More consolidation is in the offing in the cement sector as top firms embark on a capacity addition spree, mostly eyeing the 15.9-million tonne per annum (MTPA) stressed assets available in the country. Expansion through greenfield initiatives is also in the offing as cement companies mull addition of another 150-160 MTPA of production capacity over the next five years.

India is the second-largest producer and consumer of cement after China, with a total of 570 MT capacity as of FY22-end. The demand in the country has grown at an average 1.3 times its GDP. A wave of acquisitions also swept across the sector, starting with Adani Group’s acquisition of Switzerland-based Holcim Group’s stake in Ambuja Cements (ACL) and ACC for $6.6 billion in September 2022.

With a “slightly higher” inclination towards organic capacity addition, Dalmia Bharat is targeting 110-130 MTPA by 2031.

“Over the past five to six years, almost all of the incremental cement demand was absorbed by the top four companies, which implied that the rest of the sector got impacted by both low market share and suffered from higher costs. This would have probably resulted in the recent consolidation in the sector,” Dalmia added.

The acquisition spree continued with ACL acquiring a 56.74% stake in Sanghi Industries at an enterprise value of Rs 5,185 crore in August this year. UltraTech Cement’s deal to acquire Kesoram Industries’ cement assets in a share-swap deal in November for an enterprise valuation of Rs 7,600 crore is the latest in the series.

On its part, UltraTech Cement – now topping the charts with 143.3 MTPA – has plans to increase installed capacity to 159 MTPA by FY25. Shree Cement has plans to expand capacity to 80 million tonne by 2030, while Dalmia Cement (Bharat), Nuvoco Vistas and JSW are among others looking for capacity additions.

Miren Lodha, director, research at Crisil market intelligence and analytics said: “Over the past five years, the sector has witnessed an unparalleled surge in M&As, resulting in the transfer of 106-108 MTPA of capacity, of which 95-97 MTPA have been acquired by large players. On the other hand, large players have installed only 51-53 MTPA of capacities via the organic route.”

There are stressed assets of about 15.9 MTPA as of date, compared with the 29.95 MTPA earlier. This was after Dalmia Bharat acquired Jaypee Group’s 11.45 MTPA assets and Sagar Cements bought Andhra Cements’ 2.6 MPTA capacity.

At present, Cement Corporation of India (8.5 MTPA capacity, of which about 1.5 MTPA is operational), Vadraj Cement (6 MTPA capacity, of which only 2 MTPA was operational before being shut) and Bheema Cement (1.4 MTPA operational but loss-making) are companies with stressed assets.

“Almost 297 MTPA of cement capacity is with mid and smaller players. However, most of the mid-sized players (with capacities of 8-30 MTPA are part of big integrated groups, making it difficult to disintegrate and acquire them. On the other hand, smaller players (of less than 8 MTPA capacity), which are grappling to stay afloat in the market amidst rising competitive intensity, will seek to exit the market. Given that there have been 12 significant acquisitions in the last five years, the pace of consolidation may slow down as fewer stressed assets are available for consolidation,” Lodha added.

When asked why there are a lot of stressed assets in the cement sector, Munish Aggarwal, managing director head-Equity Capital Markets at Equirus, said, “Cement is an extremely energy-intensive business, with energy costs contributing over 20% of revenues from operations. Over the past few years, global coal prices have increased from less than $100 per tonne to over $300 per tonne and the energy costs for some companies rose to over 35%. Companies have not been able to pass through the entire increase and thus their profitability has been impacted. This, along with high reliance on debt, has caused stress for companies,”

For the cement sector, raw material and access to good quality limestone reserves that can be extracted on commercially viable terms and proximity to key consumption markets are of utmost importance, Aggarwal said, adding most companies planning to expand their operations either prefer brownfield expansion or acquiring an existing unit.