Rakesh Arora, Founder, Go India Stocks, says despite decent demand and being in one of the best seasons for demand, cement prices have gone down, which is a rarity. Until and unless the market share grab game continues, cement prices are probably going to take a back seat. Also, if you are looking to acquire some companies, it probably makes strategic sense to have low cement prices and put pressure on these guys so they sell out at cheap valuation. So, that could also be one of those possibilities. Overall, cement prices would remain a little bit weak in the near term and cement companies will have to contend with lower profitability but investors might look beyond that and expect consolidation in the industry and pricing power coming back.
Cement sector has been going through a consolidation of late. Also, many big players have come out and talked about ramping up their capacities.
Rakesh Arora: We have two big groups jostling with each other to grab market share. UltraTech is the undisputed leader right now and as you were mentioning about the big capacity they already have and the expansion plan they are rolling out. Adanis have come into the fray with acquisition of Ambuja and ACC and have made it very clear that they want to be the number one player in cement. There is a lot of catch-up that they need to do because their capacity is closer to around 80 odd million tonnes after the acquisition of Sanghi Industries. There is still a big gap between them and UltraTech. They would not be able to bridge this gap just by doing organic growth. They will have to look for inorganic acquisitions.
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While Sanghi, Ambuja as well as ACC are under the blanket of the Adani Group, Along with UltraTech, the AB Group is in talks with the promoters of Orient Cement also. There are other small players as well like India Cements as well. What is the prospect for these smaller cement players going ahead? Do you see aggressive consolidation taking place in cement sector?
Rakesh Arora: First of all, UltraTech recently acquired Kesoram, and Orient Cement’s plants are not very far from where Kesoram plants are. So, one needs to really evaluate whether UltraTech will be able to get CCI approval and all that, that is number one for Orient. So, I doubt if UltraTech alone could be the frontrunner here.
Coming to smaller companies, India Cement is the largest one, but their plants are not that great and valuation that India Cement can command will also not be that high. Overall, probably the deals for cement companies will happen between $80 to $90 per tonne of capacity, so investors need to kind of evaluate what they are buying and whether it is really cheap and there is some upside still left or not.
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Dalmia Bharat is coming out with a commentary that the price hikes could be a little delayed. Since we are seeing a lot of consolidation in the sector, with major groups acquiring the major part of the industry, what is your view on the pricing power in the industry? Cement prices are at levels seen a decade ago. So, no substantial change on the pricing front. With this consolidation, will there be more legs on pricing front?
Rakesh Arora: No. I do not think it is correct to say that cement prices are stuck at where they were 10 years ago. Cement prices have increased. It is only of late that we have seen sharp correction in cement prices and that is reflected in the first cement company which reported yesterday, Dalmia Bharat. Their margins have dropped and this is happening because both UltraTech and Adani are looking to grab market share.
So, despite decent demand and being in one of the best seasons for demand, prices have gone down, which is a rarity. It does not happen all the time. So, until and unless this market share grab game continues, cement prices are probably going to take a back seat, so that is point one. Point two, if you are looking to acquire some companies, it probably makes strategic sense to have low cement prices and put pressure on these guys so they sell out at cheap valuation. So, that could also be one of those possibilities.
Overall, cement prices would remain a little bit weak in the near term and cement companies will have to contend with lower profitability but investors might look beyond that and they will look at consolidation happening in the industry and pricing power coming back eventually.
