Will Heidelberg Materials sell up in India?

Will Heidelberg Materials sell up in India?

The Indian corporate rumour mill ramped up this week with speculation that UltraTech Cement and Adani Group might possibly be interested in buying Heidelberg Materials’ assets in India. This follows the story broken by the Economist newspaper last week that JSW Cement had made an unsolicited offer to buy them. However, when HeidelbergCement India was asked by the Bombay Stock Exchange what exactly was going on, it replied that it was unaware of any such development and that it did not comment on market speculation.

A week later though and now another related story has popped up. In this case it is unclear exactly what the Hindu newspaper actually knew. The country’s two largest cement producers are locked in a battle for capacity expansion and any opportunity is likely to be of interest to them both. Yet the newspaper did quote a source who said that any divestment by HeidelbergCement India (HCI) would involve a “full-fledged bidding process,” implying that something may be going on.

Germany-based Heidelberg Materials operates four main subsidiaries in India: Gulbarga Cement; HC Trading (India); HCI; and Zuari Cement. HCI and Zuari Cement are the main two in terms of cement production. Heidelberg Materials entered the market in 2006 via a number of purchases and a joint-venture. It then acquired Zuari Cement via its takeover of Italcementi in 2016. Between them the two subsidiaries operate four integrated plants, three grinding plants and one terminal in Central and Southern India. Altogether the company says it has a total cement production capacity of 14Mt/yr. Gulbarga Cement, meanwhile, is a long running project via Zuari Cement to build a new integrated plant at Gulbarga in Karnataka. As of mid-2021 at least the company was still finalising planning and permitting requirements.

HCI’s income fell by 3% year-on-year to US$275m in the financial year to the end of March 2023 from US$282m in the same period that ended in 2022. Its earnings before interest, taxation, depreciation and amortisation (EBITDA) dropped by 39% to US$35.4m from US$58.2m, its lowest figure since at least its 2017 financial year. The company blamed this on higher fuel prices, although it has been trying to offset this by optimising its fuel and power mix. Unfortunately, it was not able to pass these costs on to its customers through price rises due to competition and new cement plants being commissioned in its market areas. Its revenue and profits improved somewhat in the quarter to July 2023. Recent financial data on Zuari Cement appears to be unavailable, possibly in part due to the company changing the dates of its financial year in 2020. However, it reported revenue of US$249m in its 2021 financial year, a broadly comparable figure to HCI’s. When asked during the company’s earnings call in July 2023, HCI’s managing director Joydeep Mukherjee did confirm that the company was looking at a potential merger with Zuari Cement. However, the company was waiting for the right time before it would consider actually doing it.

The Indian cement market has been consolidating in recent years. Companies have been increasing their production capacity, competition has been intensifying and the spike in fuel prices in 2022 battered profits. Adani Group’s acquisition of Holcim’s businesses in 2022 has probably been the most visible example of this trend towards mergers and acquisitions. It follows UltraTech Cement’s acquisition of Jaiprakash Associates in 2017. Heidelberg Materials has been steadily selling off bits and pieces of its cement business since the mid 2010s but at a slower pace than Holcim. Selected sales have occurred in Italy, Spain, Georgia, Ukraine and various countries in Africa, but the biggest was the sale of its US West region to Martin Marietta Materials for US$2.3bn in 2021. It reinforced this process with its ‘Beyond 2020’ strategy with the stated aim to simplify its country portfolio and prioritise its strongest market positions. A large-scale divestment of its operations in India would certainly fit with this plan. Whether the current reporting is accurate or not, Heidelberg Materials’ intentions for its Indian operations are certainly worth keeping an eye on.