The impact of UltraTech-Century deal on cement prices

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UltraTech Cement Ltd is on an acquisition spree. The latest addition to its shopping basket is the cement business of Century Textiles and Industries Ltd.

UltraTech will acquire 13.4 million tonnes per annum (mtpa) of Century Textiles’ cement assets for an enterprise value of Rs8,600 crore. With that, the pan-India cement producer’s presence in the eastern (Chhattisgarh), central (Madhya Pradesh) and western (Maharashtra) markets will strengthen further.

Following this acquisition, the company’s domestic capacity will increase nearly 15% to 106 mtpa from 92.6 mtpa (see Chart 1) Its all-India capacity market share will rise from around 20% to 23% by the end of the current fiscal year (FY19). Region-wise, its capacity market share would improve by 7%, 6% and 8% in the central, eastern and western markets, respectively, say analysts.

Moreover, UltraTech’s cement capacity will stand augmented to 109.9 mtpa including its overseas operations, making it the third-largest cement maker in the world, outside China (see Chart 2).

While the deal does not give UltraTech Cement access to newer markets, it clearly consolidates the company’s dominant position across these regions.

This may be good news for the company’s shareholders , but would get its competitors in these regions worried because, despite this being the busy construction season, the sector’s demand growth is not strong enough to support higher prices. And with increasing competitive intensity, if UltraTech Cement decides to aggressively chase volume growth, cement prices, which have slowly begun to rise, would suffer again.

This is the company’s second acquisition in two years. As for the first one, it is ramping up the 21 mtpa of cement capacities acquired from Jaiprakash Associates Ltd. That, coupled with a ramp-up of capacities by other large cement producers such as Shree Cement Ltd, has kept cement prices in north India under pressure.

So much so that cement prices on an all-India basis inched up in May, but the north remained a laggard.

It should be noted that a final decision on the acquisition of Binani Cement Ltd is still pending. UltraTech Cement is desperately trying to acquire those assets, and ramping up of capacities by the acquirer would also have a bearing on cement prices in Rajasthan.

As for other regions, cement prices in the west saw the highest increase of Rs14 per bag on a month-on-month to Rs324 per bag in May, showed a monthly cement dealer channel check report by Kotak Institutional Equities. One cement bag weighs 50kg.

The price increase in Maharashtra was moderate at Rs8 per bag from a month earlier. In the central region, prices in Madhya Pradesh fell by Rs5 per bag month-on-month and prices in the east remained flat at Rs337 per bag in May, the report added.

Meanwhile, the transaction with Century Textiles is subject to the Competition Commission of India’s approval and is expected to be completed in the next six-nine months.

In any case, the scenario remains challenging as far as input costs are concerned, and if cut-throat competition leads to larger cement companies pushing volumes at the expense of prices, then smaller cement makers may not be able to survive the pressure.livemint