BOMBAY, 21 July 2003 — The Indian cement industry, the world’s second-largest market for cement, is undergoing a major phase of consolidation. This fact was further reiterated when a fortnight ago Grasim Industries’ purchased L&T’s cement business, making it now the biggest player in the Indian cement industry.

This deal has catapulted the Aditya Birla group flagship into the top league of cement-makers in Asia with a combined capacity of 31 million tons. Grasim Industries’ buyout of the cement business of Larsen & Toubro makes the Aditya Birla group the seventh largest player in the world with a combined capacity of 31 million tons. Gujarat Ambuja, along with its strategic partner ACC, have access to around 29 million tons of capacity.

Grasim will own 51.5 percent stake in L&T’s 16.5 million ton cement business, which is to be hived into a new company. And L&T is happy as it is now free to focus on its core strengths in engineering and construction. Tough negotiations preceded the country’s largest-ever cement deal. The Birlas had earlier included key assets like ready mixed concrete plants, and the L&T cement brand in its initial valuation of Rs.130 per share for a vertical demerger. Grasim, however, gave up its claim and will finally pay Rs.171.3 per share for the cement business, minus these assets.

The L&T brand also remains with the company. Grasim will have the option to use the L&T brand name till July 1, 2004, or the effective date, whichever is earlier.

The Rs.40.00 billion acquisition cost (including the Rs.18.60 billion debt liability) will start yielding respectable returns only after three years.

Analysts say that India Cements which is the top player in the region, is set to lose the coveted position to the Aditya Birla group flagship, which will now command a market share of 17.8 percent. Post Grasim-L&T deal, India Cements will slip to the second position for the first time with an overall market share of 17.7 percent in the four southern states.

However, India Cements will retain its numero uno status in Tamil Nadu and Kerala. In Tamil Nadu, the Aditya Birla group with a 22.6 percent share of the market, followed by Grasim with 15.4 percent. ACC has a rather modest 3.8 percent market share in the state.

Grasim, along with Cemco, the cement company to be carved out of L&T, will have a dominating presence in the western region as well. Its total market share in the region shoots up to 16.8 percent, as against Gujarat Ambuja Cements’ (GACL)14.4 percent. ACC, which is 14.4 percent owned by Gujarat Ambuja, has a 11 percent market share in the west.

Grasim will now control a whopping 36 percent share of the market in Maharashtra, followed by GACL and ACC at 17.4 percent and 16.3 percent respectively.

In Gujarat, Grasim will be the industry leader with a 31.2 percent market share, as against 27.1 percent held by GACL. Following the buyout, Grasim will emerge as the largest player in Karnataka with a 30.7 percent market share.

In the northern states, ACC will remain the top cement maker with a market share of 16.5 percent, followed by Gujarat Ambuja with 15.3 percent. Grasim will become the third largest player in the region with a 12.1 percent marketshare.

India’s 120-million-ton Indian cement industry is fragmented with 53 operating companies and 118 manufacturing locations. Grasim Industries’ taking a controlling stake in L&T’s cement business has thus accelerated the consolidation process which could, in the coming months, pave the way for much higher realizations. There is talk that after this deal, transnationals like Cemex and Holcim will now be forced to look out for smaller capacities.

Some recent examples of consolidation include Gujarat Ambuja picking up a 14 percent equity stake in ACC, Gujarat Ambuja taking over DLF Cements and Modi Cement, India Cements taking over Raasi Cement and Sri Vishnu Cement, Indian Rayon’s cement division merging with Grasim, Grasim taking over Sri Digvijay Cements, and acquiring a stake in L&T Cement & Narmada Cement.

Multinational cement companies have also taken the acquisition route in the Indian cement market. Lafarge, the French cement major, has acquired the cement plants of Raymond and Tisco in the recent past, while Italy-based Italcementi has acquired a 50 percent stake in the K. K. Birla-promoted Zuari Industries’ 1.7 mtpa cement plant in Andhra Pradesh.

Similarly, Zuari Cements (a 50:50 joint venture between Zuari Industries and Italcementi) has acquired Sri Vishnu Cement’s one mtpa cement plant in Andhra Pradesh from India Cement.

Players feel that the coming months could witness consolidation of cement capacities. Construction slows down during rains which adversely impacts cement prices. Realizations are lower by Rs.5-15 per bag across major markets. Marketmen believe that post

L&T-Grasim deal, Aditya Birla group Chairman Kumar Mangalam, Birla would now be inclined to look at cement capacities owned by his grandfather B. K. Birla.

Cement analysts are also of the opinion that post the Grasim-L&T deal, global players will be forced to look at smaller capacities as the biggies are no longer available.