Inorganic growth alternatives such as acquisitions tend to be relatively more cost-effective than organic routes. They aid in faster scale-up of operations, in certain cases the acquirer gets access to captive limestone mines more economically. Plus, expansions into newer geographies helps in lowering the lead distance. Together these factors typically help cement makers to get a tighter grip on operating costs and boost volumes.

A Crisil Ratings Ltd note dated 24 March points out that the consolidation that began in FY24, has seen 51 million tonnes of capacity acquired to date, excluding capacities that changed hands due to the entry of a new firm (Adani) in the sector, and an additional 14 million tonnes worth of buyouts announced, which are likely to be completed by the first half of FY26.

On its last legs

Is there more juice left in the consolidation theme then? A key trigger for increased merger and acquisition (M&A) activities in the cement sector this time and even in the past has been balance sheet stress among mid/smaller companies that then become potential acquisition candidates.

Acquiring assets of a distressed company usually means reasonable valuations for the acquirer. But from here on, the consolidation pipeline is expected to have shrunk with very few companies witnessing balance sheet constraints. “Among NCLT (National Company Law Tribunal) assets, JPA (~9.4mtpa) in Central and Bheema (~1mtpa) in South could be acquired over the medium-term. Other high probability M&A candidates including Mangalam Cement (~4mtpa), Saurashtra Cement (~2.7mtpa), Shree Digivjay (~1.2mtpa), and Heidelberg-Zuari (~13.5mtpa) could sell due to succession issues or lucrative exit multiples,” said DAM Capital.

However, DAM’s analysts are of the view that the sector is nearing the end of consolidation phase primarily due to dearth of acquisition candidates. “Although companies like Sagar Cements, NCL Industries, Deccan Cements and Prism Cement are perceived as M&A targets, we believe probability for consolidation remains low for them due to manageable balance sheets and proper succession planning in place,” said the report on 12 March.

Nonetheless, a slowing pace of consolidation brings respite for investors in cement stocks as it could translate into easing of competitive pressure among the large cement makers. That in turn, should give some legroom to cement prices where a meaningful and sustainable improvement is much-awaited.

Companies have seen earnings downgrades as the chase for market share has kept cement prices depressed. Here, some regions have suffered more than others. As Jefferies India points out, cement prices across regions have seen a clear divergence in the past few quarters with prices in the south deteriorating, east slightly lagging, and north, west, central leading with hikes of around 5-7% in the past two quarters, versus around 3-4% hike at a pan-India level. In South, the competitive pressure is further accentuated by the slew of M&As, where acquirers (primarily Ultratech and Ambuja) are ramping up the acquired capacities (Penna, India Cements, Kesoram, Orient Cement), said Jefferies.

For a sector that once enjoyed pricing discipline, the recent subdued trend in cement prices dampens sentiment. With the consolidation wave expected to fade, apart from prices, another important monitorable would be input costs, which have started inching-up lately.