L&T-Grasim deal to aid cement price recovery

MUMBAI JUNE 26. The Larsen & Toubro-Grasim deal is expected to aid recovery in cement prices and limit the share of multinational companies, according to CRIS INFAC.

High operating rates would also lead to considerable improvement in prices over the next two to three years while increase in demand would be higher than the rise in capacity in the current fiscal, CRIS INFAC observed in its study.

Increasing consolidation would improve the pricing flexibility of cement manufacturers, it added.

With Grasim gaining effective control of L&T's cement capacity, the share of the top five players would increase considerably in southern and western India, it said.

CRIS INFAC, in a release said, with smaller players getting increasingly marginalised, price co-ordination would be easier, especially against the backdrop of high operating rates. The commissioning of Sanghi Cements' 2.6 million tonne greenfield capacity in March-April 2003 would limit short term price recovery in the West.

On the role of MNCs, it said concentration of large capacities with Indian players would limit the presence of foreign players in the cement industry in the country.

Five large Indian producers account for over 55 per cent of the cement capacity while Lafarge, the largest cement MNC in India, has only around 3 per cent, it said. CRIS INFAC said with cement being the core business for the top five Indian players, it was unlikely that any of them would be available for sale. The balance capacity was divided among 44 players with a medium capacity of 1.2 million tonnes.

CRIS INFAC said any potential player would have to make several acquisitions to gain market share comparable with the top Indian players, it said. The two top players, namely, Grasim-Cemco and Gujarat Ambuja-ACC are financially strong and would strongly compete for the balance capacities on sale and as a result "we do not expect foreign players to increase their market share significantly over the long term,'' it added.

Referring to operating rates, it said they had been rising due to consistent growth in demand and less increase in capacity. Demand growth driven by construction activity would be 8-9 per cent per annum over the medium term lifting cement demand to 125 million tonnes in 2004-05 from 107 million tonnes in 2002-03.

"We do not expect any greenfield expansions over the next two years. Additional capacity due to brownfield expansions and increasing proportion of blended cement would be limited, as a result, operating rates will be at their highest since 1996 in all regions except the South,'' it added.

On the financial profile of L&T-Grasim deal, it said the impact of the acquisition on Grasim was expected to be marginal. The cash outgo was estimated to be around 30 per cent of its net worth in 2002-03, which would be funded through internal accruals and borrowings.

CRIS INFAC expects a marginal decline in debt servicing indicators. However, they would remain at comfortable levels. The standalone financial profile of demerged L&T was expected to be stronger than that of the parent with lower gearing and higher interest coverage ratios. — PTI

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