Another week and another massive Indian cement industry deal. This week Nirma has won the bidding for the assets of Lafarge India that LafargeHolcim is selling. Before we get too carried away though, the diversified conglomerate entered into a letter agreement with LafargeHolcim on 7 July 2016 to pay US$1.4bn for three cement plants and two grinding plants with a total cement production capacity of 11Mt/yr.
It is worth noting that this is only a letter agreement. LafargeHolcim signed one previously with Birla Corporation for some of the same assets in August 2015. Unfortunately, an ambiguous amendment to the Mines and Minerals (Development and Regulation) (MMDR) Act struck in January 2015 made it unclear how easily mineral rights could be transferred with an industrial plant sale. After much likely internal squabbling Lafarge India said it was selling all of its assets in January 2016 followed by threats of legal action by Birla.
Some commentators in the Indian media have flagged the new deal as expensive for Nirma. It will be paying US$127/t for the new capacity compared to the US$118/t that UltraTech Cement is offering Jaiprakash Associates for its laboured deal. The Nirma deal comprises integrated cement plants at Sonadih in Chattisgarh, Arasmeta in Chattisgarh and Chittorgarh in Rajasthan, and cement grinding plants at Jojobera in Jharkhand and Mejia, West Bengal. Other assets include 63 ready mix concrete plants, two aggregate plants and a blending unit.
However, unlike UltraTech, Nirma is a relatively new entrant in the cement industry. Its main industries are in detergents and soda ash manufacture. It invested US$194m in a 2.28Mt/yr cement plant in Rajasthan that was commissioned in November 2014. It also ran into environmental issues over a proposal to build a new cement plant at Mahuva in Gujarat. One report compiled under request by the Indian Supreme Court in 2011 cited the presence of Asiatic lions as a reason for concern!
Lions aside, Nirma may be paying over the odds for its new cement business but it will gain a bigger presence in the industry quickly and diversify from its other existing industries in which it faces fierce competition. The Lafarge India plants are mostly in eastern Indian states compared to Nirma’s plant in Rajasthan in the west, giving it a reasonable geographic spread.
Nirma reportedly plans to finance the purchase through a leveraged buyout and the Mint business newspaper has described this as the largest transaction of its kind in India to date. The risk here will be how the Indian cement market plays out in the short term. LafargeHolcim reported that its cement volumes fell in 2015, although this has since picked up in the first half of 2016. UltraTech did better in its 2015 – 2016 financial year but it reported a slow construction market. Longer-term demographic trends suggest that the cement industry will grow, especially in the east of the country. With this in mind it may be a while before Nirma’s cement business roars.