ACC v/s Lafarge v/s Holcim
The
'cement story' is once again in the limelight. Global cement majors
have been eyeing the Indian cement market for some time now. What makes
the Indian cement market so attractive?
India
is a developing country and so there are good growth opportunities.
India's GDP is expected to grow at 8% annually and so the cement
sector, being a core infrastructure sector, is expected to grow at 8%
to 10% annually. The world over, especially in developed countries,
growth has slowed down, so the companies are moving to developing
economies to tap the growing market. Cement being a bulk commodity,
cannot be transported over long distances and hence there has been a
scramble among global giants to acquire capacities in the country.
Against
this backdrop, let us see how ACC, one of the largest cement companies
in the country, compares with global giants like Lafarge and Holcim.
ACC:
The company has a pan India presence and is particularly strong in the
northern and the eastern regions. ACC has undertaken modernization and
up gradation of its old plants. It has converted wet process of cement
manufacturing to energy efficient dry process and has also reduced
excess workforce. All this helped it to improve performance. Earlier,
because of its old plants and excess workforce and a leveraged balance
sheet, company always underperformed compared to domestic and
multinational players. The capacity augmentation of its plants and
favorable demand supply scenario has proven positive for the company.
Lafarge:
Lafarge, world's largest cement producer, is among the first
transnational to enter the Indian market and has already emerged as a
market leader in the eastern region. Lafarge is increasingly focusing
on developing economies like India, as diversified presence helps it to
effectively counter the lower growth rates in its mature markets.
Holcim:
Holcim, the Swiss giant, is one of the world's leading suppliers of
cement, as well as aggregates, concrete and construction related
services. It has a strong market presence in over 70 countries and
across all continents.
Though,
Lafarge was first transitional to enter India, it expanded at lower
rate. Holcim entered later but has acquired major stake in two of
India's biggest cement companies, Gujarat Ambuja (GACL) and ACC, the
latter being in consortium with GACL. Lafarge is not looking beyond
Eastern markets and expanding through brown filed and Greenfield
expansion plans. Holcim on the other hand, through its stake in ACC and
GACL, has presence all over India. Holcim has targeted western markets
through GACL and a stake in ACC (company that has pan India presence)
will benefit it to explore other markets.
Let us have a look at the financial and operating performance of the three companies in recent times.
Parameter* |
Units |
Companies |
ACC |
Lafarge |
Holcim |
Capacity |
(MT) |
18.3 |
160.0 |
160.4 |
Operating parameters |
|
|
|
|
Net Sales |
(US$ m) |
715 |
20,676 |
14,774 |
Sales CAGR - (FY03-05) |
(%) |
6.7% |
13.4% |
27.4% |
Operating margin |
(%) |
16.2% |
14.8% |
25.1% |
Net margin |
(%) |
17.0% |
6.9% |
12.3% |
Return ratios |
|
|
|
|
RoNW |
(%) |
25.5% |
8.8% |
15.4% |
RoA |
(%) |
11.8% |
6.6% |
4.8% |
Debt to equity |
(x) |
0.90 |
0.15 |
0.89 |
Valuations |
|
|
|
|
Price to earnings |
(x) |
22.7 |
17.2 |
16.2 |
Enterprise value per tonne |
(US$) |
256 |
212 |
192 |
*FY05 data
ACC's
operating margins have expanded by 400 basis points since FY03 on
account of operational efficiencies achieved. Earlier, company was
operationally less efficient than its global peers mainly on account of
its old plants and it was also hurt by lower realisations in the Indian
market. Its net margins, excluding extraordinary effect of profit on
sale of refractory business, stood at 8%. Though 8% is lower, when
compared to its transnational players and its performance in FY03,
company has improved its performance. This can be attributed to better
realisations on account of demand growth led by housing and
infrastructure activities, apart from reduction in operating costs and
reduced debt burden.
Holcim's
performance also improved substantially on account of its expansion
plans, reduction in debt and efficient use of resources. Exploring
newer and developing markets has helped the company. In FY03 the
capacity difference between Holcim and Lafarge was almost 6 MT but now
both are almost neck and neck.
In
case of Lafarge, increases in repairs, maintenance and distribution
costs, as well as higher fuel and energy costs, negatively impacted
earnings. Moreover it operates in saturated markets where margins tend
to be lower and this is manifested in lower return ratios for the
company.
As
far as valuations are concerned, ACC because of its presence in a
growing market and better operating parameters, trades at a premium
over its much fancied rivals like Holcim and Lafarge, where high growth
in developing economies get offset by a rather sedate growth in mature
economies like the European nations and the US.