In the past one month, the stock price of little-known Andhra Cements ran up close to 70 percent, even beating its larger peers by a margin. The rally could most likely have been sparked by market buzz that the Jaypee Group-promoted cement player has been put on the block.
A look at Andhra Cements’ books reveals how many of its ills, also plaguing its promoter, could possibly make it a fit target for a takeover. It has a very high debt-to-equity ratio of 11.6X and has a modest capacity of 2.6 million tonnes. Given the state of its balance sheet, organic growth looks difficult and a smarter option will be to find a buyer.
Q: A larger question to ask then is how smaller companies in the cement space are surviving against all odds?
A: The Indian cement market is split down the middle into two groups — acquirer and the acquiree. The latter usually comprises companies with smaller capacities (usually with less than 5 million tonnes) and highly leveraged balance sheets which puts paid to any plans they might have to gain market share through expansion.
Smart investors appear to have taken a fancy to this group, waiting for deals to get announced as most of these assets are still quoting at a discount to the replacement cost. Also, they are much cheaper than setting up a capacity from scratch.
Last month, smaller cement companies punched above their weight with the likes of Burnpur Cement , Deccan Cements , Kakatiya Cement , KCP , NCL , Prism and Sagar Cement outperformed their bigger rivals. Such resilience was surprising given how demonetisation had done its damage and capacity utilisation of these companies showed no signs of improvement (close to 67 percent). Besides, cost pressures, which were on the rise, added to their woes. So,
Q: What explains the strength?
A: The answer lies in the willingness of these players to consolidate, maintain volumes and stick to a pricing discipline. They have come to view acquisitions as a way of life in order to step up their game and healthy balance sheets stand to support this view. Access to ready resources and reduced time to the market are some of the benefits for the acquirers.
It is no wonder that in the last two years there have been a raft of deals involving big acquirers like UltraTech Cement , Shree Cemen t, Orient Cement and JSW Cement. With capacity addition diminishing over the coming years, the industry will stand to benefit from further consolidation significantly. However, weak demand could throw a spanner in the works during this fiscal year.
While fragmented capacities are scattered across geographies, southern India has the largest concentration. With an overall installed capacity of close to 400 million tonnes in India, even a company with a 5 MT capacity will have to expand or grow inorganically in order to bag a meaningful share of this market.
While the efficiency level would vary across companies and plants, a discount to the replacement cost (currently hovering around USD 140/T) should keep the interest alive in these companies.
Source: MoneyControl
