Bullish outlook for cement sector acquisitions in India
The ongoing consolidation in the Indian cement industry is expected to accrue three significant benefits to the acquirers over the medium term which include wider geographical reach, access to crucial limestone reserves, and economies of scale, according to a Crisil report released on Monday.
These benefits will more than offset a marginal increase in the financial leverage of the acquirers and thus, support an improvement in their credit profiles over the medium term, it said.
The consolidation began in fiscal 2024, with 51 MT of capacity acquired to date and an additional 14 MT worth of buyouts announced, which are likely to be completed by the first half of fiscal 2026, the report stated.
While the industry has a record of buying capacities in quick succession, the current phase, with about 11 per cent of the installed capacity changing hands, is the highest ever in a block of two years.
Crisil Ratings's Senior Director Manish Gupta said: "The recent spate of acquisitions is providing the acquirers an opportunity to scale up quickly and strengthen their market position, as well as access to captive limestone mines more economically. Additionally, around 92 per cent of capacity being acquired will enable acquirers to expand footprint in their existing regions and result in lower lead distance."
Inorganic growth also obviates the higher project implementation risks associated with organic expansion, in terms of procurement of land, tying up limestone mining leases, setting up clinker, grinding and captive power capacities, and stabilising the plant post-commissioning, he added.
Crisil Ratings's Director Ankit Kedia said: "One of the major drivers of the surge in acquisitions recently is reasonable valuations. The average enterprise value of Rs 8,000-9,000 per tonne in this round is comparable to the cost of setting up a greenfield integrated cement plant. That’s because about 81 per cent of these were distressed assets and were sold at a discount. Plus, over 90 per cent of the capacities acquired were funded through existing liquidity and operating cash flows, with minimal reliance on external debt, keeping financial leverage in check."
Post the acquisition related payout of Rs 41,000 crore over fiscals 2024-2026 for acquisitions, the net debt to Ebitda ratio for the sector is expected to inch up to 1.2-1.4 times in fiscal 2026 from about 1.0 time at the start of fiscal 2024, the Crisil report observes.
Despite this, the sector’s overall credit profile will improve as consolidation will strengthen the business profile of acquiring entities with improved access to limestone – a key raw material, better market accessibility, and rising scale economies in their regions, the report states.
The Crisil report states that over the medium term, consolidation may also reduce competitive intensity, enhance pricing power and improve players’ ability to manoeuvre commodity cycles, which could improve margins.
