Why Adani Group Want To Acquire Cement Industry - Real Reason

Why Adani Group Want To Acquire Cement Industry – Real Reason

A few days ago, all of us heard that Adani is going to buy two cement companies which will make them India’s second-largest cement producer.

Whenever Adani Group enters a sector something unique definitely happens. To understand this we have to know about India’s cement industry.

The competition in the industry and what opportunities is the Adani Group eyeing. India is the second-largest cement producer.

Between April 2021 and January 2022 India produced 294 million tonnes of cement. India has the installed capacity to produce 545 million tonnes per year. 65% of it is used on average.

Dept for Promotion of Industrial and Internal Trade says there are 161 cement companies in India. Out of which 20 companies control 70% of the production capacity.

Fewer players have more capacity because cement is a capital intensive business.

According to a cement company’s article to set up a cement plant requires ₹13-₹15 lakhs with a 1-tonne capacity. So a bigger capacity requires a lot more money.

But the biggest question is what did Adani Group see in the cement sector that intrigued them so much? By buying both these companies they have become the second-largest cement producer.

 68% of the cement industry’s demand comes from one thing. That is housing and real estate.  In the last year, private equity investment in the sector increased by 24%.

After Covid, tier 2, tier 3 and rural areas have seen many new real estate projects.

Those who work from home in tier 2, 3 and rural areas are saving a lot and constructing their houses. The next highest demand for cement is from the Public Infrastructure Development. That is 22%.

According to Make In India, the govt has invited companies to set up plants in India. Adani Group is the king of the manufacturing and infrastructure sector. Another sector that has a high demand for cement is Public Infrastructure Development. There’s a 22% cement demand from here.

In the Union Budget of 2022-23 the govt plans to spend more than ₹10 lakh crores on public infrastructure development. This will boost the cement demand. Apart from this, the union budget has set a ₹1,99,000 crore budget for transport and highways.

It is very well known that countries which has a strong infrastructure and logistics move ahead. India is moving in the same direction and Gautam Adani knows this well. Because the group is strong in the infrastructure sector.

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He knows there will be high demand and the cement sector will profit. Because another supporting factor is Industrial Development, where there is a cement demand of 10%. Using Make in India, India is focusing on attracting companies to set up manufacturing in India.

They are working in this direction and a lot of companies have started projects. Which makes it clear that there will be a lot of cement demand. So in the coming days, Industries and Infrastructure will have a high demand for cement. So the Adani Group is acting bullish in the cement sector.

The cement industry has rapidly grown in India. One reason is that India’s Per Capita Income has increased too. Since the Adani Group has shown interest in the sector there have been many updates.

Key Factor Of Success Of Cement Industry

Before understanding Adani Group’s cement journey we have to discuss the key factors for success in the industry. The back of cement industry operations is Logistics.

You can know this through the fact that India’s largest cement producer, Ultra Tech Cement uses 27% of its total expenses for Logistics. So if you think we make big cement plants in one specfic part of India and then transport it to different places then you probably won’t survive the competition because logistics will use up all your margin.

In India, if you want to stay ahead in the cement industry you will have to make small cement plants across the country. So each plant covers a specific area and the logistics cost is reduced.

Why Adani Group Want To Acquire Cement Industry - Real Reason

I will show you some data to understand this better. India has been divided into five regions for the cement industry. The North includes Rajasthan, Punjab and Haryana.

The West is Gujarat and Maharashtra. The South is Tamil Nadu, Andhra Pradesh and Karnataka.

The East is West Bengal, Chattisgarh and Jharkhand. The central is Uttar Pradesh and Madhya Pradesh.

These are the places with a lot of cement plants. You can see their capacity on the screen. Let’s talk about where the Adani Group stands in the cement industry.

If we add ACC and Ambuja’s cement production capacity then out of India’s total production, 12% is from these companies. If we talk about Ultra Tech Cement then Ultra Tech cement makes 20% of the total production.

Compared to ACC and Ambuja, Ultra Tech’s production capacity is 68% more. If we talk about channel partners Amubja and ACC together have 1,11,000 channel partners who help them in distribution.

Whereas Ultra Tech Cement’s channel partners are 1,08,000. Inspite of this, Ultra Tech’s revenue is a lot higher than Ambuja and ACC.

Ambuja and ACC’s revenue in the financial year 2021 was ₹30,000 crores. Whereas Ultra Tech’s revenue was ₹43,000 crores. Why?

If you look at these pictures, you will have a clear idea. You can see that most of Ambuja Cement’s clients are in the north and they get 35% of the revenue from there. ACC cement is concentrated in the south and lesser in other regions.

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Ultra Tech Cement is well distributed all over the country.

So we can say that Ultra-Tech is closer to its customers. The question always arises how do we find out which cement company is performing well? In this case, how Ambuja and ACC are performing compared to Ultra Tech? Who is performing better? We will use two metrics for this.

By using the them you can analyse any cement company. The two metrics are Revenue Per Tonne of Installed Production Capacity and Revenue Per Channel Partner.

Revenue Per Tonne of Installed Production Capacity tell us how efficiently the company uses its production capacity and how much revenue it generates per tonne of its capacity. So Ambuja and ACC together generate ₹4,570 per one tonne capacity.

Why Adani Group Want To Acquire Cement Industry - Real Reason

Ultra Tech Cement is generates ₹1,378 per tonne capacity. So when it comes to managing production capacity efficiently, Ambuja and ACC are quite ahead.

If we talk about Revenue Per Channel Partner which tells us about the efficiency of the distribution network.

Then Ambuja and ACC’s channel partner, on an average, generate a revenue of ₹27 lakhs per year. Whereas, Ultra Tech generates ₹39 lakhs. That tells us that Ultra Tech’s distribution is very efficient. They have fewer channel partners but make more revenue.

Because Ultra Tech’s brand identity is far better compared to the other two brands. So if the Adani Group wants to up its game they have to work on Ambuja and ACC’s brand identity.

They also have to distribute their plans well so they are closer to their customers and reduce logistics cost and increase profits.  So this was the reason behind Adani’s move and the analysis of the cement sector.

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