Defying the logic of scale, size and geographical presence, mid-sized cement companies are expecting a revival in fortunes, but not in terms of operations. They plan to sell stakes at a time the industry is in a consolidation mode. The buyers, say analysts, are expected to be overseas players and investors, not domestic ones.
KKR, the global asset management company, picked up a 20 per cent stake in Avnija, a subsidiary of Dalmia Bharat Enterprises, at an enterprise value of $104 a tonne. Also, Vicat SA picked up a 51 per cent stake in Bharti Cement Corp for an undisclosed amount. Domestic players have been wary of picking up stakes in these mid-cap cement companies as they are demanding a 75-125 per cent premium to the replacement cost, say analysts at Elara Capital. However, for overseas players, this does not seem to be much of a cost, given the red tape involved in starting a greenfield project in India, despite the threat of oversupply and soft prices.
In terms of consumption, India is the second-largest growing market, expecting an eight per cent rise in demand. China, the fastest-growing market anticipating around 10 per cent increase, is seen to be jittery in the short term. The global market is expected to grow at five per cent and the Brazil market (a part of the Bric) at four per cent. Russia, on the other hand, may see demand falling by around four per cent.
Over the years, Indian cement companies have consolidated from being regional entities to becoming national players. Now, the top five control around 54 per cent of the industry and, therefore, there is more pricing stability. Internationally, the top five command around 20 per cent capacity. This makes mid-cap cement companies an attractive target for overseas players.
With players like JK Cement, Orient Paper & Industries and JK Lakshmi Cement trading at half their replacement values of $100-130 a tonne, these will be attractive targets for acquisitions. The action in the mid-cap segment is slated to heat up in the days to come.
The subdued discretionary spending may have a bearing on margins
Operating margins down 230 basis points q-o-q on higher employee costs and other expenses
Analysts expect volume pressure to continue; profit growth likely to be intact