Adani plans to increase cement production by twofold through profits

Adani group is never known to quibble when it comes to aggression, big thinking and chasing economies of scale. Be it ports, green energy, transmission or city gas distribution; the Adani group has literally thought up in terms of mega scale. If we leave out their aggression in green hydrogen, the big foray in the last few weeks has been into cement. With one swipe of the pen, the Adani group took control of ACC Ltd and Ambuja Cement, giving the group combined capacity of 70 million tonnes per annum (TPA).

This deal puts Adani group in the elite group of the top cement manufacturers in India. Only Ultratech Cements, belonging to the Aditya Birla group, has a higher capacity of 125 MTPA at this point of time. The combination of ACC and Ambuja into a single Adani Cement banner, dwarfs the other large and significant players in terms of cement capacity like Shree Cements of the Bangur group, Dalmia Bharat, MP Birla Group and the India Cements group of South India. But that is just the start. Now Adani plans to double cement capacity to 140 million tonnes per annum (MTPA) over the next 5 years. 

At a time when most companies are wary of sinking too much money into the infrastructure space and even the likes of HOLCIM are selling out of Indian cement, Adani is taking a contra view on this sector. Here is why. Adani sees a multi-fold increase in cement demand in India in the coming years. Adani group believes that apart from post-COVID recovery, the aggressive infrastructure push by the Indian government will provide a massive boost to the cement demand. Not to forget, Adani group has a massive captive demand for cement.

The total acquisition price for ACC and Ambuja, payable by Adani, was $10.5 billion; including the open offer portion. However, the response to the open offer has been tepid due to sharp rally in prices. For example, the Ambuja Cements open offer is at Rs385, but at the time of the offer, the stock was already at Rs460 had had since rallied to Rs550. The response to the open offer was tepid, but Adani group has already moved in with Gautam Adani taking the helm of Ambuja Cements and Karan Adani the helm at ACC Ltd.

The Adani group already has 63% stake in Ambuja, which now gives them well above 55% in ACC too. To further enhance its stake in Ambuja, the Adani group has already approved the issue of warrants which will dilute the equity of Ambuja by nearly 25%. That would effectively take the stake of the Adani group to above 72% once the warrants are exercised. That means; the Adani group is still getting substantial control of ACC and Ambuja, a little later, but they are surely getting it. That would help the doubling of cement capacity.

There are some subtle comparative statistics that underline the potential for cement in India. For example, India may be the second largest consumer of cement, but its per capita consumption is just 250 KG compared to 1,600 KG in China. India has a 7-fold headroom to grow cement demand. Also, cement being a core sector, has high externalities. It has a multiplier effect of 1.5X of GDP so with the pick-up in GDP growth in the coming quarters, the demand for cement should also methodically pick up. That is the macro bet on Cement.

With the deal of ACC and Ambuja done, Adani now controls around 14% of the cement capacity in India. Ultratech still leads the pack with 25% of India’s cement capacity under its control. Adani plans to take its cement manufacturing capacity to 140 MTPA by year 2027 while Ultratech will take its cement manufacturing capacity to 200 MTPA by year 2030. The next few years is likely to see a pitched battle in the cement space between the Adani group and Ultratech Cements of the Birla group.