Delhi-based Dalmia Cement (Bharat) made headlines recently with the acquisition of a 1.5-million-tonne plant in Meghalaya. The plant was owned by Adhunik Cement, a joint venture between the Adhunik Group and MSP Group. The acquisition of Adhunik Cement will make Dalmia Cement one of the largest manufacturers of cement in North-East India. IDFC Capital was the advisor for the deal.

The acquisition had surprised many as the cement sector itself is going through a challenging phase. Capacity utilisation has dropped across the country. The economic slowdown has also led to a fall in investment in major infrastructure projects.

Ankur Dalwani, Managing Director, IDFC Capital (Investment Banking), spoke to Business Line on mergers and acquisitions (M&A) in the cement sector.

What will trigger consolidation in the cement sector?

The valuation of cement companies have become very attractive compared to what it was 10 years ago. In 2005-06, couple of deals happened at benign valuation as the market condition was not favourable. Deals were then struck at $80-$100 a tonne. Between 2007 and 2009, there was lot of interest from foreign players to enter India, as cement demand was at its peak. They paid a huge premium which resulted in deals being executed at a valuation of $200 a tonne. They were willing to pay the price for entering the fast growing market. Now, there is more of consolidation-led M&A. The all-India capacity utilisation at 90 per cent in 2007-08, dropped down to 75 per cent in 2010-11. Return on capital employed has also dipped and there is pressure on the economy. In this backdrop, deals are currently being executed at $140-$160 a tonne.

Why is consolidation on when cement demand is low?

I believe M&A is the best way to venture into new markets as buying land, getting approvals and tying up the required raw materials for new project is a Herculean task. Many companies with diverse business interest entered the cement business in 2006, on expectations that there would be a major boom in the sector. I believe, there will be a lot of consolidation-led M&As in the near future.

Why are few deals inordinately delayed?

Companies should set their house in order before entering the M&A market. Sellers can command a higher price if the plant is fully integrated with captive power plant, limestone mine and gypsum supply. The scope for further expansion will also be looked into when deals are struck. They should also be reasonable when it comes to valuation.

Which are the regions that command a premium in the M&A market?

More than the regions, buyers always look into the potential of the individual company before striking a deal. Having said that, buyers prefer cement plants in regions that are well connected by railways, as the cost of transportation is comparatively less. For instance, cost of cement production in the North-East is high, because it is not linked by railways. Power is also an issue. But integrated plants in this region are preferred, as the demand in this market is growing much faster. In the western region, there is pressure on prices due to the entry of new players. With reasonable capacity utilisation, the north and eastern markets look good. The southern region is more challenging with a capacity utilisation of 65 per cent.

Will the cartelisation charges stop foreign player entering the country?

I do not think so. Most foreign cement companies have already handled such situations in other countries and this will not stop them from entering a market with huge potential. Moreover, they will find it difficult to venture on their own as getting the necessary land and approvals will be a big challenge.

>Suresh.iyengar@thehindu.co.in

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