Aditya Birla hands over cement baton to Heidelberg in Bangladesh

In a regulatory filing, Heidelberg Cement Bangladesh Ltd has stated that it has entered into an agreement to acquire 100 percent shares of Emirates Cement Bangladesh Ltd and Emirates Power Bangladesh Ltd from UltraTech Cement Middle East Investments Ltd of the United Arab Emirates (UAE) at a total price around Tk 182.58 crore.

Both the non-listed cement company, with a less significant presence in the Bangladeshi cement market, and the supporting 10MW power plant entity are subsidiaries of UltraTech Cement Middle East Investments Ltd, which is a 100 percent subsidiary of Aditya Birla Group, the Indian conglomerate.

Analysts see in the move an unwillingness on the part of India's Aditya Birla Group to expand its cement business in Bangladesh, despite a double-digit industry growth and high scope for future expansion.

Industry experts, expressing their opinions on the agreed deal, note that overcapacity and extreme competition have squeezed profitability in the cement industry, making conditions really tough for small and mid-scale operators.

• Per capita cement consumption nearly doubled but still below world average

• Over 80 percent of the market share grabbed by top 10 manufacturers

• Heidelberg Cement may use its own and borrowed fund for the acquisition

• Heidelberg Cement's turnover nearly Tk900 crore in the first nine months of 2019

• Emirates Cement's annual sale below Tk300 crore mark and the company may earn moderate profits in 2019 too

Aditya Birla's UltraTech brand cement entered the Bangladesh market in 2011. Until now, though, its modern plant, equipped with German machinery, has remained confined to developing the product at an annual capacity of 5 lakh tonnes.

Minus around a capacity that is ten times more, it is extremely difficult for industry players to go ahead with an economy of scale that can help companies to be and remain competitive in a market dominated by high costs, said Masud Khan, a cement industry veteran. Khan recently retired from the position of Chief Executive Officer at the local cement exporter MI Cement Factory Ltd, popularly known as Crown Cement Group.

Top players in the Bangladesh cement industry have expanded their annual production capacity up to 30, 50, and even over 1 crore tonnes, which in turn has helped them to be aggressive in pricing and utilising their capacity much more than before, Masud Khan added, but the bottom line is gradually being squeezed.

The industry dynamic now is something like this, "Grow bigger and up to being one of the biggest or quit", said Khan. "It is a subject to the entrepreneur's decision whether a company will invest heavily to obtain the scale or go off."

"We see that Aditya Birla has opted for the second one and is handling the baton over to Heidelberg's Bangladeshi Subsidiary. It is a case similar to that of Cemex Cement, which opted out a few years ago."

In 2016, with an annual production capacity of 5.2 lakh tonnes, the Mexican construction material giant Cemex Cement sold its Bangladeshi business to Thai Siam City Cement, with the new owners in the mood to go for a moderate expansion in capacity.

Why Heidelberg sought the deal for acquisition

Officials of Heidelberg Cement Bangladesh Ltd declined to comment beyond the regulatory disclosures.

Sources at an equity research team informed The Business Standard about the assets of the companies subject to acquisition. They also shared their analysis on why the loss-making listed cement company is interested in the planned acquisition.

The UltraTech cement manufacturing plant of Emirates Cement Bangladesh at Muktarpur in Munshigonj district is situated on 16-17 acres of land, with the company itself buying a major portion of it. By owning the modern plant, Heidelberg will add an annual capacity of 5 lakh tonnes to its existing capacity of 28.5 lakh tonnes.

In future, unutilised land will help the company set up larger factories at the premises of UltraTech plant. The jetty there will be more convenient for transportation of raw materials and produced cement.

The acquisition may not be fruitful in the short term, but it looks promising over the long term as it is offering a moderately additional scale of economy along with the scope for future expansion.