The Hindu Business Line : What drives Holcim's strategy

"I THINK everybody is very positive about India. There's substantial further growth expected in the coming years," said Mr Markus Akermann, Chief Executive Officer of Holcim, in a conference call on January 30, after the announcement of the deal to buy a controlling stake in Gujarat Ambuja Cement.

Last year, he had detailed Holcim's strategy to enter the Indian market when it announced its strategic alliance with Gujarat Ambuja Cements and a decision to buy a 50-per cent stake in ACC. Here are some edited extracts from the views expressed by Mr Akermann:

I would like to describe the overall strategic thinking that drives our investment rationale. Our investment focus is essentially driven by market maturity considerations. Let's start with the emerging markets. These are typically cement-focused, with some 80-90 per cent of sales in bags and with only around 10 or 20 per cent of cement being sold loose.

Cement is sold directly to the final customer, such as the local house-builder, commonly through dealer networks. But there is no professional ready-mix industry and no sophisticated downstream activities. Essentially, cement is branded and sold by the bag.

India fits into this category. As markets gradually develop, more sophisticated demand patterns emerge and we see the emergence of value-added products, such as ready-mix and pre-cast concrete. The markets of Eastern Europe or Latin America or other Asia Pacific markets, for instance, fall into this category.

Now you ask, why India? It is not only the world's second largest market with nearly 120 million tonnes of annual demand, but it is growing fast from a relatively low base still. The industry structure is improving, with the top five players now controlling over 50 per cent of capacity and with little or no new capacity coming on stream in the next two years.

If two drivers of cement demand are population growth and per capita GDP, India benefits from both. India will give our emerging market portfolio in Asia Pacific a significant boost. We will gain a strong foothold in a market that is larger than Europe, with a population of over one billion people and growing. We will achieve instant coverage across the whole sub-continent.

With regard to the capacity expansion, there will probably be de-bottlenecking projects. There will be capacity addition brown-fields. I do not see a huge investment boom coming, but look at a market that is growing by eight per cent and it's clear that you have to add capacity. We are used to that. We did that in Mexico. Every three years we had to build a new kiln, that's normal in emerging markets. Gradually, the prices are moving into a reinvestment level. We believe also that with the very high capacity utilisation in the Indian market and with the ongoing consolidation process, these prices will remain at least on a reinvestment level. We believe we too can add value with our expertise in alternative fuels and raw materials, procurement, energy supply and sourcing, for example, and we see opportunities to improve efficiencies and returns.

Advantage Holcim: The background

Gujarat Ambuja acquired a 14.4-per cent stake in ACC from the Tata group in 1999 at Rs 370 per share; it had also acquired Modi Cements (renamed Ambuja Cement Eastern) for Rs 166 crore.

Investments in these two companies were vested with Ambuja Cement India; a 40-per cent stake in this company was sold to strategic financial investors; the rest of the equity is held by Gujarat Ambuja, which also pocketed a profit of Rs 285 crore for transfer of Ambuja Cement Eastern to the new company.

The creation of this investment vehicle enabled the company to quickly cut down the debt burden, which helped bankroll the acquisition of the stake in ACC.

Gujarat Ambuja buys DLF Cements, renames it Ambuja Cement Rajasthan and completes the merger.

In January 2005, Holcim buys a 67-per cent stake in Ambuja Cement India, leaving Gujarat Ambuja with a 33-per cent stake. Holcim invests $ 800 million (about Rs 3,500 crore) .

This gives it an entry point into ACC and Ambuja Cement Eastern. Holcim's price tag effectively translates into an annual return of over 20 per cent for shareholders of Gujarat Ambuja Cements over and above the profit of Rs 285 crore; in contrast, strategic financial investors exit with a 10-per cent return.

Gujarat Ambuja has an option to sell its stake in Ambuja Cement India to Holcim by end 2007; Holcim has the option to buy from 2008.

Ambuja Cement India makes an open offer on behalf of Holcim for ACC to raise its stake to a tad over 50 per cent; investor response is not up to expectations and it ends up with a stake of 34 per cent.

Holcim makes an open offer on behalf of Holcim for Ambuja Cement Eastern and ends up with a stake of 96.1 per cent.

Holcim buys a 14.8-per cent stake in Gujarat Ambuja Cements and plans to raise it to about 35 per cent through an open offer; price tag: $1.03 billion.

If the open offer is successful, Holcim will have an effective stake of close to 80 per cent in Ambuja Cement India; the options on Gujarat Ambuja's stake in Ambuja Cement India will lapse; neither party is likely to exercise them as Holcim is now at the helm of affairs.

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