Will UltraTech sustain its lead?

The Economic Times

This month’s approval by Competition Commission of India (CCI) to acquire the Jaiprakash group’s 21.1 million tonnes (mt) of cement assets will catapult the Aditya Birla Group’s UltraTech way ahead of its close competitor, Switzerland-based LafargeHolcim. On completion, the acquisition would see UltraTech’s cement capacity cross 91 mt, significantly widening its lead over LafargeHolcim, which controls ACC and Ambuja Cements. However, it is not this acquisition that has put UltraTech in the top slot but its aggressive growth strategy in the past decade.

This month’s approval by Competition Commission of India (CCI) to acquire the Jaiprakash group’s 21.1 million tonnes (mt) of cement assets will catapult the Aditya Birla Group’s UltraTech way ahead of its close competitor, Switzerland-based LafargeHolcim. On completion, the acquisition would see UltraTech’s cement capacity cross 91 mt, significantly widening its lead over LafargeHolcim, which controls ACC and Ambuja Cements. However, it is not this acquisition that has put UltraTech in the top slot but its aggressive growth strategy in the past decade.
From being a small player, UltraTech has consistently added capacities, entered new regions and made acquisitions. From 15.5 mt in 2004-05, its capacity has grown over fourfold to 66.2 mt in 2015-16, a compounded annual growth rate (CAGR) of 14.1 per cent.
It was in 2006-07 when the Holcim group acquired controlling stakes in Ambuja Cements (earlier Gujarat Ambuja) and ACC. Capacity apart, UltraTech’s earnings have also grown at a CAGR of 25.6 per cent and share price by 17.5 per cent in the past 10 years. However, UltraTech’s lead over its larger peers has come mainly in the past three-four years. In this period, the ACC and Ambuja Cements’ stocks have also lagged UltraTech’s by a big margin.
The combined capacities of LafargeHolcim (ACC and Ambuja) in India have remained 58-60 mt since calendar year (CY) 2011, excluding the 11 mt capacities of Lafarge India which is being sold to Nirma (deal announced in July). The sale is being done to meet CCI’s requirement for approving the merger of Holcim and Lafarge in India, in line with their international merger (announced in 2014).
Will UltraTech sustain its lead? The erstwhile Lafarge and Holcim groups, pursuing a strategy to restructure and merge their assets, have been left behind in India in terms of capacities (see chart). For instance, ACC and Ambuja, which were awaiting a nod on the restructuring announced in 2013, have not seen significant capacity addition since CY2011. ACC announced commissioning of a 2.8 mt unit in Chhattisgarh last month, but the expansion work had started before the announcement of restructuring. On the other hand, UltraTech, with 19 new and expansion projects in the past decade, along with inorganic growth, has emerged as India’s largest cement entity. With acquisition of the Jaiprakash group’s capacity to be completed in a couple of quarters, its own will stand augmented to 91.1 mt a year.
Kumar Mangalam Birla, chairman, while addressing the annual general meeting, said: “It is with great pride I record that UltraTech is the largest cement player in India and fourth largest on the world stage, excluding China.”
Mihir Jhaveri and Siddharth Vora at Religare Institutional Equities expect it to exceed industry growth in FY17, led by expanded capacities and a diversified presence. “The company is likely to continue getting premium valuations as it continues consolidating on acquisitions and growing fast, beside improving its profitability as it ramps-up the acquired plants,” they add.
Will UltraTech sustain its lead? However, once the global restructuring of LafargeHolcim completes (expected in a few quarters), it will also seek to fuel growth.
LafargeHolcim, in response to Business Standard’s queries on their India growth strategies, said: “India will remain an important market and the group will continue to maintain a strong presence, reinforced by the simplified structure, with a cement capacity of more than 60 mt and a distribution network across the country.”
The proposed restructuring of ACC and Ambuja Cements recently got approved by the government. After commissioning 2.8 mt clinker facility in Chhattisgarh, ACC plans to commission two associated grinding plants in the September quarter, allowing the group to address the strong demand in east India.
The ACC-Ambuja restructuring is being looked at in a positive light by the Street. Analysts at Karvy Stock Broking say these transactions would enable the group to create a linear corporate structure (with Ambuja becoming parent and ACC being a subsidiary). “The restructuring is expected to produce significant synergies from the India operations. Management expects synergy potential of Rs 900 crore (primarily through supply chain and fixed cost optimisation),” they add.
Siddharth Purohit at Angel Broking feels the recent run-up in ACC’s share price has not only been fuelled by improving profitability, but the fact that as the ACC-Ambuja restructuring completes, it might lead to more capacity expansion. Acquisitions are also not ruled out. Clearly, interesting times ahead for both the groups and the industry.
 

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