THE cement sector in India continues to witness a lot of churning with mergers and acquisitions, though dominated by less than half a dozen major Indian and international producers.

Leading international cement producer LafargeHolcim is a key player in the Indian cement industry. The group owns both Ambuja Cement and ACC and has been trying to merge these two giants.

Earlier this month, LafargeHolcim initiated steps that could lead to the merger of its two major Indian companies. Directors of both the companies set up a special committee a few days ago to evaluate the benefits of merger.

“No decision to merge has been taken and our board will decide on a merger upon receiving recommendation from the special committee and the audit committee,” the two listed companies said. The merger would result in hefty savings of between Rs5-10bn.

LafargeHolcim has a more than 63pc share in Ambuja, which has a nearly 55pc stake in ACC. The two companies also have a combined cement capacity of more than 63m tonnes

LafargeHolcim has a more than 63pc share in Ambuja, which has a nearly 55pc stake in ACC. The two companies also have a combined cement capacity of more than 63m tonnes.

If they merge, the new unit will be the second-largest producer of cement in India. The largest producer is Aditya Birla group company UltraTech, with a combined production of 70m tonnes. However, UltraTech’s capacity will shoot up to more than 90m tonnes after it completes the acquisition of the cement assets of the Jaypee group.

Interestingly, Lafarge India had sold its cement assets last July to Nirma Ltd, a leading Gujarat-based soap and detergent manufacturer, for $1.4bn.

A few months later, Anil Ambani’s Reliance Infrastructure sold its cement unit to Birla Corp, the flagship of the MP Birla group for almost Rs50bn.

Earlier this year, JSW Cement decided to buy the promoter’s holdings in Shiva Cement. And a few months earlier, two other companies — Dalmia Bharat and OCL India — also cleared a plan to merge. All these companies together account for nearly half of India’s cement production.

The industry has been undergoing major changes with several business groups moving out of the sector. Tata Steel, Larsen and Toubro and Raymond are major business groups that have sold their cement units to others. And international investors including Blackstone, Mexico’s Cemex group, and China’s Anhui Conch, have also shown interest in acquiring cement companies.

India currently has a production capacity estimated at about 420m tonnes. It is expected to rise to 550m tonnes by 2025. India is the second-largest producer of cement after China, which produces nearly 2.5bn tonnes.

But the cement industry in India faced a setback this month after the GST Council announced that the commodity would attract a tax rate of 28pc. Many cement producers believe that the high tax rates would discourage buyers from acquiring large quantities of cement.

Motilal Oswal Securities, in a note, said that the GST rate of 28pc is neutral as the rate differential of 1-2pc would be passed on to the end consumer, which should not impact profitability.

THE cement sector in India, which suffered a harsh setback over the past few months, especially after the demonetisation of the rupee late last year, has finally started recovering.

The demonetisation of the rupee, which saw the government withdrawing 500 and 1,000-rupee currency — the two notes made up more than 85pc of the currencies in circulation — hit the cement sector the worst.

Slackening demand for cement saw production fall sharply — for the first time since 2001 — along with prices.

“With the impact of demonetisation gradually subsiding, cement prices have reached the pre-demonetisation levels in April in most markets,” said Sabyasachi Majumdar, senior vice-president and group head at ICRA Ratings. “Going forward, we expect prices to be supported by a marginal improvement in capacity utilisation.”

The slowdown in new capacity addition and improvement in the supply-demand scenario in FY18 should support capacity utilisation levels and thereby cement prices, he added.

Last year, a significant chunk of production capacity remained idle because of falling demand from December. Overall, cement demand expanded by a mere 5pc during the entire fiscal.

According to experts, demand for cement should outpace GDP growth in a developing economy like India. The damage caused by the rains and the demonetisation of the rupee hit the cement sector in India last year.

However, the past few weeks have seen a revival in demand for cement. “The slowdown in new capacity addition and improvement in the supply-demand scenario for FY 2018 should support capacity utilisation levels and thereby cement prices,” adds Majumdar.

ICRA expects cement demand to grow by almost 5pc in fiscal 2017-18, thanks to the rapid growth in the infrastructure sector in the country. Analysts expect demand to soar with the government continuing to push several projects, including the ambitious 100 smart cities project and the ‘Housing for All by 2022’ programme.

A report by the research desk at ICICIdirect.com earlier this year noted that the government’s focus on infrastructure development and its new thrust on affordable housing projects are expected to drive cement demand over the coming years.

“Healthy monsoons are expected to drive demand for rural housing thereby further boosting cement demand,” said the report. “Consequently, cement demand is expected to reach 323MT by FY19E (i.e. at CAGR of 7.0pc) vs. (CAGR of 5.4pc over the last five years). In addition, we expect an improvement in pricing to continue especially in the north-led by a demand pick-up.”

Analysts at Elara Capital, a brokerage, expect demand to surge to 7pc in the next fiscal and 8pc thereafter. “We expect all-India utilisation to have bottomed out in FY17, due to demand recovery and limited capacity addition,” says a report by the firm. “We expect north and central India to regain pricing power.”

Demand from the rural areas is also expected to soar thanks to the record rise in foodgrains production, which is expected to top 272m tonnes.

Published in Dawn, The Business and Finance Weekly, May 29th, 2017