Living on the edge
When India Cements (ICL) took over Raasi at Rs 300 per share (ruling market price of Raasi -- Rs 60), it wrongly created a perception of an expensive acquisition. At Rs 2,883 per tonne, the acquisition was at a discount to a greenfield cost of Rs 3000 per tonne. Consider the other benefits: it gave ICL an efficiently running plant with a capacity of 1.8 mt, which could be enhanced to 2.5 mt by de-bottlenecking. ICL gained a lucrative 19% market share in Andhra Pradesh. Competition between the two companies was totally eliminated. At the same time the takeover made ICL the largest and the most dominant player in the southern market. Freight costs to transport cement to Andhra Pradesh from ICL’s plant in Tamil Nadu were totally eliminated as the company could now source cement from the Raasi plant.Others too have gained
Acquisitions have been the mainstay of the Indian cement industry for the last two years. Till now, 10.7 mt have changed hands, excluding India Rayon's transfer of 3 mt to group company Grasim. In each of these acquisitions, the acquiring company has got much more than the returns possible from an equal investment made in a greenfield expansion project. Gujarat Ambuja’s takeover of Modi Cements’ 1.5 mt plant at around Rs 200 crore was not only very economical but it also allowed it valuable tax breaks. Grasim's acquisition of Dharani’s 0.9 mt unit at Rs 290 crore gave it large limestone deposits, which are now being used for capacity expansion. Similarly, the takeover of Shree Digvijay (1.3 mt) for Rs 300 crore has allowed Grasim a 1 mt captive jetty that can be used for coal imports for its cement and VSF divisions.
Similar were the benefits reaped by L&T when it acquired Narmada (1.2 mt). Jetties owned by Narmada helped it reach the existing and the new markets at low freight costs.It also benefited from adjacent extensive limestone quarries.
Not always cheap
This is not always the case as is exemplified by ICL’s bidding war with Gujarat Ambuja when it acquired Cement Corporations’ 0.4 mt plant at Yerranguntla, at an exorbitant Rs 4,950 per tonne.
The acquisition, however, can be justified by the tax breaks and the possibility of a low cost expansion, thanks to the huge limestone deposits.