Top 5 cement players' capacity share to surge amid consolidation: Ind-Ra

Cement sector: India Ratings and Research (Ind-Ra) anticipates significant consolidation in India's cement sector in the near-to-medium term. The top five players' capacity share is projected to exceed 55 per cent in FY25 and reach 65 per cent in FY26, up from 53 per cent in FY20, driven by aggressive capacity expansion plans.

"Competitive intensity and pricing pressure are expected to increase, potentially widening the gap between leading and smaller players due to the larger players' wider presence and better cost efficiencies," said Khushbu Lakhotia, Director of Large corporations at Ind-Ra.

Rise in Acquisitions

The cement industry has seen a notable increase in inorganic expansions over the past 1-1.5 years, with nearly 10 deals involving around 60 million tonnes (mnt) of capacity announced, predominantly by market leaders. The largest M&A deal occurred in FY23 when 67.5 mnt of domestic cement capacity shifted from Holcim Limited to the Adani Group. Since 2016, there have been approximately 25 deals with over 200 mnt of capacity changing ownership.

Valuations of cement units depend on factors such as cost efficiency, clinker integration, limestone reserves, and brand strength. Recently, the average valuation of integrated units has been $70-90/mt, lower than the cost of constructing a greenfield plant. Despite additional costs for plant improvements, acquisitions provide immediate market access, synergies in lead distance, and economies of scale.

Increasing Competitive Intensity and Further Consolidation

India, the world’s second-largest cement producer after China, has a per capita consumption significantly below the global average. With anticipated infrastructure and housing developments, substantial investments are planned over the next five years. Leading players aim to increase capacities by 50-200 per cent between FY23 and FY30.
Ind-Ra believes this expansion level may not be entirely achievable organically due to market absorption limits and resource constraints. Adequate limestone reserves are crucial, especially in North and East India. Additionally, the increased capital cost of setting up greenfield plants, now at $ 110-120/mt, coupled with a subdued pricing environment, could result in low returns on capital employed. These factors, along with the growing performance gap between large and smaller players, make the market ripe for further consolidation.

The top five players saw a volume CAGR of around 8 per cent from FY16 to FY24, higher than the industry CAGR of 5 per cent. Their higher volumes and better profitability have kept their balance sheets healthy despite expansions. The top five players also witnessed a reduction in net leverage between FY20 and FY24. While the sector overall has a strong balance sheet, there are pockets of stress, particularly among small to mid-sized companies, where weak profitability has led to a deterioration in credit profiles coinciding with capex.

Share of Top Five to Increase; Large Inorganic Potential in the South

The capacity share of the top five players increased by only 100 basis points to 53 per cent between FY11 and FY20 but rose by over 100 basis points between FY20 and FY24. Ind-Ra expects this share to increase further to 56-57 per cent by FY25 and by another 1,000 basis points by FY30, considering the announced expansion plans.