JSW Cement Enters M&A Race with Adani for CK Birla’s Orient Cement

Mumbai: Sajjan Jindal-led JSW Cement has begun evaluating acquisition of the promoter stake in Orient Cement Ltd (OCL) from CK Birla, said people aware of the development, amid a consolidation wave in the sector that’s seen the Aditya Birla and Adani groups race to pick up assets across the country.

The development sees the entry of a third contender for OCL’s 8.5 million tons per annum (MTPA) capacity after the Adani and Aditya Birla groups, both of which have been in active discussion with Delhi-based CK Birla at various points since late last year when JP Morgan kicked off the sale process. ET was the first to report about these developments in editions dated October 18, 2022 and July 4th.

JSW Enters the Fray

JSW Cement, led by Sajjan Jindal, is looking into buying the promoter stake in Orient Cement Ltd (OCL) from CK Birla. This move comes amid a consolidation wave in the cement sector, with the Aditya Birla and Adani groups also trying to acquire assets across the country. With JSW entering the fray, there are now three contenders for OCL’s 8.5 million tons per annum (MTPA) capacity. Previously, Adani and Aditya Birla groups have been in active discussions with CK Birla since late last year when JP Morgan started the sale process.

History of Competition

Jindal’s interest in OCL’s 8.5 MTPA capacity adds a third contender in the race, joining Gautam Adani and Kumar Mangalam Birla. Both Adani and Birla have been in talks with CK Birla since late last year when JP Morgan initiated the sale process. In 2022, all three competed for the $6.5 billion acquisition of Holcim’s India assets, with Adani ultimately winning and becoming the second-largest player in India’s building materials industry. Since then, Adani and Birla have acquired seven companies between them.

Stake and Valuation

The Birla family and private investment vehicles hold 37.9% of Orient Cement. Buying this stake would trigger an open offer for an additional 26% stake from minority shareholders. In the past three months, OCL’s shares have increased by 56%, anticipating a sale as CK Birla’s second generation is not interested in running the business. Based on current market prices, acquiring 63.9% of OCL could cost around ₹4,546.54 crore. OCL’s current market value is ₹7,115.09 crore.

Strategic Moves by Competitors

Adani and Ultratech’s negotiations have been slow due to valuation issues and environmental clearance for key limestone mines. Seeing an opportunity, Jindal joined the race. Recently, Adani acquired Penna Cement, and Ultratech bought a stake in India Cements, eventually gaining majority control last Sunday.

JSW’s Acquisition Strategy

“JSW has been keen to acquire assets like Heidelburg’s India assets, Penna, and India Cement. Heidelburg wanted an equal joint venture, and Adani moved quickly ahead with Penna,” said a person aware of the negotiations. “Orient Cement is a medium-scale asset and has been on JSW’s radar since the sale process began. Their efforts have intensified after the India Cements deal.”

Plans for Listing

JSW Cement plans to list its cement business next year. Acquiring OCL could facilitate a reverse merger and listing process.

Communication and Market Dynamics

CK Birla, chairman of the eponymous group, and Deepak Khetrapal, MD and CEO of OCL, did not respond to calls, emails, or messages. A JSW spokesperson declined to comment.

Potential Transaction Outcomes

There’s no guarantee these discussions will lead to a transaction, warned those familiar with the talks. “The competition is so intense that it’s now a seller’s market,” said a CEO of a rival cement company. “Birla will sell to the highest bidder.” OCL has an 8 MTPA limestone mine that could help new owners increase capacity to 16 MTPA.

In 2018, Orient Cement announced plans to double its capacity with a ₹2,000 crore investment, based on a supply contract with Telengana State Mineral Development Corporation (TSMDC). The company’s FY23 annual report mentions reopening its Rajasthan mines and plans to enter Northern India with a new 3 MTPA capacity, diversifying its reach and commanding a higher valuation.

Analysts’ Insights

According to sector analysts, Orient Cement’s promoters seek valuations higher than India Cements due to better assets and balance sheets. Penna’s sale of 12 MTPA valued it at $88/tonne, while India Cements’ (14.5 MTPA) deal ranged between $93/tonne and $112/tonne. Orient Cement trades at $100 EV per ton based on current capacity. It’s nearly debt-free, with a debt-to-equity ratio of just 0.07 in FY24.

Operational Performance

Orient Cement achieved 81% utilization in the fourth quarter, with sales volume growth of 24%, focusing on premium cement sales, which increased from 14% to 22% of total volume in FY24. “OCL’s valuation should be more than $110-112 EV per ton, translating into a market cap of around ₹8,100 crore,” said a person familiar with the talks.

JSW’s Expansion Plans

JSW Cement has a current capacity of 16.6 MTPA with plants in Maharashtra, Andhra Pradesh, and Karnataka. It aims to reach 26 MTPA by FY26 and 50 MTPA by 2030 through greenfield and brownfield expansions.

OCL’s Manufacturing Footprint

OCL’s manufacturing units are in Devpur (Telangana), Jalgaon (Maharashtra), and Chittpur (Karnataka), supplying 11 states across Central, Western, and Southern India. Western India accounts for 67% of sales, South India 24%, with the rest from Chhattisgarh and Madhya Pradesh. A successful acquisition would help increase capacity in complementary markets and improve market share in existing markets. Orient Cement has allocated ₹1,000 crore for expansion at its Telangana and Karnataka plants this fiscal year.