As the two cement giants of the world, Lafarge and Holcim, plan to join hands and cut costs, trim debts and beat the market blues felt by the industry since the economic crisis of 2008, we wonder how this biggest ever tie-up in the cement industry will impact the market in India. Will the merger of ACC, Ambuja (both owned by Holcim) and Lafarge change the market dynamics? Or will the impact be restricted more to the foreign markets? And then there is the bigger question, what is driving so many cement companies towards consolidation?
The combined sales from Lafarge and Holcim will amount to CHF 39bn/EUR 32bn and EBITDA to CHF 8bn/EUR 6.5bn. The merger will involve strategic optimisation of portfolio while anticipating regulatory requirements through divestments 10 per cent to 15 per cent of the global EBITDA. No country would account for more than 10 per cent of the combined revenues. LafargeHolcim would be listed on the SIX in Zurich and Euronext Paris. It would continue to be domiciled in Switzerland and would operate under the local governance rules with a board composed of Lafarge and Holcim directors in equal number and through the distribution of central corporate functions in France and Switzerland.
The project is now subject to information consultation process with the relevant employee representative bodies and will be submitted to the approval of the relevant competition authorities. It is expected to be finalised in H1 2015.
Though, we will have to wait for some time before Lafarge talks to us about brand consolidations, new logo, or about its asset disinvestment plans, an interaction with officials at Lafarge did allow us a peek into the company?s expectations from the merger.
Lafarge looks at the planned merger as a way to create the most advanced group in building materials industry as the merged entity would occupy complementary positions. Combined operations would include production sites located in 90 countries across all continents with the most balanced and diversified portfolio in the industry. The merger will create a balanced and diversified global portfolio, well positioned to seize opportunities in high growth countries and to push recovery in developed markets. The combined know-how and expertise will allow the merged entities to be even more innovative.
Concerning synergies, LafargeHocim expects EUR 1.4bn of incremental synergies on a full run-rate basis (in over 3 years), within EUR 1.0bn at EBITDA level through best practices, scale and cross utilisation of innovative products and solutions.
LafargeHolcim expects following annual synergies:
Lafarge is the world leader in building materials, employing 64,000 people in 62 countries with sales reaching C15.2 billion in 2013. The company is one of the top-ranking players in cement, aggregates and concrete businesses in the world. With world?s leading building materials research facility, Lafarge places innovation at the heart of its priorities. Speaking about the merger, Rolf Soiron, Chairman, Holcim said, ?this proposed merger is once in a lifetime opportunity to deliver substantially better. value to customers with more innovation, a wider range of products, solutions, better sustainability and enhanced returns to shareholders. LafargeHolcim will be uniquely positioned to take advantage of growth in developed markets and fast growing economies by supplying the materials that will enable the construction industry to meet the challenges of the future.?
Holcim is a global leader in the manufacture and distribution of cement and aggregates, ready-mix concrete, asphalt, and associated services. The company holds majority and minority shareholdings in some 70 countries and on every continent. In 2013, Holcim recorded net sales of over 19.7 billion Swiss francs. Bruno Lafont, Chairman and CEO of Lafarge, said that, ?By combining Holcim?s experienced teams, complementary geographies and innovative expertise with ours, we propose to set up the most advanced group in the construction industry, for the benefit of our clients, our employees and our shareholders.?
He further added that, ?For years, I have had the utmost respect for Holcim. The merger of Lafarge and Holcim will allow the group with strong roots in Europe to enter into a new dimension in our ambition to contribute to building better cities on a global scale and in a sustainable manner.?
