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Is there a new wave of consolidation in the Cement space                                                  If it happens, it will open a path towards value creation

Over the last one month, we have seen a 5-37% rise in Cement stocks, barring a few stocks (UTCEM, TRCL, and HEIM), which have underperformed off late. Rising hopes of a higher consolidation in the Indian Cement industry are behind the recent run-up in stock prices. Our interactions with Cement dealers suggest attempts at a price hike of INR10-20/bag in early Sep’22 in a few markets. However, to date, no material price hike has been taken, except an increase of INR5-10/bag in some parts of East and South India.

Change in industry dynamics can lead to higher consolidation

* The Adani group has forayed into the Cement business by acquiring Holcim’s stake in ACEM and ACC, which has a combined Grinding capacity of 68mtpa (70mtpa by 1QFY24E). The management aims to achieve an installed capacity of ~140mtpa over the next five years and believes that the group will be the largest and most efficient cement company by 2030.

* Other large players (UTCEM, SRCM, and DALBHARA) too have continuously hinted at expanding capacities through the organic and inorganic route. Based on capacity expansion announcements (organically) by Cement players till date, the top five players will continue to register a higher installed capacity CAGR of ~8% over FY22-25E v/s ~3% for the rest of the industry.

* Most of the bigger players are eyeing inorganic growth opportunities, which have gathered pace after the foray of the Adani group into the Cement business. For instance, SRCM, as per media articles, is exploring inorganic growth plans in Central and South India.

* A consolidation in the industry, if it occurs, will boost: 1) pricing power, 2) synergies in the form of cost reduction and operational efficiency; and 3) cross branding, which will help expand market reach.

Bigger-sized acquisitions can lead to a re-rating in smaller names

* Given the aggression shown by larger players in expanding capacity and the changing industry dynamics, there can be a capacity acquisition of 45-50mtpa over the next two-to-three years.

* Many regional players have not added capacities over the last few years, and, have, in turn, lost market share. Few players are finding it difficult to pare their leverage and may be willing to exit the Cement business at good valuations.

* The replacement cost of Cement plants is in the USD100-120/t range, with the acquisition of good assets historically at USD106-151/t. Many mid/small-sized companies are trading at an EV/t of USD48-87. However, the actual valuation will depend on asset quality, the strategic needs of the buyer, and the bargaining power of the seller.

* The anticipation of bigger acquisitions in the industry is driving the valuation rerating of regional and smaller players, which are trading at a discount to replacement cost. Historically, a valuation premium is assigned to assets based on their ability to generate cash flows and/or their market presence or operational efficiency.

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