95%! That's their market share!

Gas Authority of India Limited (GAIL), a wholly owned company of the Indian government and the youngest Navratna company, was established in August 1984. It happens to be the sole behemoth in gas transmission & marketing in India, while being counted among the best oil majors in India as well. From those days of being a 100% equity holder, the government has considerably reduced their controls, with a much less current share ownership of 67%. The company has a wide array of activities, which includes transmission, distribution and marketing of LPGs, liquid hydrocarbons and petrochemicals.

The quarter ending June 2006 has given to GAIL a tremendous yoy growth of 34% in its earnings. This comes on the back of a substantial increase in its turnover, which amounted to Rs.4,078 crore in the same period (as against Rs.3,288 crore in the same quarter last year). Proshonto Bannerjee, Chairman and MD, GAIL, advanced the argument, “Today, the energy sector in India is booming and natural gas is living up to its epithet of being the ‘fuel of the future’. This lays more emphasis on our efforts to effectively harness the immense potential of this valuable fuel. In this context, we are spurred by a strategy to expand our business profile by developing into an integrated company across the natural gas value chain and making our presence felt across the gamut, from exploration and production to gas transportation and processing.”

Breaking down these effervescent, though credible, words, the fact is that GAIL has a four-part business strategy. First, protection of the existing LNG businesses; secondly, upstream integration; thirdly, downstream integration and lastly, diversification of business internationally. The key strategic moves that have set GAIL apart from its other competitors is their continual focus on upstream integration, that is, by maintaining and increasing their work in the field of explorations and refining of the new avenues.

The company plans to spend a capacious sum of Rs.700 crore in the next two years to expand its functions and presence. Even currently, it has an astronomical 5,600 kms of gas pipelines spiralling the country (running through eleven states), apart from an additional 1,922 kms of LPG pipelines. Just for those who didn’t have an idea, GAIL happens to have an elephantine government gift ed 95% of market share in the natural gas business in India. GAIL also happens to be a major contributor to the urea production in India, thus making a mark in the Indian agriculture sector as well.

Its strong international presence in the form of trans-national gas pipelines in Myanmar, Iran, Turkmenistan, apart from LNG explorations in Australia, Qatar, Oman Abu Dhabi, Iran and Algeria, speaks volumes about GAIL’s global orientation. No wonder then that GAIL has been ranked amongst the top four Indian companies by S&P and Crisil, due to its strong business and financial profile; it further obtained the highest domestic rating of LAAA by ICRA, the Platt Global Energy Award 2005 for industry leadership and the Oil and Gas Conservation Fortnight Award for “Best Overall Performance”. And now, they’re #4 on our list!

Be quick, or be dead!...
Expansions, takeovers and greenfield projects, cement has it all

It's indeed extremely eccentric that the cement sector, which was once nursed by the government, has become the centre of gravity for players across the globe. Raison d’être? Well, the sector in a span of two decades the has matured from a dilapidated stage to a juncture where it has outclassed industries in nations like US & Japan to become the second largest cement producer in this gigantic ball game, second only to China. In the last decade, this sector documented a CAGR of 8%, above the world average of 3.5%, and China’s sector average of 7.2%.

The industry is riding on the back of towering cement prices. With demand surpassing supply, prices have gone upto Rs.200 for the period from April to July 2006, an increase of 25% in contrast to last year. The demand is so strong that even the onset of floods in three states couldn’t spoil the party for the industry. K. M. Birla, Chairman, Grasim Industries, commented to media, “The government’s initiatives on infrastructure development and the boom in the housing sector are major growth drivers for the cement industry. In the medium term, the demand and supply situation is expected to be in balance, with a couple of years before the next cycle of new capacity enters the market.” On the subject of rising prices, Swati Korvi, cement analyst, Parag Parikh Financial Advisory Services Limited, enunciates, “We have witnessed a surge in the cement prices owing to the robust demand from housing and infrastructure projects. However, with capacity expansion plans in the pipeline, we can expect some pressure on realizations in FY09.”

So what will be the vista of the industry ten years down the lane? Jayesh Doshi, VP Treasury, Gujarat Ambuja Cement Ltd. (GACL) answers, “On the consolidation front, the sector would remain fragmented with about 30-35 players.” The fire that was started by GACL in the 1990s by taking over Modi Cement and DLF Cement is being re-ignited by global giants. Holcim – via acquiring controlling stakes in GACL, ACC and ACEL – has taken the top slot in the sector, leaving Grasim snubbed. On the other hand, Lafarge, the world’s largest cement company, is moving on altogether a diff erenttrajectory. The company’s existing capacity in India is a miniscule 5 MMT, which certainly does not justify their global size and scale. Bertrand Collomb, Chairman, Lafarge, explains the anomaly thus, “India continues to remain a key growth market for us; (but) it has been tough getting returns on investments, and it will take time before we realise our initial investments. If others believe that they can get returns faster, good luck.”

With more global players like Cement Francais S.A, Italicement and Heidelberg hoping to cash in on the opportunities in the sector, small and medium-sized players are viewing these developments as an opportunity to exit this theatre of war with a big booty. On May, 2006, Cement Francais S.A, France, acquired 50% stake of its JV partner (K. K. Birla) in Zuari Cement for Rs.6 billion; and the most recent case is Mysore Cement, an S. K. Birla group company, in which Heidelberg acquired a controlling stake of 51% for $93 million. These are the true colours of globalization and cement is no exception to it. Where there are the small fish genuflecting against the foreign players fortified with a massive war chest, there are only a few good companies like Grasim, who are holding their own. With a capex of Rs.27 billion, Grasim is making valiant attempts to regain its lost tiara. Comments Rajan Kumar, cement analyst, Networth Stock, “The expansion is in response to recent aggressive moves by Lafarge and Holcim. Capacity expansion is in order to consolidate Birla Group’s position in cement industry. Along with the planned 8 MMT expansion of Grasim in north India, the 4 MMT Ultratech expansion would take AV Birla’s capacity to 45 MMT by the year 2009.”

Indeed, the thumb rule of surviving in this ferocious sector, where over 68 MMT of new capacities are on the anvil in next three years, is to either go for a kill... or be killed!

...Or be ACC! India’s largest!

ACC was an upshot of the coming together of ten cement companies under one parasol way back in 1936, at a time when terms like mergers and acquisitions didn’t even exist. Right from its derivation, the company has been involved in the task of taking the Indian cement industry to newer heights. Since its seven decade long journey, this company has gone through many hands from Tatas to GACL to Holcim, but still its operations never suffered, which gives an insight of how effective, efficient and dedicated ACC’s management has been. Today, by being part of the international Holcim group, the company looks forward to a smooth integration, relying on the anticipated synergies.

And now, N. S. Sekhsaria, Chairman, ACC, comments, “I believe that the company stands at another important threshold – one that can open up global benchmarks for performance.” Threshold it sure is! For the six months ending June 2006, ACC’s sales stood at Rs.31.84 billion (growth of 16%) and profits touched Rs.6.43 billion, roughly twice the figure registered in the previous year. At ACC, cement accounts for maximum business, followed by refractory and ready mix operations. The company dominates around 12.8% of the total market in FY 2005-06, although market share declined by 0.4% as compared to the financial year 2004-05.

The installed capacity of the company is 20 MMT, making it the largest cement company in the country. It has 14 cement factories under its belt. Furthermore, a well laid out channel network across the nation makes ACC a tough contender to be dealt with. With an army of more than 170 warehouses and 9000 dealers – which makes sure that the produce reaches every nook and cranny of the country – Associated Cement Companies is our sectoral #1!