Analysis of Indian cement industry and competitive strategy of Gujarat Ambuja

Abstract

The cement industry is a fairly attractive industry due to low threat of substitutes, low threat of new entrants and moderate segment rivalry, bargaining power of buyers and suppliers. It is a highly fragmented industry heading toward consolidation. The industry growth is closely related to the GDP, with the main contributor being the housing sector. The entry barriers consist of access to limestone clusters and high capital requirements due to economies of scale. Exit barriers are moderately high due to high vertical integration and government restrictions on closing sick plants. There is a moderately high level of bargaining power with buyers, and the bargaining power of suppliers is decreasing. Gujarat Ambuja is one of the major players in the cement industry, with a high concentration of capacity in the Western and Northern regions of the country and a small amount of capacity in the East. It is the undisputed cost leader of the industry, with various initiatives aimed at reducing costs. It has dedicated limestone mines for its use, with the use of long conveyor belts for limestone transfer in some cases. It meets most of its power requirements from captive plants, leading to lower power costs. It also has lower transportation costs, with intra-state dispatches being very large. To keep the coal input costs down, it imports high calorific value coal. As part of its future strategy, it is this study’s recommendation that Gujarat Ambuja acquire a promising player in the Southern region. To this end, Dalmia Cements is evaluated as a potential acquisition target due to its strategic focus on innovation to cut costs and its strong presence in Kerala and Tamil Nadu, which it is looking to ramp up. Based on comparables and present market values, an acquisition price of Rs. 5,191.4 million would be an acceptable price, balancing EPS accretion, debt cover and returns to Dalmia’s shareholders