Cement: Too early for the consolidation party
India Cements Ltd for ₹1,900 crore. This is a non-controlling financial transaction, but wide-held expectations are that this move would eventually lead to the acquisition of India Cements. For UltraTech, the Southern regions contribute the lowest capacity market share of 11%.
The company aims to boost its presence in this region through organic and inorganic routes. Nonetheless, a development of this kind often leads to excitement in cement stocks. Shares of both UltraTech and India Cements soared to 52-week highs on Thursday.
In another instance, close competitor Adani Group company Ambuja Cements Ltd announced acquisition of Hyderabad-based Penna Cement at an enterprise value of ₹10,422 crore earlier this month. In reaction, Ambuja shares hit a 52-week high on 14 June. Positive impact of M&A Moreover, a positive rub-off of news flow on mergers or acquisitions is also seen on many midcap and small-cap cement stocks that are seen as potential acquisition candidates.
Among listed companies, this includes Sagar Cement Ltd, Orient Cement Ltd and Mangalam Cement Ltd. But this excitement may not persist. To be sure, a crucial long-term benefit of increased consolidation in any sector is the anticipated pricing discipline among large companies.
For the cement companies, there appears to be no immediate respite on the sector’s Achilles heel of muted prices. In fact, as companies continue to sacrifice on realizations growth for volumes, the near-term pricing outlook is getting bleaker. This could further weigh on the sector’s earnings outlook, triggering more downgrades.
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