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Monday, Dec 23, 2002

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17.5 mt cement capacity up for sale

Dinesh Narayanan
Kripa Raman

MUNBAI, Dec. 22

WHILE the battle for the control of engineering major Larsen and Toubro - arguably for its 16.5 million tonne per annum cement manufacturing capacity - moves from boardrooms to courtrooms, nearly 17.5 million tonnes of cement-making capacity in the country is up for sale.

According to merchant bankers, companies such as Mangalam Cement, Saurashtra Cement, Sanghi as well as plants of the India Cements group are on the block, totalling nearly 17.5 m.t. of capacity. Many of these cement makers are in talks to exit from the business, the vagaries of which have exhausted those with relatively small capacities, say the merchant bankers.

Mr Ashok Wadhwa, Managing Director of Ambit Finance, who is currently helping a company sell off its cement business, says, "The cement industry is ready for consolidation. There are several players who want to exit the business, but are holding on as a `right buyer' has not materialised.''

Apart from the big four - L&T, ACC, Gujarat Ambuja, and Grasim - which among them control more than 50 per cent of the country's total cement capacity of 135.5 million tonne per year at the last estimate, the other companies are sitting ducks for buyers on the prowl.

Mr Udayan Bose, Chairman, Lazard India, who advises global cement majors such as Italcementi and Lafarge, says, ''I would say that all the capacity, apart from that of the big four, could be bought by larger players.'' Senior executives at heavyweights Grasim and L&T agree; in fact, they say as much as 40 m.t. of capacity could be up for sale. L&T is said to be keenly interested in expanding capacity through acquisitions: "We are interested in plants in geographies where we do not have a presence as well as in geographies where we can cut transport costs,'' said a senior executive.

The Cement Manufacturers' Association feels the estimate of 17.5 m.t. is closer to the current reality. Says Mr. A V Srinivasan, Secretary General, CMA: ''At present, we would say 17.5 m.t. is the right figure, consisting of capacities which are actively ready for sale; however, over the next decade there could be 40 m.t. capacity up for sale.''

While it is a dismal period for many a cement plant, the sellers would also be looking for the best price which they cannot currently fetch. "There would mismatch of valuations between buyer and seller,'' says Mr. Srinivasan.

However, some deals appear to be close to execution. Says Mr. Bose: "We are currently talking to two-three companies on behalf of our foreign clients. The discussions are pretty hot.''

Italcementi, whom Mr. Bose advises, recently bought Vishnu Cement; it also has a half-stake in Zuari Cement, promoted by the K K Birla group.

However, the big-ticket deals remain elusive. One reason is the geographically-scattered nature of the plants. Besides, even though there are many sellers, valuations are not matching.

"The balance sheets of many of the buyers are already stretched. For example, Lafarge, which was looking for good buys has gone slow after it bought Blue Circle globally. The biggies are unlikely to spend heavily on purchasing capacity unless the valuation is very attractive,'' says Ambit's Wadhwa.

The slump in the industry over the past couple of years has also taken its toll on valuations. In 2001-2002, the total production capacity in the country was underutilised by almost 10 per cent. Margins of most cement makers were under pressure during the last two years because of poor realisation. While prices have improved since then, the southern and eastern markets are still under pressure.

When Lafarge entered the country by buying out the Singhanias from Raymond's cement business, it had valued the business at about $70 per tonne. Gujarat Ambuja also paid about the same price to buy the Tatas stake in ACC. But is $70 still the benchmark?

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