Why Adani is doubling down on cement
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Today on The Daily Brief:
Adani is bullish on cement
Adani Group, India's second-largest cement maker, is reportedly negotiating a ?10,000 crore deal to acquire Heidelberg Materials’ Indian operations. This potential deal is part of Adani’s broader strategy to rapidly expand in the cement industry. If it goes through, it will add to Adani's growing portfolio, following its 2022 acquisition of Ambuja Cements and ACC for over $6 billion. Heidelberg, one of the world’s largest cement producers, operates in over 50 countries.
Source: MOFSL
But why is Adani so interested in cement? We'll get to that soon. First, let’s break down the basics.
Cement is a key material in almost all physical infrastructure, from high-rise buildings to highways. In India, the housing sector uses most of the cement—over 60% of the total production goes toward residential projects. Cement is also crucial for infrastructure like roads, bridges, and airports, making up around 24% of the demand.
Source: Ambuja Cement
Now, considering India’s ambitions of becoming a developed economy, we’ll need to build a massive amount of physical infrastructure—everything from roads and airports to offices and affordable housing. And for all that, we’ll need an enormous amount of cement. If we assume India’s growth trajectory mirrors China’s, here's a mind-blowing fact: Bill Gates once noted that between 2011 and 2013, China used more concrete than the U.S. did in the entire 20th century. If India reaches its full economic potential, you can imagine the cement demand.
And this isn't just speculation. There's a huge push from the government to build more affordable housing, ports, and roads.
Now, back to the main topic.
India’s cement industry is going through a big transformation, mainly due to aggressive consolidation. While there are still some smaller, regional players, the top four cement producers now control 60% of the market, according to a recent report by Care Ratings. And this consolidation is only speeding up.
Source: Care Ratings
This isn’t a new trend. Companies like UltraTech Cement, Dalmia Bharat, and now Adani Group have been racing to acquire as much capacity as they can. In the last decade, UltraTech has been leading the charge, increasing its capacity by acquiring companies like Binani Cement, Century Cement, and more recently, India Cements. Today, UltraTech has a production capacity of 141 million tonnes per year (MTPA), and they plan to grow that to 200 MTPA by 2030.
Source: MOFSL
For comparison, Adani Group only entered the cement sector in 2022, but it already has a capacity of nearly 80 million tonnes per year after acquiring Ambuja Cements, ACC, Sanghi Industries, and Penna Cement. Its goal is to reach 140 MTPA by 2028. And all of this capacity came from acquisitions, not from organic growth—Adani is playing the "buy, don’t build" game on a massive scale.
By now, you might be wondering: why does everyone want to grow capacity so quickly?
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First, there’s demand. According to S&P Ratings, India’s cement demand is expected to grow at a 7% annual rate over the next few years, driven by infrastructure spending and the housing boom. This growth, boosted by the government’s focus on building roads, metro networks, and affordable housing, has everyone rushing to meet future demand.
Second, there’s efficiency. Bigger players can cut costs through economies of scale. Owning more capacity allows them to spread their fixed costs, like power and fuel, over a larger output. Cement production is energy-intensive, with power and fuel making up 25-30% of a cement company’s costs.
Consolidation also means fewer companies controlling more of the market, which improves pricing power. With fewer competitors, the top players can raise prices or keep them stable as demand rises, boosting profitability.
If the Heidelberg deal goes through, Adani will solidify its position as a serious challenger to UltraTech’s dominance. For India’s cement industry, this means fewer, bigger players with more control over pricing and the supply chain.
Looking ahead, the main risk is overcapacity. If cement capacity grows faster than demand, prices could drop, hurting profits. But with the Indian government’s continued focus on infrastructure and affordable housing, demand is expected to stay strong. The big players, with their access to capital, integrated operations, and economies of scale, are well-positioned to dominate the sector.
No one is buying cars anymore?
According to NDTVProfit, inventory levels at car dealerships have hit an all-time high, with about 7.9 lakh unsold vehicles sitting on lots, worth a whopping ?79,000 crore. This comes as car sales in September 2024 dropped by nearly 20%, leaving unsold cars piling up for 80-85 days.
Source: Statista
The gap between the number of cars sent to dealerships and actual demand is growing. While stocking up before the festive season is normal, this year’s inventory is much higher than usual. So, why is that a problem?
Before we dive into what’s caused this and what’s been happening over the past few years, let’s first explain why having high inventory levels is an issue.
Excess inventory is bad news for both dealerships and manufacturers. Dealerships end up with more cars than they can sell, tying up their money and storage space, which messes with their cash flow. To move these unsold cars, they often have to offer big discounts, cutting into their profits. It also means that carmakers are sending more cars to the market than there’s demand for.
This isn't just a logistical problem. When dealers are stuck with too much stock, they have to cut prices, hurting their margins. In some cases, they may even struggle to make loan repayments, which can lead to defaults.
So, why have inventory levels shot up?
A mix of weather disruptions and seasonal factors is to blame. Earlier this year, extreme heat delayed the monsoon season, disrupting the usual market activity. When the rains finally came, they were excessive, causing floods in several regions and discouraging people from buying cars during these tough conditions.
On top of that, the Shraddh period—considered an unlucky time for big purchases like cars—happened just before the festival season, further holding back demand. Many potential buyers chose to wait for the festive season to make their purchases.
Despite these setbacks, manufacturers kept sending cars to dealerships, expecting a spike in festive season demand, which led to the massive inventory buildup we're seeing now.
Now, it's normal for inventory levels to rise before the festive season, as dealerships gear up for more buyers. Historically, stock levels can increase to about 60 days’ worth of sales during this period. But this year, the inventory has gone beyond that, hitting 80-85 days—an unusually high figure.
Something similar happened in 2022. Inventory spiked before the festive season, but sales rebounded sharply by November, helping dealerships clear out most of the excess. Strong consumer sentiment and year-end discounts fueled record-breaking sales, bringing inventory back to normal levels by year-end. So, the 2022 spike was just a short-term issue.
But 2023 was a different story. Inventory levels surged again during the festive season, but unlike 2022, the excess stock didn’t fully clear. While sales improved towards the end of the year, it wasn’t enough to bring inventory levels back to normal. This leftover stock from 2023 carried over into 2024, and now, combined with this year’s buildup, the problem has worsened.
The auto industry is now facing a serious inventory crisis. While festive sales might help ease some of the pressure, the sheer volume of unsold cars, plus the lingering stock from last year, has put dealerships under a lot of stress.
Aggressive discounts might help clear some of this excess inventory, but it could also take a toll on the industry’s profitability.
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This post was first published on Substack.
SEBI Registered Investment Advisor (RIA NO: INA000017505) | Expert in Retirement Planning & Tailored Investment Solutions | Former Senior Equity Research Analyst at Edelweiss
1 个月Adanis foray into cement has other angles 1. Providing large steady cashflows unlike infra related assets which has dependence on regulations (power) and global trade (ports) 2. Fly ash (by product from power), freight costs (port access), electricity costs are sizeable components of mfg costs. These can meaningfully come down due to group's presence and enhance margins for all entities. 3. Ports, airports and real estate consume sizeable cement. Adani is present in all these 3 verticals. So both demand and supply at negotiated rates will be beneficial too.