Southern cement sector poised for growth amid industry consolidation: Rakesh Arora

Synopsis

In South India, it was closer to 50%. And with this acquisition of India Cements by UltraTech and now Orient by Ambuja Cement, it is getting to the levels where the other regions are.

"And with this acquisition of India Cements by UltraTech and now Orient by Ambuja Cement, it is getting to the levels where the other regions are. So, very positive for the southern cement companies and also on India Cements," says Rakesh Arora, Go India Stocks

Just talking about now this value at 10,400 crores, given that it has now the third largest position in the South, what do you make of this further consolidation within the cement sector?
Rakesh Arora: You have two large players who are trying to gain market share and consolidation has been going on pretty strongly. And I think this is the right step for the industry, especially South India has been highly fragmented. In other regions, the top five players have 80% capacity share. In South India, it was closer to 50%. And with this acquisition of India Cements by UltraTech and now Orient by Ambuja Cement, it is getting to the levels where the other regions are. So, very positive for the southern cement companies and also on India Cements.

Whatever we may say about consolidation, the grain of the truth here is that cement prices are not going higher. Cement demand is lacklustre and pricing power is still with the buyer, not the seller, despite the fact that we have seen a massive consolidation in last three years and a solid economic growth. Why is that happening?
Rakesh Arora: So, I tend to disagree with that statement. Cement prices are lower because of the intense competition between UltraTech and Adanis to acquire capacity. It could also be a strategic move to keep prices lower when they are consolidating the industry because they are able to get all these assets closer to replacement costs.

So, once the consolidation is complete, the pricing power would be visible. So, I would not really worry too much on that, meaning whenever they want, they can increase the prices.

The power is not with the buyer of cement. Number two, on the demand, demand one cannot do too much about it. It is a short-term phenomenon that demand is down because of elections in Q1 and extended monsoon in Q2 but that is something which you cannot really do much about. Overall, the demand trend would remain at around 8% or so. For the next two-three years, probably we are looking at 8% to 9% demand growth.

Do you see a mini re-rating movement in some of the other cement stocks which are single owner owned, small in capacity because India Cements is gone. Now, Orient Cement is gone. But few cement companies are still left. For example, Mangalam is left, Heidelberg is left. It is a matter of time you think these smaller players will also be gobbled up?
Rakesh Arora: Yes, so there is already buzz about the names that you took and probably the deals would happen in the same range where we are seeing between $80 to $100 per tonne. So, these stocks are trading slightly below that. So, there is an opportunity, but timing is the most crucial thing. One cannot be sure when these kind of acquisitions happen, like Orient was in making for more than a year-and-a-half. So timing is something which is uncertain. So, if investors are okay holding through, these deals are most likely to happen in the next 12 to 24 months.

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