Sector Watch - Indian Cement Companies

Sector Watch - Indian Cement Companies

THE Indian cement industry, the world’s second-largest, is in the cross-hairs of global private equity giants as the booming economy spurs construction demand and small & mid-size companies look to cash in on the rising prices.

Major foreign private equity funds such as JP Morgan are keen on buying equity stakes in Indian cement companies as the sector is fast becoming the country’s major feedstock for growth. The move, if successful, could enable consolidation in the Indian cement sector as the stakes can later be sold to large multinationals keen on increasing their presence in the country, analysts and market sources said.

Major cement multinationals now in India include the world’s largest, Lafarge and the world’s second biggest, Holcim. Mexico’s Cemex recently said it’s keen on the cement industries in India and China, the world’s two largest cement consuming markets. Sources said, funds are particularly interested in northern and southern cement companies, as the two regions will soon see a sharp rise in consumption due to construction activities.

Funds are believed to have shown interest in companies such as Andhra Cements, Chettinad Cements, India Cements and Binani Cement. It is widely believed that JP Morgan is in an advanced stage of talks with the GP Goenka-promoted Andhra Cements for buying a 14.9% equity stake in the company.

The price could be between Rs 35 and Rs 40 per share, sources added. Andhra Cements shares ended on Wednesday, down 5.5% at Rs 29.95 on the BSE. Mr Goenka confirmed he was talking to several companies, but didn’t give further details.

JP Morgan recently bought 25% in Binani Cements for Rs 250 crore. Binani Cement, a major player in India’s largest cement producing state of Rajasthan, said the money would be used to double its capacity to 4.5m tonnes a year. The deal with Binani Cement could prompt other Indian cement companies to seek similar negotiations with other funds as it has pegged the value of the 2.5m tonne plant at $100 a tonne.

“Two years ago when local cement companies were talking to large multinationals, the talks got stuck on prices as foreign companies thought paying $80-$90 a tonne was high,” said an analyst with a European brokerage.

Chettinad Cement is also being touted as a possible target for private equity funds, but no independent confirmation of this was available. “Chettinad Cement has been in the news for long as it’s an efficientlyrun company with a good presence in the southern market,” said an analyst. The company makes about 2.5m tonnes a year and was started by Rajah Sir Muthiah Chettiar. The promoters own about 76.2% in the company.

Analysts say that better prospects for the sector are prompting most foreign companies to pick up equity stakes in Indian cement firms. “The current consumption of cement is around 140m tonnes and is expected to grow at CAGR (compound annual growth rate) of 8% over a five-year horizon to touch 190m tonnes by ’10,” says Mumbai-based brokerage house KR Choksey Shares and Securities.

“After several years of lull, the sector is in the midst of sustained and growing business opportunities as indicators such as flourishing demand, hardening prices and stagnant supply are pointing at a strong growth momentum,” Choksey said in a recent report to clients. Analysts said with most companies likely to take three years in building a cement plant, it is unlikely that any major greenfield capacities will come up in the near term. This is likely to improve the demand-supply balance and operating margins of existing players.

Sources said funds would avoid the mandatory open offer to minority shareholders by restricting their purchases to just below the 15% mark. “Proceeds from sale of Andhra Cements’ stake could be in the region of Rs 90 crore,” said sources. Incidentally, the GP Goenka group had earlier committed to invest approximately Rs 90 crore into Andhra Cements by reducing promoters’ stake, as part of a corporate debt restructuring exercise of its flagship company, Duncans Industries.

As on March 31, ’05, Mr Goenka owns 71.6% equity stake, while foreign promoters and private corporate bodies hold 13.04% and 5.38%, respectively. The public holds 9.3% in Andhra Cements.

Source: economictimes.com

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Saint

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