Speaking on alternatives to giving-off assets to ensure a competitive environment, Lafarge?s response is that the competition authorities have a full array of tools to ensure proper competition in their country. The gist of it is: ?Divestments are sometimes required, but also are behavioural remedies in most cases. In the case of this merger project, we will work closely and in full cooperation with the competition authorities where and when relevant, to understand their potential concerns and see how to address them. Keeping in mind that the project is to create the best growth platform in the sector and position our business to meet changing market needs and addressing the challenges of urbanisation. This merger will allow us to combine our know-how and expertise to be even more innovative for the benefit of our customers.? The rationale of the transaction is very strong, resulting in a significant enhancement of the overall business profile. This merger is an attractive transaction for both the companies and it is reflected in the revised ratings for Lafarge. Standard & Poor?s has changed Lafarge?s rating with a positive outlook on Lafarge to BB+ and Moody?s has rated Lafarge Ba1 under review for upgrade. In addition, both agencies indicated that post merger they would expect Lafarge?s rating to be raised to BBB/A2 with Standard & Poor?s and Baa2 with Moody?s.
?This merger could further accelerate consolidations.?
Research Analyst, HDFC Securities
ISneha Venkatraman, Research Analyst at HDFC Securities elaborates on how the planned merger may affect market dynamics here in India.
How do you see the Lafarge-Holcim merger impacting the cement market in India and abroad?
If the combined entity proposes to merge all India operations under one roof, LafargeHolcim, it will have a massive ~70 mtpa domestic capacity, beating UltraTech Cement?s 57 mtpa capacity. The entity will have a better regional distribution with only ~14 per cent exposure to supply surplus in southern region and a healthy 38-40 per cent share in the lucrative eastern market. The combined entity will have ~20 per cent share at an all India level. This calculation is based on an assumption that the CCI will not insist on divestment of certain assets when the two combine.
Post this potential merger, the new entity could emerge as the clear leader in the Eastern and Northern markets of India and a close second to UltraTech in the western market. Lafarge is a relatively new entrant and mostly concentrated in the eastern part of the country. It could gain from a merger with ACC and Ambuja, which are older and more established brands in India. Lafarge could also benefit from lower financing costs as Holcim currently has a better credit rating than Lafarge.
This merger could further accelerate consolidations in Indian cement industry, where the current top two players may become aggressive to maintain their market share. Post the consolidation of Lafarge India and Holcim India, the top five players are likely to hold around 50 per cent of the market share of the cement industry after considering incremental capex. The consolidation of the cement industry is in the hands of several well-established industry leaders and may unleash competitive pressure in the cement industry, thereby keeping a check on prices. Smaller players could feel the heat unless they fall in line with the pricing and supply dynamics of the regional leaders.
How will the merger affect the credit ratings of Lafarge?
Lafarge India enjoys AA/A1+ ratings from Crisil. Internationally, the parent company, which has a lower rating, could benefit from this merger with Holcim. Holcim has a stronger balance sheet and a better credit rating than Lafarge and this would enhance Lafarge?s credit profile.
?Brand leaders will have to join hands, consolidate and grow.?
VP Marketing, KJS Cement
In the last financial year we saw a slew of acquisitions and consolidations. Ashutosh Rampal, VP Marketing, KJS Cement, talks about the need to join hands.
Would Lafarge Holcim merger impact the cement market in India?
Lafarge and Holcim are both leading and well established players in the market. They have overlapping capacity in North India to some extent, but since the capacity is not too large in this region there wont be any significant impact. I believe that the brands would continue to remain separate. The Indian cement market may remain neutral to this merger.
It will be more of a merging of balance sheets.
We saw several mergers and consolidations in the last financial year. What is driving these consolidations and when can we expect organic growth?
I think that we will continue to see more acquisitions and mergers and less of organic growth for next few years. The market has two types of players those who sell cement as commodity (push marketing) and others who drive sales by branding (pull marketing). Today land acquisition is a big challenge making it difficult to set up a new facility. As the market becomes more and more competitive, the commodity sellers will find it difficult to sustain, while the brand leaders will have to join hands, consolidate and grow. Companies are merging to achieve operational efficiencies and to leverage economies of scale.
Price hikes, drop in input costs help cement industry to post positive margins: Care Ratings
Region-wise,the southern region comprises 35% of the total cement capacity, followed by thenorthern, eastern, western and central region comprising 20%, 18%, 14% and 13%of the capacity, respectively.
The cement industry is expected to post positive margins on decent price hikes over the months, falling raw material prices and marked drop in overall production costs, said an analysis of Care Ratings.
