Takeover of Raasi Cements by India Cements

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Background Contd...

ICL was no stranger to Raasi. In 1995, one of Raju's sons-in-law sold the 0.68 million shares in his possession (roughly 4 per cent of the company's equity) to Srinivasan, on the understanding that the shares would be bought back in more favourable times. According to Raju this was done without his knowledge. Since then, ICL had been quietly increasing this stake. The company bought an additional 0.13 million shares in 1996-97 at an average price of Rs 90, taking its stake to around 5%. When the share dipped to Rs 50 in October 1997, it was an opportune moment for ICL to increase its holdings in Raasi and by late 1997, ICL increased its stake in Raasi to 8%.

Industry Profile In the late 1990's the Indian cement industry was a highly fragmented one. There were 117 plants belonging to 59 companies spread across the length and breadth of the country, with an installed capacity of 109.97 mtpa.7 In the early 1990s, the industry expanded considerably as new plants with large capacities came up. The success of the economic reforms of the early 1990s was a boost to the expansion plans of the cement companies. However, in the mid and late 1990s, as demand for cement declined, the share prices of most companies fell. In the late 1990s, acquisitions triggered off consolidation in the cement Industry. The process of consolidation started in 1998 with ICL taking over Visaka Cement and CCI's plant at Yerraguntla, (Andhra Pradesh) and Grasim taking over Dharani Cement and Shri Digvijay Cements. Also, in 1998, Lafarge, a French building material multinational took over Tata Iron and Steel Co's (Tisco) 1.7 mtpa plant. (Refer Table II for major deals in 1998-99).

TABLE II
MAJOR DEALS IN 1998-99

Source: Business World, January 22, 1999.

The main reason for the sudden spate of acquisitions was that overcapacity had squeezed margins, making it impossible for the smaller, inefficient players, especially in the north and west, to carry on with their operations. Capacity had grown by 9% a year, whereas demand had grown by only 7%. The industry was operating at an average capacity of 81% in 1996-97, 1% less than in the previous year. But most plants need to operate at over 85% capacity utilization to make a profit.⁸

In contrast to the northern and western regions, in the late 1990s, Southern region had a deficit of cement. In the late 1990s, both Larsen & Toubro (L&T) and Gujarat Ambuja Cements Limited (GACL) tried to set up their private jetties in Kerala to procure shipments from their respective Gujarat plants. However, the local cement lobby thwarted their attempts, and as a result, neither L&T nor GACL was able to set up a jetty.

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7] As in March 1999.
8] BusinessWorld, April 7, 1998.