Post its induction of the cement industry veteran Anil Singhvi for its natural resources business, Reliance ADA Group is now looking at acquisitions of small and medium cement companies. A Business Standard today said that the group has already initiated talks with various small and medium sized companies, while it has also hired a merchant banker to shortlist acquisition targets.

VC Circle spoke to analysts tracking the cement sector and found that there could be some regional cement players - large and small ones - whom ADAG could look at acquiring. “RS Lhoda could look at exiting the cement business but it may take a call on this only after Lodha’s claim on MP Birla group is settled,” said an analyst, who did not want to be named.

Lodha has cement plants at Satna (Madhya Pradesh) and Chanderia (Rajasthan). Lodha’s cement plant might prove useful to ADAG Group’s 4,000 MW mega power project at Sasan. Analysts further reckon that Binani Cement and Saurashtra Cement could also be the likely candidates for a sell-out. Other potential targets could be JK Cement, Jaypee Group, Prism Cements and Sidhee Cements.

VC Circle does not have an official response from any of these manufacturers nor is to say that any of these cement manufacturers are up for sale. But analysts find some of them as probable buyout opportunities.

Nearly all cement companies are expected to report a dent in its operating margins on account of rising input costs (especially coal) and higher freight expenses, the analysts said. Profitability will also be impacted owing to higher depreciation and interest cost due to capacity additions.

“It’s all about the timing. I would rather not enter a business when the margins are expected to be under pressure than be in it when margins have already come under pressure,” said a senior analyst with a Mumbai based broking firm. He said that it is still too early to enter the cement market even if the ADAG Group is eyeing the real estate and infrastructure space because excess supply coupled with cost push will put margins effectively under pressure.

The current down cycles have been significant for the industry and the revenues are expected to witness single-digit growth as compared with the same period last year, while net profit is likely to decline.

So, there could be players who could be interested in selling out and looking to exit the cement business which is facing legitimate concerns of high input costs, high freight expenses, excess capacity amidst reduced demand, and the limitation of being a regional player. Also, a large chunk of the cement industry’s revenues goes to the exchequer as tax and loyalty payments.


Dwindling Margins

“A cement industry by its very nature has to be a regional player. The input costs are escalating and the coal component is very expensive. There is excess supply and the demand for cement is growing at 8% annually which could see a slowdown if the current cycles don’t improve. We see a reduction of 400-500 basis points in the margins,” says another analyst with another Mumbai based broking firm, who adds that “the situation should improve by the end of this year.”

However, the companies are not facing any kind of selling pressures as yet. So the ADAG Group will have to offer a high premium for these acquisitions. Unlike the previous cycles, where the cement companies were overleveraged and were facing pressures of capacity additions and selling out (when we saw an Ultratech-Grasim sellout happening), the scene is different now. Most of these tier II players are managing cash flows and funding through internal accruals and have stable financial help, also available in the form of private equity to a few players. There would be players mostly in the tier II cities who would be willing to sell out and there could be some consolidation in the cement players of southern India as the top players in the space constitute the northern region.

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