INDIA: Struggling to survive, smaller cement firms look for buyers

Sluggish economic growth and the absence of new infrastructure projects, along with a difference in prices across regions, are forcing a number of smaller cement companies, mostly in South India, to consider a sale of their facilities.

Bhavya Cements Ltd, Parasakti Cement Industries Ltd and JSW Cementare three such firms that intend to sell some of their assets but are finding it difficult to get buyers, according to two people familiar with the developments, who requested anonymity.

One of the two people cited above belongs to a large cement manufacturer who has inspected these assets, while the second is a top official at one of the companies looking to sell assets.

“Many of these companies haven’t been able to build a strong brand and are facing increased competition from larger players like UltraTech, ACC and Ambuja,” said one of the people cited above. He requested anonymity since he belongs to one of the top three cement firms.

The bigger firms, however, are not keen on acquiring these assets, mainly because of their geographical location, he added.

Hyderabad-based Parasakti Cement was established in 1998, and currently has a capacity of 1.5 million tonnes (mt) per annum. The brand is available in Andhra Pradesh, Tamil Nadu, Kerala and Karnataka.

Bhavya Cements, another Hyderabad-based company, was incorporated in April 2007 and has an annual capacity of 1.4 mt. It has approvals to increase the plant to 4 mt capacity.

JSW Cement, a part of the Sajjan Jindal-controlled JSW Group, started operations in 2009. It has the capacity to produce more than 5.4 mt per year.

Emails sent to Bhavya, Parasakti and JSW Cement did not elicit any response. However an official at JSW Cement, on condition of anonymity, said the company is considering a sale of its cement assets since it is one of the group’s non-core businesses.

These companies are struggling to survive at a time when cement demand remains muted; logistics, transportation and raw material costs remain high, and prices are under pressure, particularly in the southern parts of the country.

The average prices as on 11 April for the southern region rose 2.2% from a year ago, while the prices for all regions in India rose 8.3%, while that for the northern region increased 17%, the highest among all regions, according to a report Centrum Broking Pvt. Ltd, dated 15 April.

In the fourth quarter of fiscal 2014, all-India average cement prices rose 4.5% to Rs.305 per 50kg bag on a year-on-year basis, according to a 16 April report by HDFC Securities.

According to Nitin Bhasin, an infrastructure analyst at Ambit Capital Pvt. Ltd, a lot of companies in South India are in distress because not enough projects are coming up, and at a time like this, the smaller groups will suffer the most because they had never invested in marketing and branding.

“Many of the smaller companies in South India continue to be highly leveraged and are barely able to meet their interest payments; this distress could lead to some of them closing down or selling out,” Bhasin said.

In the South, factors such as poor infrastructure project execution, lack of new projects, and tepid real estate construction are proving to be major challenges for these companies.

A 24 March report by Ambit Capital highlights that some South India-based companies such as Sagar Cements Ltd, Andhra Cements Ltd, KCP Ltd,Keerthi Industries Ltd and Anjani Portland Cement Ltd, had in fiscal year 2014 an interest expense that eroded most of the earnings before interest, tax, depreciation and amortization, while most of them had a debt-to-equity ratio of more than 1.

To be sure, the southern region also has the lowest capacity utilization rate, a metric used to measure the rate at which potential output levels are being met or used. The utilization rate in the region for fiscal 2014 was at 59%.

Consolidation of cement capacities in the hands of larger firms such as the Aditya Birla Group-owned UltraTech Cement Ltd, the Holcim-ACC-Ambuja combine and Jaypee Cements has also made it tougher for smaller companies to compete. The top three companies already control around 30% of the approximately 370 mt per annum total capacity in the country. 

Analysts say the recent Holcim-Lafarge merger will further concentrate capacities in the hands of the top companies and lead to more consolidation in the industry. In fiscal 2013, the Indian cement industry saw deals adding up to around $3.3 billion, according to a January report by India Ratings and Research Pvt. Ltd. The agency expects the consolidation to continue in fiscal 2015 due to regional imbalances and cost inflation.