Cement : Making Deals

The cement industry appears to have taken one more step down the road to consolidation, with the AV Birla company Grasim acquiring a 10 per cent stake in diversified engineering major Larsen & Toubro. The deal, worth Rs 766 crore (representing a huge 47 per cent premium on L&T's market price), puts the L&T-Grasim duo squarely in the lead with a combined cement capacity of 28 mn tonnes (out of a total of 119 mn tonnes) and a market share of around 30 per cent. The cement industry has seen a number of deals in recent years, such as Gujarat Ambuja's purchase of the Tatas' 14.4 per cent stake in ACC and India Cements' acquisition of Raasi Cement. Both Grasim and L&T have spoken of the deal as one that will create 'synergies' and 'cost advantages' in an industry plagued by chronic overcapacity and persistent sluggish demand. It has also given fresh impetus to market speculation on the next round of consolidation involving smaller cement firms, driving up their share prices in recent weeks.

Following on the heels of the Grasim announcement, major cement manufacturers unveiled price increases of Rs 10-12 per 50-kg bag in Mumbai, the country's largest market for cement. Industry observers say the increase may be extended to other cities, depending on whether the price hike can be sustained in Mumbai. Such actions, carried out in tandem, have in the past given rise to allegations of price cartels in the cement industry, which is now dominated by four or five companies. Indeed, earlier this year an outcry by builders alleging restrictive practices by cement companies prompted a probe by the Monopolies and Restrictive Trade Practices Commission. Major cement producers have raised prices by Rs 10-20 per bag during the past year. Besides, there have been wide price fluctuations, sometimes by as much as Rs 20-30 per bag within a month. The four major producers account for 55 per cent of the cement market, so there is scope for more combinations with smaller companies. Further moves towards consolidation are likely to give rise to more allegations of price-fixing.