FMCG major Nirma’s purchase of the assets of Lafarge India for an enterprise value of $1.4 billion (₹9,400 crore), will ensure price stability for cement players in the eastern region. The deal has also been done at reasonable valuation.

Right valuation Lafarge India has major presence in the eastern region – with cement manufacturing plants at Chhattishgarh, Jharkhand, West Bengal and Rajasthan.

“Valuation is lower than expected,” said Girish Choudhary, analyst at Spark Capital. It works out to $127 per tonne against $142 paid in 2015 by Birla Corp to buy its eastern assets, he said.

In August 2015, Birla Corp had bought two cement assets of Lafarge India in Chhattisgarh and Jharkhand with combined production capacity of 5.15 million tonnes for ₹5,000 crore.

According to industry sources, the ‘lower pricing’ partly has got to do with its partial footprint in the North (which isn’t as lucrative as the East). Some also blame the new Bill, Mines and Minerals (Development and Regulation) Amendment Bill, 2016, that allows transfer of captive mining rights to the buyer, but on payment of a transfer fee which could be almost 80 per cent of royalty fee.

This adjustment could have lowered the purchase price.

Nirma is paying a price almost equivalent to that required for setting up a new cement plant of similar capacity – which is roughly $125 per tonne. Last week, Jaypee Group sold its 17.3 million tonne cement business to UltraTech for ₹16,189 crore which worked out to a valuation of $113 per tonne. It has footprint spread across Uttar Pradesh, Madhya Pradesh, Himachal Pradesh, Uttarakhand and Andhra Pradesh. “However, these assets are inferior to that of Lafarge India,” said Choudhary. Post merger, LafargeHolcim has been adopting an asset light model, reducing capex, while focusing on generation of free cash flows and higher incremental return on capital employed. And India is a critical market for the group – with its Indian operations accounting for 7-8 per cent of LafargeHolcim’s EBITDA.

Premium market The eastern region, where the Lafarge facilities are situated, is the most lucrative cement market among all the regions in India.

Average cement prices for a 50-kg bag was highest in the eastern region (around ₹293) for the five-year period between FY 10-15. However, over the years there has been an onslaught of intense competition from new players. In FY-15, the cement capacity share in eastern India was 23.3 per cent for UltraTech, 19 per cent for Lafarge, 12.9 per cent for Ambuja Cement and 12.1 per cent for ACC.

“With Nirma taking over the Lafarge assets, we don’t expect major disturbance in the eastern market,” said Nitin Bhasin, analyst at Ambit Capital.

Nirma maintains price discipline (which is good for the market) – as against what could have been expected from players such as JSW or a Chinese player (China’s Anhui Conch was also in the race for buying Lafarge’s assets), he said.

Nirma has a small presence in cement production – with its 2.28 million tonnes capacity at Pali, Rajasthan.

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