Acquisition of Binani Cement to strengthen UltraTech’s leadership, help low-cost expansion
UltraTech Cement, which is already the largest cement maker in India, will further strengthen its leadership and gain additional scale, particularly in north India, with the acquisition of Binani Cement. Furthermore, the later’s limestone reserves will help in low cost capacity expansion for the Aditya Birla Group-owned UltraTech, say analysts.
The National Company Law Appellate Tribunal had recently approved UltraTech Cement’s acquisition of the rival debt-laden Binani Cement, which was under insolvency process initiated by lenders.
The Supreme Court too cleared UltraTech’s bid for the rival cement maker last week. Binani Cement has since been made a subsidiary of UltraTech.
UltraTech has an installed capacity of 93 million tonnes per annum (mtpa) of grey cement. It has 18 integrated plants, one clinkerisation plant, 25 grinding units and seven bulk terminals. Its operations are spread across India, UAE, Bahrain, Bangladesh and Sri Lanka.
Binani Cement has a capacity of 6.25 mtpa in Rajasthan, which comprises an integrated cement unit with a capacity of 4.85 mtpa and a split grinding unit with a capacity of 1.4 mtpa. The company, additionally has 2 mtpa capacity in the UAE and 3 mtpa capacity in China, note analysts.
Over the last few years, UltraTech has done several acquisitions to expand its cement business, Binani being just one of them.
In May, it struck a deal with Century Textiles and Industries to demerge the later’s cement business into UltraTech. Century’s cement business consisted of three integrated cement units in Madhya Pradesh, Chhattisgarh and Maharashtra with a total capacity of 11.4 mtpa and a grinding unit in West Bengal of 2 mtpa.
Earlier in 2016, it inked an agreement with Jaiprakash Associates, to acquire cement plants for a total capacity of 21.2 mtpa.
The amalgamation of the cement business of Century and Binani will “greatly enhance UltraTech’s bargaining power and economies of scale as well as bolster its market leadership,” said Rajesh Kumar Ravi, an analyst at Centrum Broking in a recent report.
Another key advantage for UltraTech will be Binani’s limestone reserves.
“Binani acquisition can provide Utratech with the opportunity for low cost expansion given good limestone reserves. Binani has two limestone mines in Sirohi, Rajasthan with reserves and resources in excess of 450 million tonnes,” said Abhishek Poddar at Kotak Institutional Equities.
Analysts note that Binani Cement’s profitability over the last few years had been weak due to low capacity utilisation, but believe UltraTech was well equipped and experienced to turn it around.
“UltraTech has a track record of turning around operations—the company has already made significant improvement at acquired assets of Jaiprakash Associates with plant utilisations improving to over 70 per cent from 15-20 per cent when it was acquired,” pointed Poddar.
The acquisitions should augur well for UltraTech, at a time demand is expected to be strong given the huge push in infrastructure development as well as affordable housing projects.
According to the India Brand Equity Foundation (IBEF), cement production capacity in India, the world’s second largest producer, is expected to reach 550 million tonnes by 2020, up from 480 million tonnes in September 2018. Currently, per capita cement consumption at 210 kg is the lowest among developing countries, while the world average is 580 kg, IBEF notes, adding long-term cement demand growth rate is estimated at 1.2 times of GDP growth rate.
KrupalManiar of ICICI Securities expects demand growth for the year ending March 2019 to be “strong” at 9-10 per cent.
“With 7-8 per cent demand CAGR (compounded annual growth rate) and 4-5 per cent supply CAGR over next 3-4 years, companies expect overall industry utilisation to improve,” he said, adding that companies also expect prices to improve gradually over next few month.