Finally, if a single company were to create so much infrastructure, didn’t it make sense that it also produced cement? It is with this most recent expansion – Adani is paying $10.5 billion to acquire the entire Indian business of Swiss building materials specialist Holcim Ltd. – that the businessman from Gujarat, Prime Minister Narendra Modi’s home state, has met with some resistance. The challenger is not his great rival Mukesh Ambani, the only Indian tycoon currently richer than Adani. Another billionaire has risen.
Kumar Mangalam Birla comes from old money unlike Adani who is a first generation entrepreneur. His great-grandfather, who branched out from the textile trade to jute manufacturing and more, was a confidant of Mahatma Gandhi during India’s freedom struggle. Birla’s father – thwarted by the socialist turn in post-independence economic policies – globalized the commodity conglomerate by expanding into Indonesia, Thailand and the Philippines. Birla, who turns 55 this month, built on that when he bought US-Canadian company Novelis Inc. in 2007 to become the world’s largest aluminum rolling company.
But then Birla faced the financial crisis of 2008, followed by a boom in demand for raw materials in China and a long and costly entanglement in telecommunications, an industry disrupted by Ambani’s foray. in 2016 with cheap data and free voice calls. While a government-backed bailout for Vodafone Idea Ltd. prevented the telecommunications company from going bankrupt, a new battle began. Adani, continuing his strategy of entering adjacent industries, challenges Birla into the latter’s cement family territory.
It is therefore not surprising that the acquisition of Adani by Holcim India has generated a rapid response. UltraTech Cement Ltd., controlled by Birla, recently announced a capital expenditure of 129 billion rupees ($1.7 billion) to increase its cement capacity by 22.6 million tons per year. That works out to $75 a ton. Meanwhile, Adani is paying nearly double per tonne for taking over an estimated 73 million tonnes of annual capacity this year at the two Holcim companies, Ambuja Cements Ltd. and ACC Ltd. build cheap. The game is in progress.
Birla, who was worth $6.5 billion at the start of 2013 when Adani wasn’t even a billionaire, is now nearly $85 billion behind. But he knows his cement: UltraTech’s current capacity of around 120 million tonnes per year gives it a 20% market share, ahead of the 12% just acquired by Adani. It is not, however, a guaranteed track. As noted by Mumbai-based Kotak Institutional Equities, Adani has the opportunity to increase its capacity to 100 million tonnes through a relatively inexpensive expansion: spending $80-90 per tonne. This should reduce its acquisition cost.
UltraTech also has a $3.20 to $3.90 advantage over Holcim in the amount of Ebitda — earnings before interest, taxes, depreciation and amortization — it can achieve per ton. Kotak says Adani can bridge the gap by eventually merging the two acquired companies, ending royalties to Holcim and reducing costs through waste heat recovery. But Birla is not without options. He too will enter adjacent industries to strengthen his moat. One area is painting, where the group wants to be a solid No. 2 player in India in five years.
It’s too early to tell who will win India’s construction materials war, although one thing is certain: Birla won’t take a new challenger lightly. In 2017, when he decided to merge his Idea Cellular Ltd. with the Indian business of Vodafone Group Plc, he may have thought that this scale – the merged entity started out as India’s largest telecom operator by subscribers – would shield him from the carrier’s relentless price attacks. telecommunications owned by India’s biggest billionaire, Ambani. This was not the case. The government won a Supreme Court case over arrears of mobile phone company dues, casting doubt on the very survival of Vodafone Idea; customers fled the joint venture in which Birla holds a significant minority stake. Finally, New Delhi had to offer a bailout to prevent the telecommunications market from becoming an Ambani-led duopoly.
Cement is not as regulated as telecommunications. But Birla has yet to lament the ease with which Adani beat his rival – and yet another Indian billionaire – for Holcim assets by agreeing to take on any liability arising from a price-fixing case brought by the indian trustbuster.
The real question before Birla, however, is deeper. If Adani has decided to dethrone him as cement king, what is the correct answer: Fight or flight? His great-grandfather, the patriot Ghanshyam Das Birla, bet on Gandhi and won against British leaders and their companies like Andrew Yule & Co. Confronting Adani – who also considers himself a nationalist businessman – is not is perhaps no less a bet. in Modi’s India.
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Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia. Previously, he worked for Reuters, the Straits Times and Bloomberg News.
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