Freeze on consolidation

S. Vaidya Nathan

IF THERE is major change in the cement industry dynamics in 2001 compared to the last three years, it is the virtual absence of any activity on the consolidation front.

The last three years had seen the likes of Grasim, India Cements, Gujarat Ambuja, Larsen & Toubro and Lafarge building capacity through acquisitions in a big way.

Now things seem to be at a standstill. To some extent, it is attributable to the fact that almost all the Indian companies that played the acquisition game have stretched their balance-sheet and taken on sizeable debt. Of the lot, Gujarat Ambuja has been quite successful in replacing debt by equity/quasi-equity.

Barring perhaps L&T and Grasim, the rest are not in a position to pursue more takeovers now. Even those with resources may hesitate as the current cement price levels could make the return-risk-investment trade-off an unfavourable one. Narmada Cement and Shree Digvijay Cements which were acquired by L&T and Grasim respectively are still to become paying propositions. Having been in deep trouble, they may take quite some time.

The freeze in consolidation activity in the cement industry is despite the fact that almost for the first time in three years, stock prices of would-be target companies are languishing at low levels. The likes of Priyadarshini Cements, Prism Cement among others fall in this category.

The fact that the B. K. Birla group has virtually put its plans to sell-off some units (the group has cement units in companies such as Kesoram Industries, Century Textiles and Mangalam Cement) is evidence of sluggish state of acquisition market.

The much expected demerger of the cement unit of L&T and sale of a strategic stake to a partner has also been put on hold. This after a completion seemed close on hand for the first time in two years - with the likes of Cemex, Holderbank and Lafarge undertaking due diligence exercises and making bids.

But now the global majors seemed to have put their plans on the backburner. This is as good an indicator as any about the staid state of the acquisition market. Consolidation stands further postponed and this cannot also be good for building pricing power.