ACC v/s Lafarge v/s Holcim

The 'cement story' is once again in the limelight. Global cement majors have been eyeing the Indian cement market for some time now. What makes the Indian cement market so attractive?

India is a developing country and so there are good growth opportunities. India's GDP is expected to grow at 8% annually and so the cement sector, being a core infrastructure sector, is expected to grow at 8% to 10% annually.

The world over, especially in developed countries, growth has slowed down, so the companies are moving to developing economies to tap the growing market. Cement being a bulk commodity, cannot be transported over long distances and hence there has been a scramble among global giants to acquire capacities in the country.

Against this backdrop, let us see how ACC, one of the largest cement companies in the country, compares with global giants like Lafarge and Holcim.

ACC: The company has a pan India presence and is particularly strong in the northern and the eastern regions. ACC has undertaken modernization and up gradation of its old plants. It has converted wet process of cement manufacturing to energy efficient dry process and has also reduced excess workforce. All this helped it to improve performance. Earlier, because of its old plants and excess workforce and a leveraged balance sheet, company always underperformed compared to domestic and multinational players. The capacity augmentation of its plants and favorable demand supply scenario has proven positive for the company.

Lafarge: Lafarge, world's largest cement producer, is among the first transnational to enter the Indian market and has already emerged as a market leader in the eastern region. Lafarge is increasingly focusing on developing economies like India, as diversified presence helps it to effectively counter the lower growth rates in its mature markets.

Holcim: Holcim, the Swiss giant, is one of the world's leading suppliers of cement, as well as aggregates, concrete and construction related services. It has a strong market presence in over 70 countries and across all continents.

Though, Lafarge was first transitional to enter India, it expanded at lower rate. Holcim entered later but has acquired major stake in two of India's biggest cement companies, Gujarat Ambuja (GACL) and ACC, the latter being in consortium with GACL. Lafarge is not looking beyond Eastern markets and expanding through brown filed and Greenfield expansion plans.

Holcim on the other hand, through its stake in ACC and GACL, has presence all over India. Holcim has targeted western markets through GACL and a stake in ACC (company that has pan India presence) will benefit it to explore other markets.

Let us have a look at the financial and operating performance of the three companies in recent times.

Parameter*	Units	Companies
		ACC	Lafarge	Holcim
Capacity	(MT)	18.3	160.0	160.4
Operating parameters
Net Sales	(US$ m)	715	20,676	14,774
Sales CAGR - (FY03-05)	(%)	6.7%	13.4%	27.4%
Operating margin	(%)	16.2%	14.8%	25.1%
Net margin	(%)	17.0%	6.9%	12.3%
Return ratios
RoNW	(%)	25.5%	8.8%	15.4%
RoA	(%)	11.8%	6.6%	4.8%
Debt to equity	(x)	0.90	0.15	0.89
Valuations
Price to earnings	(x)	22.7	17.2	16.2
Enterprise value per tonne	(US$)	256	212	192

*FY05 data

ACC's operating margins have expanded by 400 basis points since FY03 on account of operational efficiencies achieved. Earlier, company was operationally less efficient than its global peers mainly on account of its old plants and it was also hurt by lower realisations in the Indian market. Its net margins, excluding extraordinary effect of profit on sale of refractory business, stood at 8%.

Though 8% is lower, when compared to its transnational players and its performance in FY03, company has improved its performance. This can be attributed to better realisations on account of demand growth led by housing and infrastructure activities, apart from reduction in operating costs and reduced debt burden.

Holcim's performance also improved substantially on account of its expansion plans, reduction in debt and efficient use of resources. Exploring newer and developing markets has helped the company. In FY03 the capacity difference between Holcim and Lafarge was almost 6 MT but now both are almost neck and neck.

In case of Lafarge, increases in repairs, maintenance and distribution costs, as well as higher fuel and energy costs, negatively impacted earnings. Moreover it operates in saturated markets where margins tend to be lower and this is manifested in lower return ratios for the company.

As far as valuations are concerned, ACC because of its presence in a growing market and better operating parameters, trades at a premium over its much fancied rivals like Holcim and Lafarge, where high growth in developing economies get offset by a rather sedate growth in mature economies like the European nations and the US.