Cementing growth

Adani Group is increasing its stake in the India story

Swiss cement major Holcim, which through its 63 per cent stake in Ambuja Cements and thereby in ACC is currently the second-largest cement producer in India, has agreed to sell its India business to Adani Group. Adani, which is paying a 7 per cent premium or so over the traded price for Ambuja, has said it has put aside $10.5 billion for the sale; Holcim has said it will receive $6.4 billion in cash proceeds immediately to plough back into other purchases. The markets have reacted positively as far as the Indian companies are concerned, with Ambuja Cements closing up 2.5 per cent on Monday after a spike in early trading. Holcim should not be displeased, given that it has cashed out of its India venture, which began in 2005, with about three times the cash that it brought in. Nevertheless, its shares declined by as much as 2.3 per cent after news of the sale, before rallying somewhat.

Holcim has been pivoting away from cement production in emerging markets — including in Indonesia and Brazil, besides India — to the “solutions and products” business in its home markets, intending to focus on energy-efficient buildings partly financed by big stimulus packages in the United States and the European Union. The cement sector in India has generally provided an average return on equity of almost 15 per cent and a net profit margin that approaches 10 per cent on average. The sector’s growth potential is also considerable by global standards. Construction in India overall is expected to grow twice as fast as in China over the coming years. Nor will this be driven entirely by government expenditure, with a CRISIL Ratings report last week arguing that residential real estate prices will rise by 10 per cent over the coming year as a consequence of inventory levels at record lows. Apollo Global Management has estimated that the number of unsold houses in India is at a 10-year low, and has decided to put $1 billion into lending to the construction and real estate sector this year.

In spite of losing access to the technological and financial pool that Holcim’s global reach would have provided, the outlook on the Indian cement sector is therefore generally optimistic. Many voices have suggested this is another step towards the maturing and consolidation of a historically fragmented sector. However, many challenges remain. For one, consolidation in a sector with distinct regional markets is difficult; given the difficulty of transporting cement, regional powerhouses can hold off national or global players. Consolidation’s difficulties are revealed even in Holcim’s inability to properly harmonise its holding in Ambuja and ACC. As a consequence of the failure to complete an Ambuja-ACC merger, the anticipated positive effects from competition between market leader Ultratech and Holcim’s companies did not eventually materialise. The emissions-intensive sector also faces the looming threat of climate change; given the degree to which steel makers across the world, including India, are investing in greening their production processes, cement will soon stand alone as the sector contributing least to the decarbonisation effort. Nevertheless, this is another feather in Adani Group’s cap. At a stroke it has become a major player in a sector closely tied into India’s growth.