Wholesale and retail prices of cement have increased 11.9% and 12.4%, respectively, in the current financial year. As whole prices have remained elevated in most of the markets in the months of FY20, against the corresponding period of the previous year.
Similarly, electricity and fuel cost have declined 11.9% during 9M FY20 due to drop in crude oil prices. Logistics costs, the biggest cost for cement industry, has also dropped 7.7% (selling and distribution) as the Railways extended the benefit of exemption from busy season surcharge. Moreover, the cost of raw materials, too, declined 5.1% given the price of limestone had fallen 11.3% in the same aforementioned period, the analysis said.
According to Care Ratings, though the overall sales revenue has increased only 1.3%, against 16% growth in the year-ago period, the overall expenditure has declined 3.2% which has benefited the industry largely given the moderation in sales.
Even though FY20 has been subdued in terms of production and demand, the fall in cost of production has still supported the cement industry by clocking in positive margins, the rating agency said.
Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. The cement sector will be seeing a sharp growth in volumes mainly due to increasing demand from affordable housing and other government infrastructure projects like roads, metros, airports, irrigation.
The government’s newly introduced National Infrastructure Pipeline (NIP), with its target of becoming a $5-trillion economy by 2025, is a detailed road map focused on economic revival through infrastructure development.
The NIP covers a gamut of sectors; rural and urban infrastructure and entails investments of Rs.102 lakh crore to be undertaken by the central government, state governments and the private sector. Of the total projects of the NIP, 42% are under implementation while 19% are under development, 31% are at the conceptual stage and 8% are yet to be classified.
The sectors that will be of focus will be roads, railways, power (renewable and conventional), irrigation and urban infrastructure. These sectors together account for 79% of the proposed investments in six years to 2025. Given the government’s thrust on infrastructure creation, it is likely to benefit the cement industry going forward.
Similarly, the Pradhan Mantri Awaas Yojana, aimed at providing affordable housing, will be a strong driver to lift cement demand. Prices have started correcting Q4 FY20 onwards due to revival in demand of the commodity, the agency said in its analysis.
Industry’s sales revenue has grown at a CAGR of 7.3% during FY15-19 but has grown only 1.3% in the current financial year. Tepid demand throughout the country in the first half of the year has led to the contraction of sales revenue. Fall in the total expenditure of cement firms had aided in improving the operating profit and net profit margins of the industry (OPM was 15.2 during 9M FY19 and NPM was 3.1 during 9M FY19). Interest coverage ratio, too, has improved on an overall basis (ICR was 3.3 during 9M FY19).
According to Cement Manufacturers Association, India accounts for over 8% of the overall global installed capacity. Region-wise, the southern region comprises 35% of the total cement capacity, followed by the northern, eastern, western and central region comprising 20%, 18%, 14% and 13% of the capacity, respectively.
Installed capacity of domestic cement makers has increased at a CAGR of 4.9% during FY16-20. Manufacturers have been able to maintain a capacity utilisation rate above 65% in the past quinquennium. In the current financial year due to the prolonged rains in many parts of the country, the capacity utilisation rate has fallen from 70% during FY19 to 66% currently (YTD).
Wonder Cement shows journey of cement with new campaign
The campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV…
Cement manufacturing company Wonder Cement, has announced the launch of a digital campaign ‘Har Raah Mein Wonder Hai’. The campaign has been designed specifically to run on platforms such as Instagram, Facebook and YouTube.
#HarRaahMeinWonderHai is a one-minute video, designed and conceptualised by its digital media partner Triature Digital Marketing and Technologies Pvt Ltd. The entire journey of the cement brand from leaving the factory, going through various weather conditions and witnessing the beauty of nature and wonders through the way until it reaches the destination i.e., to the consumer is very intriguing and the brand has tried to showcase the same with the film.
