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By Ramnath Subbu
Grasim's move to acquire the cement business of Larsen & Toubro for Rs. 2,200 crores marks not only one of the largest M&A transactions but also signals another step in the industry's consolidation. Grasim is now the third largest cement maker with a capacity of 14 million tonnes and the L&T's cement business (CemCo) is the largest with a capacity of 16.5 million tonnes and the complex deal will result in Grasim having 30 million tonnes plus capacity — the largest by far with practically one-fourth the capacity of the 130 million Indian cement industry. With this, Grasim is among the largest cement players in Asia. In geographical terms, Grasim (with CemCo) will have a considerable presence in the western and southern markets and thus enjoy pricing power. Speaking to The Hindu, A.V. Srinivasan, Secretary General, Cement Manufacturers' Association (CMA), said, "Grasim will benefit greatly from the arrangement. L&T is by no means a weaker brand than Grasim and in some areas, it is, in fact, a stronger brand. "As a combination, there is definitely, muscle power enabling Grasim to emerge as the dominant player. They would have an all-India reach and virtually cover the whole country.'' D. D. Rathi, Chief Financial Officer, Grasim, said, "We are confident that the deal will give a boost to industry consolidation. Apart from better logistics and inventory management, it will help both reduce transportation costs. "In fact, in clusters that consume 42 per cent of the total cement in the country, we will be number one.'' The industry is highly fragmented with more than 50 operating companies and 118 manufacturing locations and could well be on the threshold of further consolidation. "The consolidation phase in the Indian cement industry is by no means complete. By global standards, the Indian industry is still highly fragmented, so there is scope for consolidation,'' said A. K. Jain, Executive Director, ACC, adding, "The L&T-Grasim deal is a good development for the cement industry — after all, fewer players and a healthy consolidation is welcome because it lends stability to the industry. According to Mr. Srinivasan, "consolidation moves have been there for a while. However, one would not expect the larger players to get into it. But this is a one-off opportunity — no one could have predicted this. Consolidation per se will continue for the next decade.'' Together with the arrangement already existing between Gujarat Ambuja Cements and ACC, the Grasim-CemCo combine will control around 60 million tonnes of cement and this would leave little room for manoeuvring for any multinational to elbow in. As a result, players such as Cemex and Holcim will have to wait. "This development will certainly make things more difficult for MNCs and they will be forced to look at the smaller players for acquisition,'' said Mr. Jain. "For multinationals, India is an important market and they will continue to eye it. The last few years have been difficult with pressures on realisation, prices and profitability. Also, MNCs look for opportunities across the globe. In India, in spite of all factors, MNCs would prefer picking up existing units instead of setting up greenfield ventures where there are too many bottlenecks of time, cost and returns as also relative ranking of projects on returns on investment. However, they will keep watching closely,'' said Mr. Srinivasan. The cement industry had been battling demand-supply mismatches but things have been looking up. Mr. Jain said, "Demand growth was 8.5 per cent last year and this year too, we are looking at 8-9 per cent growth. Housing and road construction would continue to be the largest contributors. "Last year, demand was around 110 million tonnes and this year an additional 10 million tonnes could come in with the road projects contributing 3-4 million tonnes of additional demand. "Although there is some delay in implementation of a few road projects, the incremental cement demand has already started coming in.''
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