Strategically cut costs and strengthen the Southern Empire Foundation.

The Adani conglomerate’s desire to expand is not a new topic for everyone. As the demand for infrastructure increases in Modi 3.0, so does the need for relevant industries revolving around it. Among them, the cement sector is one of the most important entities. And the titanic Adani group has always focused on the same and waited for opportunities. After acquiring Ambuja, ACC Cements and Sanghi, the Adani empire has made its mark on another cement company, Hyderabad-based Penna Cements. Recently, Adani Cement’s Ambuja unit acquired Penna Cement Industries for INR 10,422 crore, which increased its production capacity and market share in South India.

So how are the Adani Group’s exposure to Indian infrastructure and focus on expanding its footprint in the cement sector complementary strengths?

In 2022, the Adani Group entered the cement market by acquiring assets from Ambuja Cements and ACC. This has helped the group become the second largest cement company in India, with a market share of 14% and a production capacity of 79 MPTA (million tonnes per annum). The latest addition, Penna Cement, will increase its production capacity to 89 MTPA. According to Ambuji’s filing, the Adani group expects to have an installed capacity of 100 MTPA by 2026 and 140 MTPA by 2028.

Cement company Adani currently generates over INR 5,000 crore of free cash flow annually. Each MTPA of new greenfield capacity requires an investment of around INR 1,000 crore, which means the Adani group can add around 5 MTPA of capacity per year, organically, using internal accruals.

The Adani Group aims to double its operating EBITDA per tonne from the current level of INR 1,000. Shree Cements, one of the most efficient cement companies in the country, currently has an EBITDA per tonne of INR 1,229 while Ultratech, the largest cement company, is generating INR 1,101 per tonne after proper implementation of waste heat recovery plant. In such circumstances, the projected profitability of Adani Group appears to be high. To achieve this, it focuses on cost rationalization by using synergies with other group companies to reduce production costs.

How will shaking hands with Penna Cements reduce Adani cement logistics costs?

According to CFO Vinod Bahety, after the acquisition of Penna Cement, increasing the use of the sea route for transportation would help Adani Cements reduce logistics costs. Adani Cements currently transports less than 2% of its cargo by sea, but access to 5 bulk cement terminals in Kolkata, Gopalpur, Karaikal, Kochi and Colombo through Penna Cement is expected to increase this figure to 10% by 2027-28. March).

Shipping goods by sea can reduce expenses by up to £300-400 per tonne, giving an overall saving of £50-70 per tonne. Adani Cements uses the sea for some shipping purposes in Sanghi Industries and Ambuja Cements. The maritime logistics plan will mature immediately after this purchase. In 6-12 months we will see significant progress in maritime logistics, added Bahety.

The most important feature of this transaction is that Adani cement will have full strength to service the Indian peninsula. Many companies have cement, but this company has proven to be much more visionary when it comes to maritime logistics infrastructure. That’s why experts considered Penny’s buyout a good decision.

In terms of freight transportation, having maritime logistics infrastructure and bogie cement fly ash scrapers (BCFCs) – wagons used to transport cement and fly ash – will reduce logistics costs. In addition, fly ash from the group’s power plants guarantees a steady supply at reduced prices, increasing EBITDA per tonne.

Moreover, on the raw materials side, which accounts for approximately one fifth of total expenses, the company would have access to a larger share of coal from its own mines and the possibility of purchasing imported petcoke, which would translate into lower fuel prices.

Transport and energy expenses account for almost half of the total costs of the cement industry. The Adani Group is increasing the use of cheap green energy to minimize energy expenses. Green energy share will reach 30% this financial year and may increase to 60% in FY28. The group’s thermal and renewable energy business will help reduce energy costs.

How will this acquisition help Adani’s penetration in the southern belt?

Adani Cements has announced that it aims to reach 140 million tonnes of production capacity by FY28. Earlier this week, it was announced that the company has earmarked $3 billion for acquisitions to overtake the country’s largest cement maker, UltraTech Cement, in the next 3-4 years.

In April, Ambuja Cements had decided to buy a mill in Tamil Nadu for Rs 413.75 crore. This acquisition increased distribution efficiency in response to the growing demand for cement in the region. Ambuja Cements has since made a second purchase, acquiring 100% stake in Penna Cement Industries Ltd for Rs 10,422 crore. The deal not only increased the group’s position in South India but also provided access to the Sri Lankan market. On June 13, Adani-owned Ambuja Cement announced a $1.25 billion deal to acquire Hyderabad-based Penna Cement. Due to its significant distribution network and manufacturing capabilities, Penna Cement has a strong presence in Andhra Pradesh and Telangana.

Why are cement companies betting on south India?

Southern states such as Karnataka, Tamil Nadu, Andhra Pradesh and Telangana are experiencing rapid urbanization and more and more residential, commercial and industrial developments are being built. Major infrastructure such as highways, bridges, metro systems and airports are being developed in this area, creating optimal demand for cement. Moreover, the cement industry in South India is rather fragmented, allowing existing companies to consolidate and increase their market share.

What makes this move strategically sound for the Adani empire?

According to a recent report by US brokerage Jefferies, the company is back in expansion mode and plans to invest over $90 billion in capital expenditures over the next decade. Jefferies forecasts FY24-FY28 capital expenditure to be $5-7 billion, up from $3.3 billion in FY24, based on estimates for Adani Enterprises, the group’s business incubator.

Consistent investments in capacity expansion limit cement companies’ return on capital employed (RoCE) growth to over 15-17% despite operating margins of 18-21%. As a result, long-term profitability depends largely on pricing discipline. Unlike their larger counterparts, mid-sized cement companies may lack pricing power, making them takeover targets.

The most important thing.

Over the last decade, the cement sector has witnessed a turnover of around 200 MTPA of capacity, which is approximately one-third of the total capacity in India. The capacity market share of the top five companies reached 53% in FY24 compared to 33% in FY10. This is expected to increase further as most of the new capacity is added by large players.

Given the government’s emphasis on infrastructure and the construction of physical infrastructure such as airports, bridges and others, demand for government projects is high and capable of absorbing a certain amount of supply. Given that the same government is still in power, there is no reason to believe that the focus on infrastructure will diminish.