Sanjay Joshi, executive director, Wonder Cement, said, "Cement as a product poses a unique marketing challenge. Most consumers will build their homes once and therefore buy cement once in a lifetime. It is critical for a cement company to connect with their consumers emotionally. As a part of our communication strategy, it is our endeavor to reach out to a large audience of this country through digital. Wonder Cement always a pioneer in digital, with the launch of our IGTV campaign #HarRahMeinWonderHai, is the first brand in the cement category to venture into this space. Through this campaign, we have captured the emotional journey of a cement bag through its own perspective and depicted what it takes to lay the foundation of one’s dreams and turn them into reality."
The story begins with a family performing the bhoomi poojan of their new plot. It is the place where they are investing their life-long earnings; and planning to build a dream house for the family and children. The family believes in the tradition of having a ‘perfect shuruaat’ (perfect beginning) for their future dream house. The video later highlights the process of construction and in sequence it is emphasising the value of ‘Perfect Shuruaat’ through the eyes of a cement bag.
Tarun Singh Chauhan, management advisor and brand consultant, Wonder Cement, said, "Our objective with this campaign was to show that the cement produced at the Wonder Cement plant speaks for itself, its quality, trust and most of all perfection. The only way this was possible was to take the perspective of a cement bag and showing its journey of perfection from beginning till the end."
According to the company, the campaign also marks Wonder Cement being the first ever cement brand to enter the world of IGTV. No other brand in this category has created content specific to the platform.
In spite of company’s optimism, demand weakness in cement is seen in the 4% y-o-y drop in sales volume. (Reuters)
Cost cuts and better realizations save? the ?day ?for ?UltraTech Cement, Updated: 27 Jan 2020, Vatsala Kamat from Live Mint
Lower cost of energy and logistics helped Ebitda per tonne rise by about 29% in Q3
Premiumization of acquired brands, synergistic?operations hold promise for future profit growth Topics
India’s largest cement producer UltraTech Cement Ltd turned out a bittersweet show in the December quarter. A sharp drop in fuel costs and higher realizations helped drive profit growth. But the inherent demand weakness was evident in the sales volumes drop during the quarter.
Better realizations during the December quarter, in spite of the 4% year-on-year volume decline, minimized the pain. Net stand-alone revenue fell by 2.6% to ?9,981.8 crore.
But as pointed out earlier, lower costs on most fronts helped profitability. The chart alongside shows the sharp drop in energy costs led by lower petcoke prices, lower fuel consumption and higher use of green power. Logistics costs, too, fell due to lower railway freight charges and synergies from the acquired assets. These savings helped offset the increase in raw material costs.
The upshot: Q3 Ebitda (earnings before interest, tax, depreciation and amortization) of about ?990 per tonne was 29% higher from a year ago. The jump in profit on a per tonne basis was more or less along expected lines, given the increase in realizations. "Besides, the reduction in net debt by about ?2,000 crore is a key positive," said Binod Modi, analyst at Reliance Securities Ltd.
Graphic by Santosh Sharma/Mint
What also impressed analysts is the nimble-footed integration of the recently merged cement assets of Nathdwara and Century, which was a concern on the Street.
Kunal Shah, analyst (institutional equities) at Yes Securities (India) Ltd, said: "The company has proved its ability of asset integration. Century’s cement assets were ramped up to 79% capacity utilization in December, even as they operated Nathdwara generating an Ebitda of ?1,500 per tonne."
Looks like the demand weakness mirrored in weak sales during the quarter was masked by the deft integration and synergies derived from these acquired assets. This drove UltraTech’s stock up by 2.6% to ?4,643 after the Q3 results were declared on Friday.
Brand transition from Century to UltraTech, which is 55% complete, is likely to touch 80% by September 2020. A report by Jefferies India Pvt. Ltd highlights that the Ebitda per tonne for premium brands is about ?5-10 higher per bag than the average (A cement bag weighs 50kg). Of course, with competition increasing in the arena, it remains to be seen how brand premiumization in the cement industry will pan out. UltraTech Cement scores well among peers here.
However, there are road bumps ahead for the cement sector and for UltraTech. Falling gross domestic product growth, fiscal slippages and lower budgetary allocation to infrastructure sector are making industry houses jittery on growth. Although UltraTech’s management is confident that cement demand is looking up, sustainability and pricing power remains a worry for the near term.