India’s cement sector has seen a lot of activity in the past couple of years. Deal flow has been unprecedented, with the latest being UltraTech Cement picking up a stake in India Cements. The Kumar Mangalam Birla-promoted UltraTech, the largest cement maker of the country with an installed capacity of close to 150 million tonnes per annum (mtpa), picked up a 23% stake in the Chennai-based India Cements—led by N. Srinivasan, who is a former president of the Board of Control for Cricket in India (BCCI)—for `1,900 crore. UltraTech has made it clear that this is a “non-controlling financial investment”, while it has been reported that the stake was bought from DMart Founder Radhakishan Damani and his associates.

This wasn’t the only big cement company acquisition in the southern part of the country in the recent past. Weeks earlier, Ambuja Cements, which is a part of the Adani Group, acquired the Hyderabad-based Penna Cement Industries for $1.25 billion (`10,420 crore). Most of Penna’s 14 mtpa capacity (including 4 mtpa under construction) is housed in the region and this is where a lot of the sector’s M&A play will continue to take place. India Cements’ capacity is similar and for UltraTech, with its earlier buyout of Kesoram Industries (10.75 mtpa), will more than double its capacity in the South to 45 mtpa. The Adani Group, ever since it picked up Ambuja Cement and ACC in May 2022 for $10.5 billion, has been active inorganically and has a capacity of more than 75 mtpa, making it the second-largest cement producer in the country after UltraTech. The race to raise capacity is on the back of both players outlining ambitious targets—200 mtpa for the leader and 140 mtpa for the challenger.

If UltraTech picks up another 2% of India Cements stock from the open market, it will not just own 25% of the company, but also trigger an open offer for 26% and potentially give it a controlling 51% holding. But Rakesh Arora, Founder of market research firm Go India Stocks, says that UltraTech is unlikely to up its stake in India Cements. “The strategy is to prevent competition from buying over the company or just make it very expensive for them. For now, they will just remain at that 23% stake,” says Arora.

India Cements itself is in the middle of an extremely challenging phase. It has been in the red for two financial years, leaving little money for modernisation, apart from having a high-cost structure. In fact, Arora identifies multiple options that can play out in the time to come: India Cements’ promoters (led by Srinivasan) may offload their 28% holding for more than the `267 per share that UltraTech has paid; or UltraTech could wait it out for valuations to correct given that the company is facing tough times. “In all probability, they will just sit tight and do nothing for a while,” he says.

Gurmeet Chadha, Managing Partner & Chief Investment Officer of wealth management firm Complete Circle Wealth, says India Cements’ valuation of around $90 per tonne is high given the number of ageing plants. “The competitive landscape in the South is extremely hot right now and we are just in the middle of a bull market when it comes to valuations,” he says. In a report put out right after the UltraTech-India Cements deal, financial services and research firm Emkay Global says, “We believe this deal is a precursor to UltraTech ultimately increasing its stake and converting it into a strategic investment ahead. The top groups (especially UltraTech and Adani) are in the race for capacity expansion/market share gains, accelerating the consolidation trend in the sector and boosting valuations of small-to-mid-size cement players.”

In the race for capacity expansion in the southern part of India, expect more activity in the space. 

@krishnagopalan