UltraTech Cement has secured a controlling stake in Chennai-based India Cements, enhancing its dominance in the competitive cement industry while impeding the Adani Group's short to medium-term expansion plans. This strategic acquisition by India’s largest cement manufacturer comes at a time when organic growth is becoming increasingly expensive in both cost and time.
Despite some analysts viewing the deal as pricey compared to recent sector transactions, they acknowledge its long-term advantages. Beyond the valuation concerns, there is immediate worry over the costs UltraTech will face in making India Cements' assets more efficient.
Nomura Financial Advisory and Securities (India) estimates that UltraTech may need to invest around ₹1,000 crore to modernize India Cements' older assets and integrate them into its core operations. In FY24, India Cements' operating cost per tonne was ₹5,306, higher than the industry average of ₹4,608. Furthermore, the company's earnings before interest, tax, depreciation, and amortization (EBITDA) per tonne dropped significantly from ₹516 in FY20 to ₹105 in FY24.
Jefferies India’s estimates indicate the deal values India Cements’ 14.5 million tonnes (MT) capacity at an enterprise value (EV) of $110 per tonne. This is higher compared to the $85 per tonne Ambuja Cements offered for Penna Cement's 14 MT capacity in June. Notably, the Adani Group acquired Ambuja and ACC assets in 2022 to boost its presence in India’s cement market.
In the long run, UltraTech’s acquisition of India Cements is strategically sound. It enhances UltraTech’s presence in Tamil Nadu, Telangana, and Andhra Pradesh, increasing its capacity share in the southern region from 11% to nearly 25%. According to Nomura, the deal also adds 1.2 billion tonnes of limestone reserves to UltraTech’s resources, a critical raw material in the region.
India Cements also brings additional assets to UltraTech, including 50 MW of captive power plants in Tamil Nadu and Telangana, a 20 MW plant in Rajasthan, and a 26.25 MW gas-based power plant in Tamil Nadu. The company’s operations extend to the shipping sector with two handymax vessels and ownership of coal mines in Indonesia.
Meanwhile, UltraTech's main competitor, Ambuja Cements, aims to increase its capacity to 140 MT by FY28 from the current 89 MT through both organic and inorganic growth. With the acquisition of Penna Cement, Ambuja will enhance its low-cost sea logistics capabilities and strengthen its coastal cement distribution network.
UltraTech’s acquisition of India Cements not only consolidates its market position in South India but also sets a benchmark for future industry consolidations, signaling its intent to remain a formidable player in the cement industry.
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