Summary
India’s blue chip US$ 30 billion Aditya Birla Group will transfer the cement business from their unit Grasim Industries Ltd. to another subsidiary, Samruddhi Cement Ltd., as part of a plan to merge all production and sales of construction materials into a single company.
Now let us see whether this merger is going to have any impact on their cement prices with respect to their peers Holcim-ACC and Ambuja Cement etc.
Analysis
The prices of cement totally depend upon its demand supply. Indian cement industry is regional industry and not national industry. There are 7 clusters of limestone mines across the country where all the cement plants are located. Markets are away from the plants by 200- 600 kms and higher logistic cost influences the market prices. . National market is divided into 5 regions as north, south, east, west and central. Prices in each region vary with respect to demand and supply and brand image. There are 3 grades of cement brand in each region as Grade A, Grade B and Grade C. Branded cement grade A fetches premium Rs. 4-5 per 50 kg bag, grade B prices less by Rs.10-12 per bag and grade C prices by Rs.20 per bag.
Merger of cement business by any business house has as such no impact on their cement prices in the market as market forces control the prices and not the merger / restructuring.
In the light of above market dynamics of Indian cement industry; I do not see that cement prices of UltraTech Cement are going to be affected by merger of cement business by Aditya Birla Group.
UltraTech fetches premium on their cement sales in the market irrespective of the region they are in which they will continue to fetch even after merger and becoming single entity of Aditya Birla Group doing cement business.
Pre merger Grasim cement prices were always lower than UltraTech prices. Post merger Grasim brand fetching lower prices than UltraTech since there would be a single brand of “UltraTech:” under single cement company so Grasim cement would also fetch premium and thus improve the profitability of cement business of AV Birla Group from higher earnings that follow from higher volumes and higher market spread..
Since UltraTech capacity of 23 million tonne would increase to 49 million tonne post merger , their present share prices would also be rerated and which would again have positive impact on Grasim Industries in particular and Aditya Birla Group in general by way of increased market capitalization.
As regards cement prices of UltraTech post merger is concerned with respect to their peer like Holcim ACC Ltd and Ambuja Cement, I do not see any negative impact as cement prices of UltraTech pre-merger has always been higher than ACC and Ambuja Cement. Sales realization of 9 month average from January to September 2009 has been at UltraTech Rs 205 per bag, Ambuja Cement Rs. 197 per bag, ACC Rs. 195 per bag, Grasim Cement Rs. 190 per bag and Shree Cement Rs.180 per bag.
UltraTech has plants in west, south and east whereas Grasim in north, south and west.
Post merger, single company UltraTech will have Pan India status, probably the only cement company. Hence should continue to command a premium as compared to other peer cement companies.
Post merger UltraTech would have Pan India status and cement production capacity at 49 million tonne would be having market share of 21%. higher than their peer Holcim - ACC at 30 million tonne and Holcim - Ambuja Cement at 25 million tonne. Shree Cement at 10 million tonne capacity is no match to UltraTech as being regional player limited to rural sectors partly of north and partly of western region.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
