On May 15, 2022 - a Sunday - Adani did not have a cement business. On Monday, he was India's second biggest cement player. The announcement by the Adani Group of a massive $10.5 billion deal to buy Swiss company Holcim's India business, changed the industry overnight.
When India's richest billionaire makes eye contact with a sector, the existing players get nervous. Adani's entry has set off an intense fight between him and the industry leader, Aditya Birla's Ultratech Cement, for market share.
Over the past several months, the top two players have been busy filling their concrete shopping bags. Ultratech Cement acquired over 50% of India Cements in July 2024. Meanwhile, Ambuja Cements, part of the Adani Group, has fully acquired Penna Cement and is reportedly eyeingITD Cementation.
Since 2016, there have been 21 significant deals totalling at least Rs. 1.6 trillion. This surge in acquisitions is rapidly reshaping the sector. While such consolidation excites financial markets, it poses challenges for both the industry players and investors.
In this week's Analyticks:
- Adani versus Birla: Growing pains in the Indian cement industry
- Screener: Rising stocks with strong Forecaster revenue estimates for Q2FY25
Trying to find the shortest route to the top
The Adani Group is in a hurry. It became the second-largest cement player after it acquired Swiss-based Holcim’s India business, which included Ambuja Cements and ACC. It has also reportedlyset aside $3 billion for more acquisitions.
Its production capacity has jumped from 68 million tonnes per annum (mtpa) in 2022 with the Holcim acquisition to 89 mtpa today with the addition of Sanghi Industries and Penna Cement. It plans to reach 140 mtpa by 2028.
Meanwhile, Ultratech Cement, once known for its organic growth strategy, is also in acquisition mode. In the last few months, it has acquired Burnpur Cement, Kesoram Industries and India Cements. From 115 mtpa, its capacity has reached 155 mtpa today with a target of reaching 200 mtpa by FY27.
CareEdge Ratings estimates that the top four cement companies’ share of India's capacity has increased from 35% in FY12 to 50% in FY24, with projections to hit 60% soon. Their share in cement demand has jumped from 47% to 65% over the same period. Smaller players have lost ground, and could see their market shares fall further.
Acquisition fever has South India in focus
The cement industry is not homogenous; it varies by region. Regional dynamics define pricing as well as market leadership.
In South India for instance, the market is more fragmented, with the top five players holding 47% of the market share compared to 83% in the North. The capacity utilisation level is lower (60-65%) than the North (85%). This complicates acquisition strategies.
However, the competitive landscape has intensified in the last few years as large players seek to expand their market share.
The acquisition spree is not over yet. Southern companies such as Deccan Cement, Chettinad Cement, MyHome Industries and Bharthi Vicat, holding 9% of India’s capacity, could be prime targets for acquisition, according to an Emkay Securities report. Higher capacities, fragmented markets, and rising cement demand have made the region an attractive hunting ground.
Large players are pricing to the bottom as they fight for market share
While demand usually drives up prices, rising competition has disrupted this in cement.The big companies are using aggressive pricing strategies to undercut smaller, regional players. For instance, leading companies have sold cement cheaper by Rs.10-15 a bag to compete with Orient Cement in the South.
Orient Cement’s management explained how this strategy has hurt them. “We see that their goal is to sweat the asset, and sell more volume in the market. But their aggression in driving volumes is pushing pricing lower, while demand is not robust enough."
"So the only option for people like us is to either succumb to the pressure of very low pricing and start losing money, literally losing money, or to follow our own strategy and make sure that the business being done is not at a loss”, Deepak Khetrapal, Orient's MD & CEO, saidrecently.
As a result, smaller companies are facing lower margins, and if their financial position isn’t healthy, they risk becoming acquisition targets.
Are cement companies overvalued?
The acquisition wave has inflated valuations for cement players. As the market anticipates more M&As, the large companies are seeing their valuation multiples soar. Stock prices of smaller companies tend to spike even on rumours about potential acquisitions, as seen recently with ITD Cementation.
