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Low valuations on Indian cement market affect mergers

World Cement,

India has the world’s second largest cement market, and it is currently weighed down by overcapacity. Reports of consolidation have been rife, but so far only two deals have come to light. Firstly, the private equity firm, Kohlberg Kravis Roberts & Co based in the US has bought a 20% stake in Dalmia Cements’ Avnija Properties. Secondly, French Vicat SA has bought a controlling portion in Bharathi Cement based in Hyderabad.

Other deals have not gone through, and blame is assigned to the rising input cost, weak pricing power and consequentially, the lower valuations. Deals, which reportedly fell through recently, include Nagpur-based Murli Agro’s with Italicementi and Cemex, and the Hyderabad-based Penna Cements with Cemex.

The largest cement manufacturer in the world, Holcim AG owns controlling stakes in both ACC and Ambuja Cements, and is now said to be assertively seeking out acquisition targets in Rajasthan. Holcim is reportedly not interested in paying more than US$120 – 130/t, which is tough as analysts are stating no one is interested in selling at such a low valuation.

Holcim has been talking to Wonder Cement, owned by RK Marbles. An analyst commented, Wonder Cement has a 2.5-3 million tpa capacity, alongside limestone reserves making a buyout possible, but nothing concrete has come out of the talks as of yet.  

In the south, smaller players are supposedly asking for US$150 – 160/t, which is impossible under the conditions of the present market. Prices are set to decline in three month’s time as the monsoon season approaches.

During the past couple of months, the average capacity utilisation in the cement industry has been at 71%. “Ensuring profitability with such numbers is a difficult task,” said the analyst.

Between 2005-08, the average value of cement acquisitions was US$168/t compared to the US$121/t figure, a decade prior.

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