Consolidation to continue in cement sector; operational efficiency will reduce cost: ICRA
May 31, 2024
New Delhi [India], May 31 : Over the past decade, the market share of the top five cement companies has steadily risen, reaching 54 per cent as of December 2023 from 45 per cent in March 2015.
According to ICRA, forecasts suggest this trend will continue, with expectations of a further surge to 55 per cent by March 2025, indicating a notable consolidation within the sector.
This shift is being propelled by several factors, chiefly among them being the robust demand prospects for cement.
With a bullish demand outlook, large cement firms are actively seeking to expand their capacities, both organically and through inorganic means such as mergers and acquisitions (M&A).
The consolidation trend is most pronounced in the eastern and western regions of India, where the market share of the top five players is projected to increase by 22-25 per cent from FY15 to FY25.
Even in the southern region, traditionally fragmented, a trend towards consolidation is evident, with the share of the top five companies expected to rise from 40 per cent in FY15 to 50 per cent by FY25.
Consolidation not only allows companies to increase their market share but also brings about synergies in the form of cost reduction and operational efficiency improvements.
Through acquisitions or mergers, acquirers gain access to ready-made capacities and essential resources like limestone reserves, bypassing the lengthy gestation periods associated with setting up greenfield cement plants.
In the past nine years, the industry has witnessed 15 M&A deals, with the average cost per metric ton (USD 80/MT) significantly lower than the cost of establishing new integrated cement plants (USD 110-120/MT), resulting in substantial capex cost savings.
Despite the increased debt levels anticipated in FY25 to fund ongoing capital expenditures, the outlook for the cement sector remains stable, according to ICRA.
Revenues are expected to witness a healthy growth of 9-10 per cent, with operating margins projected to improve by 80-100 basis points to around 16.8-17.3 per cent.
Despite the higher debt levels, comfortable debt protection metrics are anticipated, with leverage and debt coverage ratio expected to range between 1.3-1.4x and 2.7-2.8x, respectively.