Although most experts are positive about the sector, analysts at Kotak Institutional Equities have flagged valuation concerns. Cement is a capex-heavy commodity business, with a low fixed asset turnover ratio (around 1x). A ratio of 1x means that if the company adds Rs. 100 in assets, it generates Rs. 100 in sales. If that ratio is higher, then it can generate more revenue with low investments.
But the low ratio of cement companies means that capex drags free cash flows (FCF) down, resulting in a low FCF to profit-after-tax (PAT) ratio. Kotak analysts believe that FCF to PAT is a better metric than the price-to-earnings (P/E) ratio for such sectors. That number suggests the sector is overvalued at 30-40x PE.
Trendlyne scores do not suggest overvaluation as the scores are still above 30. Larger players are a bit pricey compared to the smaller ones, but they are fundamentally strong.
Capex plans stay ambitious, thanks to manageable debt
Despite the buzz around acquisitions, companies are not neglecting organic growth. The industry has plans for an overall capex of Rs. 1.5 trillion in the next 2-3 years, almost 1.4X the amount spent in the last five years.
Analysts from Crisil note that this expansion will largely be funded through internal resources and operating cash flows, thanks to the healthy balance sheets and low debt levels of these cement firms.
The focus on both organic growth and acquisitions has made the race to the top a fierce one. It also reflects confidence in India’s economy, as the government’s infra push and a robust real estate market is driving cement demand. India right now, has lots of room to grow.
The future? Mostly sunny, with some clouds
Trendlyne forecasts suggest moderate revenue growth for cement companies in FY25. In the first half of this fiscal year, elections and monsoons dampened demand. Higher raw material costs and a weak pricing environment could impact profitability too.
However, analysts are predicting a demand uptick from Q3 this year, especially as government infrastructure projects kick off after the Diwali festival. Whether this increase in demand will translate into pricing power remains uncertain, amid fierce competition for market share.
The cement sector is going through a major transformation. The big companies are on top right now, dictating prices and turning smaller players into acquisition targets. Once the dust settles in a few quarters, the industry will look very different.
Screener: Rising stocks with strong Forecaster revenue estimates in Q2FY25
Forecaster expects construction and cement stocks’ revenue to grow in Q2FY25
As we enter the last week of Q2FY25, we take a look at stocks that have risen over the past quarter, and where Forecaster expects YoY revenue growth. This screener shows stocks in the cement & construction sector rising over the past quarterwith strong Forecaster estimates for quarterly revenue YoY growth in Q2FY25.
Stocks from the construction & engineering and cement & cement products industries dominate the screener. Notable stocks in the screener include Capacit’e Infraprojects, ITD Cementation, Kalpataru Projects International, Grasim Industries, Larsen & Toubro, Ahluwalia Contracts (India), Dalmia Bharat, and UltraTech Cement.
Forecaster expects ITD Cementation’s revenue to grow by 32.6% YoY in Q2FY25. This construction & engineering stock has also risen by 16.8% over the past quarter, after reports emerged that the Adani Group is planning to buy a 46.6% stake in the company for Rs 5,888.7 crore. Analysts at Asit C Mehta Investment Intermediates expect the company’s revenue to grow, driven by the government push in the infrastructure sector, and strong order inflows. The brokerage expects the company’s revenue to grow at a CAGR of 17% over FY25-26.
Kalpataru Projects International, another construction & engineering company, shows up in the screener as Forecaster expects its revenue to grow by 17.7% YoY in Q2FY25. Its stock price rose by 12.9% in the last quarter. ICICI Direct believes the company is well positioned for revenue growth owing to its strong order pipeline in the transmission & distribution (T&D), buildings & factories (B&F), and water segments in the domestic market. It expects the company’s T&D business to win orders in the international market. The brokerage anticipates the company’s revenue to grow at a CAGR of 23.5% over FY25-26.
You can find some popular screeners here.
