Rs 100 Crore benefit for the Birlas

Mumbai: The AV Birla Group's acquisition of a 10 per cent stake in Larsen and Toubro is expected to save them around Rs 100 crore through the reduction in freight charges and would control 25 per cent of the Indian cement market. The Grasim-L&T combine has currently a huge capacity of 29,000 tonnes per annum.

Analysts tracking the cement industry say Birla's new strategy would result in savings in freight cost because cement supply in overlapping markets can be controlled by rationalising sales to such markets. Currently, Grasim and L&T derive 25 per cent and 32 per cent of their sales volumes respectively in Maharashtra, the most favourite market for all cement companies.

It is considered that Grasim spends around 10 to 15 per cent of its profits generated from the Maharasthtra circle only for meeting its freight costs involved in the transportation of cement. Currently, Grasim transports cement from its Andhra and Madhya Pradesh plants to cater to the needs of the Maharashtra market. Analysts say with the equity acquisition in L&T, Grasim can reduce its freight cost as L&T cement manufacturing facilities are located in Maharashtra.

Nabiket Moghe, an analyst with Motilal Oswal Securities, says ACC has been managing to reduce the freight cost per tonnes by 12 per cent in a year through its alliance with Gujarat Ambuja Cement (GACL), which had acquired a 4.4 per cent share in ACC about two years back. “Similarly, Grasim and L&T can be benefited from such a synergy. Grasim expects to save Rs 1 billion through the reduction in freight cost.“

GACL- ACC and Grasim-L&T are the biggest cement makers in the country. As a result, both the factions would have a control over the cement prices in their respective regions. “We feel GACL-ACC can manage to improve prices in northern India, while the Grasim-L&T combine would follow the same strategy in regions where the combine has a significant control,“ Moghe says. GACL and ACC have a strong presence in northern and western India while Grasim-L&T
has a presence in western, central and eastern India.

According to an analyst with SBI Caps, there is a lot of overlapping in the cement industry in the states like Maharastrha, Madhya Pradesh, Bihar and West Bengal. These overlapping states account for 50 per cent and 44 per cent respectively of Grasim and L&T's sales volumes. Besides, the level of consolidation in the cement industry in these states is higher than the national average, which would enable the Grasim-L&T combine to determine prices.

They say in Maharashtra alone the Grasim-L&T combine has a sale of 56 per cent (25 and 31.5 per cent respectively) while the other faction, GACL-ACC, has only 45 per cent (30 and 15 per cent respectively) sales in the state.

Apart from Grasim-L&T (290 million tonnes) and GACL-ACC, (280 million tonnes), India Cement (100 million tonnes, Lafarage (40 million tonnes), Madras Cements (38 million tonnes) and other Birla companies (100 million tonnes) are the major players in the Indian cement industry.