Buyout plaster on the wall

It is a churning process. Cement makers, threatened by foreign predators and saddled with excess capacity, are walking into the waiting arms of rivals to meet the challenges of a market which appears to have more companies than eager buyers.

So, while over-stretched conglomerates � which dabbled in cement when getting bigger was in fashion � look for buyers, firms which are more serious about cement are snapping up factories or buying equity stakes faster than their sales machines.

But, why is the world�s third largest cement industry (after China and the US) in a tearing hurry? One reason is the fear among many local firms of being swallowed by global cement majors, which cannot resist the temptation of operating in a massive market now showing signs of stronger demand.

At the same time, their are others, like the Singhanias of Raymond, who thought they had had enough of cement, and that they would make more money from selling suiting and premium fabrics. So, they decided it was better to sell off their 2.24 million tonne cement division to Lafarge India � a company that has suddenly stirred up a dormant market in eastern India.

Analysts cite an 8 per cent growth in anticipated demand � mostly from housing and infrastructure � as a sharp contrast to some other countries in Asia, where demand growth has virtually tapered off. This is reason enough for a shake-up.

However, while demand is picking up, it still trails supply. As a result, companies have resorted to price-wars and taken their battles for market-share to new turfs. Intense competition has meant thinner margins, and a situation in which no supplier is dominant enough to influence prices. This forces companies to join hands with rivals in the quest for growth. Even business families that split earlier are coming closer to each other in a bid to increase their valuations.

Industry grapevine has it that the Birla clan � with the family patriarch Basant Kumar Birla, Chandra Kant Birla and Sudarshan Kumar Birla � are coming together to cement their strengths.

While domestic companies redefine the contours of the industry, French giant Lafarge has different a reason to lap up local firms � it is to consolidate its presence in a fragmented market in the eastern region.

�Due to the proximity of Raymond�s cement plant to the key eastern market, this acquisition is an important strategic step for Lafarge in India,� says Lafarge India CEO Thomas Farrell. �Our paradigm is to focus on our core businesses,� Gautam Hari Singhania, managing director of Raymond Industries, said when the deal with Lafarge was announced:

Even the Tatas are pulling out from their cement business, first by selling Tisco�s 2-million tonne cement unit to Lafarge, and later striking a lightening deal with the Sekhsarias of Gujarat Ambuja to sell their ACC stake in a two-step deal, which took the entire industry by surprise.

So, is the consolidation phase over or is there more in store? After Lafarge and the Netherlands-based Holderbank tasted blood, can Mexican cement giant Cemex be far behind? Not really. The industry is already rife with rumours about Jaiprakash Industries and Cemex being close to a deal.

Industry analysts are not surprised by the shake-up. Years of rash expansions, as companies set-up fresh greenfield capacities, led to too much supply and suicidal price-wars. The figures are telling. While consumption grew 7.8 per cent in 1999-2000, 5.3 million tonnes of new capacity was added. The increase in demand in the first six months of the year was exceptionally strong at 20 per cent. It decelerated in late 1999.

Analysts say the trouble is that many companies operate at 120 per cent of their capacities. �In the east, manufacturers reached an understanding on prices, but how long will it last? Meet, eat and cheat appears to be the credo,� said a seasoned analyst about how companies do not honour their side of the agreements on keeping prices stable.

�There should be some discipline. They will learn only when the red ink spills over into the balance-sheets. The margins are nothing to make companies laugh their way to the bank. In fact, its wafer thin as costs like diesel, freight and electricity mount,� says another analyst.

Companies like Gujarat Ambuja and Grasim maintain that their margins are in the region of 10-12 per cent but analysts are not buying that .    


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