the policy restricting FDI inflows.
According to Commerce and Industry Minister Anand Sharma, foreign investors should be willing to stay invested for longer than three years. The purported purpose of the move is to limit exposure of the domestic economy to external risks and fluctuations. In fact, Sharma pointed out, India was able to come out of the real estate generated global financial downturn quickly only because of its prudent policies in FDI. India’s central bank, RBI too is highly cautious of allowing unrestricted FDI into the real estate sector.
Furthermore, the department of Industrial Policy and Promotion (DIPP) has clarified that the lock-in period of three years will be applied from the date of receipt of each instalment/tranche of FDI or from the date of completion of minimum capitalisation, whichever is later. Previously, it was understood that original investment meant initial investment. DIPP has clarified it implies total investment.
The change could be a boon to at least 30 Indian real estate groups, large as well as small, which had sold put options to foreign investors to bring in FDI through various deals. These put options required the Indian promoter to buy out the foreign investor. But grappling with a cash crunch, low demand and soft property prices, these developers are today not in a position to honour these options. And, even if they can cough up the amount, they want to avert a large payout.
Under these circumstances, if the government spells out that the entire investment of the foreign investor belocked-in for three years, the foreign investor will not be able to exercise the option immediately. This will give several cash-strapped developers time to organise money. However, it will further dampen the sentiments of foreign investors in real estate.
Future prospects
The Indian market has emerged as an attractive destination for foreign investors interested in investing in the retail sector. India was ranked as the fifth most attractive destination for future real estate investments in a list topped by China, according to a latest report of FCCI and Ernst and Young. In such a scenario, given the forthcoming opportunities, policy restrictions would not be the best way to protect traditional retailers.
The government should instead impose regulations such as sourcing requirements, zoning regulations and back-end investment requirements to protect traditional retailers. Furthermore, it should strive to make regulations more investment-friendly, like boosting the availability of liquid vehicles for investment such as REMFs and REITs.
The sector assumes an even greater importance given that real estate is second only to agriculture in terms of employment generation and contributes heavily towards the country’s GDP. In countries such as China, the retail sector has been a major propellant of growth and with a more liberal FDI policy; the story can be repeated in India.