This week India's UltraTech Cement finally finalised a deal to buy the cement assets of the Jaiprakash consortium in a deal valued at $2.5 billion. UltraTech Cement has had a tough road to acquisition and expansion. In 2014, UltraTech had planned to spend $750 million to buy two cement plants in Madhya Pradesh, India, but it was not long before the Indian government passed the Mineral and Mining Act, which eventually led to the collapse of the deal. The deal was delayed for nearly a year before the Bombay High Court threw it out in early 2016. But the rejection also sparked UltraTech's determination to expand, and eventually UltraTech launched a larger acquisition proposal, which went smoothly compared with its previous bumpy acquisition, the Jaiprakash cement asset, which was finally completed this week.
"The essence of moving forward is the expansion of geographic markets," Kumar Mangalam Birla, chairman of UltraTech's board, said in the company's 2016-2017 annual report. We also see other words that are commonly used in acquisitions such as "synergies" and "economies of scale." In his closing remarks, he said, "I am proud of the scale that the company has achieved. UltraTech is currently the largest cement producer in India and the fifth largest cement company on the world stage." On the last point, he means that in addition to Chinese companies, UltraTech currently has some assets in the United Arab Emirates, Bahrain, Oman and Bangladesh, as well as in India. The Kumar Mangalam Birla's comments also hint at UltraTech's future internationalization.
Source: UltraTech Cement Public Information
After the completion of the transaction, UltraTech's integrated cement plants will increase from 12 to 18, and its grinding stations will increase from 16 to 21. The total production capacity of UltraTech has also increased by 40% from the current 66.3 million tons per year to 91.4 million tons per year. The cement plants acquired by UltraTech through the deal are located in Himachal Pradesh, Uttar Pradesh and Uttarakhand. In Madhya Pradesh and Andhra Pradesh, the company's main profitable markets are the Northern, Central and Southern regions, especially in the Central region, where UltraTech has increased its cement capacity from 6.2 million tons per year to 21.1 million tons per year through acquisitions. At the same time, the assets acquired by Madhya Pradesh also include a new plant of 3.5 million tons per year, which is expected to be put into commercial operation in 2019.
The deal comes on the heels of India's implementation of a new goods and services tax law in July, which slightly reduces the tax rate on goods and services compared with the original tax law. UltraTech was quick to say that the price of its cement products would be reduced by 2-3 percentage points under the new tax framework. However, some manufacturers warned that the price of cement had risen a lot before the implementation of the new tax law, and the Indian Cement Manufacturers Association also said that the tax rate of the new tax law was still too high. In any case, UltraTech says the 28% tax rate is better than the previous 30-31% tax rate, and most cement manufacturers have adjusted their cement prices according to the new tax rate.
The expansion of UltraTech and the tax optimization are generally good news for the Indian cement industry. However, the demonetisation at the beginning of the year and the decline in the domestic construction industry are still likely to reduce UltraTech's domestic sales and capacity utilization, but the acquisition and tax reduction will reduce those adverse effects. Although not every interaction with the government is good news, such as demonetisation and new mining, we also see signs of good news in India's cement industry.
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