Adani group eyes cement capacity in South India

The aggressive growth ambitions of the Adani group in cement have never been a secret. They picked up 70 million tonnes per annum (MTPA) of cement capacity in India in one scoop by buying out Holcim’s stake in ACC and Ambuja Cements. At 70 MTPA, Adani is already the second largest cement player in India after Ultratech with Shree Cements and Dalmia cements at third and fourth place. But, Adani is not stopping at that. Over the next 5 years, Adani is planning to double cement capacity to 140 MTPA. Obviously, that kind of capacity expansion cannot come from greenfield projects and it has to be inorganic growth.

The coming years is likely to see cement capacity wars heating up in India. Ultratech of the Aditya Birla group, which has about 120 MTPA of cement capacity is planning to touch 200 MTPA capacity in the next 6-7 years. During this same period, Adani will also expand to 140 MTPA. Not to be left behind, Shree Cement is likely to get closer to 90 MTPA and Dalmia will also get closer to 50 MTPA in this space. But let us come back to the core of this story. Adani is seriously eying cement capacity in South India for his inorganic growth. And that is sending jitters down South based cement companies on fears of a hostile takeover.

Adani group not only has the ambition and the appetite for scale, but also the funds and the access to funds to back up such ambitions. For the combined capacity of 70 MTPA via ACC and Ambuja, Adani group has paid nearly $10.5 billion. So buying a few south Indian cement companies would not be much of a problem for the Adani group. That was obvious in the latest AGM of India Cements, the largest cement player in South India. He has been worried about Adani making a hostile bid for India Cements to expand capacity. After all, buying India Cement directly gives Adani access to about 15 MTPA of cement capacity.

There is also a macro story that Adani has been heavily betting on in his cement foray. For instance, the per capital consumption of cement in India is just 250 kg compared with 1,600 kg in China. That is a huge headroom for growth and Adani wants to capture this massive growth potential in cement demand. It is already planning to infuse another Rs. 20,000 crore into the cement business to make it globally competitive. Not surprisingly, while the larger cement players in the south like India Cements are worried, smaller players and mini cement plants will look at Adani as offering a profitable exit route from their business.

Why is Adani looking down south for cement capacity?

That raises a very pertinent question. Why is Adani looking down south for cement capacity. Firstly, the cement capacity in the West, North and East is already consolidated. It is already owned by one of the big groups like Birla, Bangur, Dalmia or Singhania. These capacities are not available for sale as these companies themselves have ambitious plans for the business. That only leaves the South for acquisition of cement plants. But, there are some very fundamental reasons why Adani is looking at south for his cement expansion plans.

1. Out of the total 642 MTPA of cement capacity in India, South India has the chunk of the capacity at 197 MTPA. More importantly, this capacity is fragmented across as many as 43 players, so buying out smaller units would be a lot easier.
    

2. The acquisition of ACC and Ambuja has only given limited access to Adani to the Southern markets. Out of the 70 MTPA capacity that Adani has in cement, only 9 MTPA is in South India and that too is in North Karnataka around the Wadi belt.
    

3. Adani also feels that the buying of South cement capacity will not attract the attention of the Competition Commission of India (CCI), since it does not breach the thresholds for market shares set by the CCI.
    

4. One more reason for Adani looking at the South is that a number of players here are financially stretched. The situation in South is hugely skewed as the output is 150 MTPA but consumption is just 80 MTPA. Shipping to other places could be lucrative.
    

5. One of the reasons, the south has been a buyer’s market is the excess supply. With greater consolidation with the likes of Adani coming in, the south based cement companies can be price setters in the future.
    

6. Most of the cement companies in South are making record low EBITDA per tonne. Comparatively, Adani can pay top dollars for the capacity in terms of EBITDA per tonne, which is what he paid for ACC and Ambuja. Obviously, smaller players in south are hardly complaining and would look at an honourable exit route.

Not all cement players in the south would be happy, especially not the larger players like India Cements. However, for scores of smaller fragmented cement plants in south India, Adani may come as a blessing in disguise.