Pan-Indian presence: With ACC and Gujarat Ambuja, Holcim acquires a pan-Indian presence and a control over capacity of about 35 million tonnes, which accounts for 25 per cent of the industry. Holcim's presence will be especially dominant in the western and northern markets.

Having fast-tracked its entry into the Indian market, Holcim is also well-placed to add capacity by a combination of acquisitions and modernisation/expansion at existing units over the next two-to-three years and new capacities over the longer term.

We expect the focus to be on expansion market share and consolidation of leadership by expanding the edge over Grasim.

Performance enhancement: The association with Holcim is bound to sharpen Gujarat Ambuja's edge as the most efficient player in the cement industry. Operating consistently at operating profit margins of 30 per cent, there may have been only room for marginal improvement at Gujarat Ambuja. This is, however, an area where Holcim's expertise, especially in the use of alternative materials and fuels, could make a difference.

Even if it leads to a margin expansion of a couple of percentage points over the longer term, the impact on earnings will be significant.

At the global level, Holcim targets a 30-per cent margin; Gujarat Ambuja is up there now and could emerge as one of the higher margin plays in the Holcim fold.

Financial strength: Benefiting from robust volume growth and higher cement prices, Gujarat Ambuja has further strengthened its financial prowess over the past couple of years. It has also not made any big move in acquisitions for over five years now. The presence of Holcim will also enhance its considerable clout in raising finances at attractive rates — equity or debt — in the global markets.

As it has no plans for new capacities over the next couple of years, the company is well placed to be active in acquisitions. It had indicated in late 2004 that the focus would be on the northern/western markets. One can add the south to that list, as Holcim is likely to aim for a strong presence across the country.

Slack in south: If there is a gap in the portfolio, it is the relative lack of clout in the south, especially Tamil Nadu and Kerala as, compared to the northern and western markets, the latter are markets with promise from a longer-term perspective. The negatives — sluggish demand growth, complex tax systems and excess capacity — that have dogged these markets in recent years also appear to be on their way out.

Given the long-term growth prospects, we will not be surprised if Holcim starts examining cement properties for acquisition in these markets over the next one- to three-year period. The likes of Madras Cements (its owners are best placed to get a handsome price though they appear an unlikely candidate to sell) Dalmia Cement, India Cements, Chettinad Cement and Mysore Cements may be on the radar of Holcim, other MNCs and Grasim.

Challenge for Grasim: Holcim and Grasim now control a tad over 50 per cent of the cement market. On key parameters, the Holcim group is in a superior position. Grasim is a strong second player. It may have to do more to stay with Holcim in the industry sweepstakes.

There is also the possibility that this development could hasten the integration of Grasim and UltraTech Cement. We maintain a `hold' on UltraTech Cement and a `buy' on Grasim, with a one-to-two year perspective.

Industry impact: The imminent consolidation could lead to a robust market for acquisitions. Prism Cement, JK Cement, Binani Cement, Jaiprakash Associates, Orient Paper and OCL may be prominent targets among companies with a presence north of the Vindhyas. Other MNC aspirants could also sharpen the focus on India Cements, as it is one of the two remaining properties that offer a sizeable capacity (the other being Jaiprakash Associates).

Capacity creation is likely to become more disciplined, as the smaller players will now have to contend with Holcim and Grasim across the country. Lenders and equity investors may also take a cautious view in bankrolling new projects by companies with less than five million tonnes capacity. With demand growth staying at close to 10 per cent and limited additions to supply, expect cement prices to stabilise at higher levels than in the past few years.

One umbrella

THE most interesting prospect over the longer term is the possibility of a merger of ACC, Gujarat Ambuja and Ambuja Cement India. As long as Gujarat Ambuja held the strategic stake in ACC, we had held the view that a merger of the two was unlikely; this was underpinned by our belief that Gujarat Ambuja would not have wanted to combine the lower efficiency capacities of ACC with its top-of-the-chart operations. It would have had a negative impact on its valuation and balance-sheet.

Holcim may, however, have no compulsion to keep its operations under different outfits. At the global level, when Holcim consolidates revenues and earnings, it will not make a difference even if the operations are brought under one fold. A merger may also enhance Holcim's stake by a few percentage points. There may also be sizeable cost benefits in procurement, logistics, administration and marketing.

Holcim can also be expected to pursue every option that enable it to fast-track the payoffs from its substantial investments in India over the past year. If the open offer for Gujarat Ambuja goes through at the intended level, Holcim will have invested close to $2 billion over an 18-month period. We do not expect a merger in six to 12 months; beyond that, we will closely track moves on this score.

Recent changes to the board of ACC also strengthen the likelihood of a merger. Listing status is likely to be maintained in line with Holcim's approach in other emerging markets.

We have maintained a positive take on Gujarat Ambuja Cements for several years now. The entry of Holcim only strengthens our view of its long-term prospects. A merger will also not be a negative, as the swap ratio will take care of the superior quality of Gujarat Ambuja's operations. Our near-term view is tempered by the sharp price rise over the past couple of months and the open offer that will open next month.

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