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MOSL: CEMENT-Consolidation continues as Emami Cement is acquired

CEMENT: Consolidation continues as Emami Cement is acquired; Top-6 players now control 80% capacity in East India  

 

• Emami Group has entered into a binding agreement with Nuvoco Vistas (“Nuvoco”, part of Nirma Group) on 6th Feb’20, to divest its entire 100% equity stake in Emami Cement for an enterprise value of INR55b. This would lead Nuvoco to become the third largest cement player in East India (after Dalmia and UltraTech) with ~15% share.
• The deal value implies USD125/t paid for clinker-backed capacity of ~5MTPA and USD25/t for excess grinding capacity of 3.3MTPA. Valuation is broadly in line with recent acquisitions and only at a marginal premium to replacement cost. Nuvoco had earlier bought Lafarge’s 11MTPA capacity in Jul’16 at a similar valuation of ~USD125/t.
• The deal improves consolidation in the eastern region with the top-6 cement players now controlling ~80% capacity, which is positive for the longer-term pricing outlook. Near-term, however, we expect pricing to remain muted in the East given the ~25% capacity expansion in the next 18 months, which we believe would create a fight for market share. 

Clinker shortfall to limit volume ramp-up at Emami’s assets

• Emami Cement operates 3 cement plants in East India with total capacity of 5.6MTPA (clinker 3.2MTPA), which is being expanded to ~9MTPA, implying 10% capacity share in East India.
• The company also has limestone mine leases in Guntur (Andhra Pradesh) and near Jaipur (Rajasthan), which are not developed.
• While the planned capacity is ~9MTPA, we believe the company has clinker availability to produce only 5-5MTPA of cement, which it anyways produces currently. Moreover, the attached limestone mine has a remaining life of 30 years, which we believe would not support any further clinker capacity expansion.
• This implies that even at 100% clinker utilization, the company is unlikely to achieve utilization of >60% for its planned cement capacity of ~9MMTPA.