In a strategic move that could reshape the Indian cement industry, UltraTech Cement has announced its decision to acquire a 23% stake in India Cements. This acquisition, valued at ₹1,885 crore, aims to strengthen UltraTech’s market presence and stave off competition from rising contenders like the Adani Group.
Let’s delve into the details of this significant transaction and its potential impact on the industry.
The deal: Breaking down the numbers
UltraTech Cement, India’s largest cement producer, will purchase up to 7.06 crore equity shares of India Cements at a price of ₹267 per share. This investment is non-controlling, meaning UltraTech will not have direct control over India Cements’ operations. However, it will secure a substantial minority stake, effectively preventing rivals from making a bid for the company.
The regulatory filing announced on Thursday stated that the acquisition would be completed within a month and will be executed entirely in cash. This move has already influenced the stock market, with UltraTech’s share price rising by 4.5% to ₹11,637 per share and India Cements share price surging by 10% to ₹288.86 per share.
A strategic move amid fierce competition
UltraTech’s decision comes at a time when the company is feeling the heat from the Adani Group, which has been aggressively expanding its cement business.
The Adani Group entered the cement market in September 2022 by acquiring Ambuja Cement and its subsidiary ACC from the Swiss Holcim Group. Since then, it has rapidly grown to become the country’s second-largest cement maker.
The Adani Group’s capacity expansion and cost-cutting measures have posed a significant challenge to UltraTech’s market leadership.
With the recent acquisition of Hyderabad-based Penna Cement for ₹10,422 crore, the Adani Group aims to reach a manufacturing capacity of 140 million tonnes per annum (mtpa). In contrast, UltraTech’s consolidated cement manufacturing capacity stands at 152.7 mtpa, significantly ahead of Adani’s 77.4 mtpa.
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Impact on India cements
India Cements, based in Chennai, has been struggling with high operating costs and working capital shortages. As of December 31, the company recorded an EBITDA of just ₹241 per tonne of cement produced, compared to over ₹1,100 for industry giants like UltraTech and Ambuja.
EBITDA, or earnings before interest, tax, depreciation, and amortisation, is a key measure of operational efficiency.
Care Ratings, a credit rating agency, downgraded India Cements’ long-term credit rating to BB+ with a negative outlook in February. The agency cited weak operating performance and high power and fuel requirements.
The agency noted that India Cements’ net debt to EBITDA ratio would remain stretched unless the management resorts to deleveraging by equity infusion or significant sales of non-core assets.
Market reaction and shareholding patterns
The announcement of UltraTech’s acquisition had an immediate positive impact on the stock market. Shares of India Cements jumped by 9.5% to ₹288.10 apiece on the Bombay Stock Exchange (BSE), while UltraTech’s shares rose by 2.8% to ₹11,461.00 each. This uptrend in India Cements share price is part of a broader positive movement observed over the last two sessions, marking a 26% increase over two days.
As of March 2024, the promoter group of India Cements holds a 28.42% stake, while prominent investor Radhakishan Damani and his associates control 20.78%. UltraTech’s acquisition is expected to create value for shareholders and enhance market competitiveness.
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Industry consolidation and future prospects
The Indian cement industry has been experiencing a resurgence, driven by increased government spending on infrastructure and housing projects. Experts predict further consolidation in the sector as larger players achieve better cost efficiencies due to their scale, pushing smaller players out of business.
UltraTech’s investment in India Cements is a strategic step towards consolidating its position in the southern region, where India Cements has a strong presence. The infusion of capital and association with a market leader like UltraTech can boost India Cements’ financial stability and operational capabilities.
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A look ahead
UltraTech Cement’s bold move to acquire a 23% stake in India Cements is a testament to its commitment to maintaining market leadership amid fierce competition. This acquisition not only strengthens UltraTech’s position but also highlights the growing trend of consolidation in the Indian cement industry.
As the acquisition process unfolds, the market will be closely watching for the long-term impacts of this strategic move. For now, both companies stand to benefit from synergies that could enhance their market positions and pave the way for future growth.
In an industry poised for further consolidation and growth, UltraTech’s investment in India Cements marks a significant milestone, setting the stage for exciting developments in the cement sector.
