Comments by Pradnya Ganar
June 2022
The other day I came across this dialogue by Amitabh Bachchan from the movie Piku. He tells his daughter, “Shaadi bura nahi hai, lekin purpose hona chahiye”. That translates to saying that there needs to be a purpose in marriage. I couldn’t have agreed more with the legend. What is marriage after all? Two people with strengths and weaknesses of their own, finding a common ground of love and respect, committing to a lifetime journey of learning from each other and growing together. Management students have a term for this - synergies.
I must admit the word synergy is quite a misused used one, in business context. For me, synergy is when two plus two equals five and not four. Not all the M&A activities that companies undertake are able to achieve this, some just to do it for the sake of irrational growth and eventually end up destroying value. On the other hand, synergies can be realised in many other cases through forward or backward integration resulting in improved efficiencies or possibly through entry into new markets or business segments.
We witnessed a very significant acquisition by Adani recently. The group led by Mr. Gautam Adani made their entry into the cement business by acquiring Holcim’s stake in ACC and Ambuja for a total consideration of USD10.5bn. This implies valuation of USD168/t of consolidated capacity, significantly higher than replacement cost of USD100/t.
To quote Confucius - ‘If one wants to define the future, they must study the past’. Mr. Narotam Sekhsaria’s autobiography “The Ambuja Story” provides a very insightful and detailed picture of the journey of Ambuja and the evolution of the Indian cement industry. I am sharing some of key highlights from the same book.
Mr. Narotam Sekhsaria's journey from being a cotton trader to an industrialist is worth admiring. Efficiency and integrity were the key values that Mr. Sekhsaria believed in his life and business. During his stint as a cotton trader, Mr. Sekhsaria after getting a hunch that cotton prices might increase, bought additional quantity for one of his client who was on vacation. The prices of cotton had indeed doubled by the time his client was back. Mr. Sekhsaria assured him that he had already bought additional cotton at lower price. The client was surprised when Mr. Sekhsaria refused to accept the additional commission and was willing to forego INR50lakhs from the rally in cotton prices. ‘I was an agent and was entitled only to my regular commission,’ writes Mr. Sekhsaria in the book.
With no prior knowledge of cement, Mr. Sekhsaria started the journey of Ambuja from a plant in Kodinar, Gujarat with the help of Gujarat Industrial Investment Corporation (GIIC). The company successfully scaled up its ordinary Portland Cement (OPC) sales in Gujarat and gained 25% market share in the state. Mr. Sekhsaria believed in being honest and fair in all dealings. One such example is the way Ambuja appointed their dealers. Traditional way was to squeeze massive cash deposit to the tune of INR20 to 30lakhs (INR2 to 3Crores in today’s value) from them for dealership. Ambuja however took a nominal payment with the only condition that the dealer would make the payment within the prescribed time.
Mr. Sekhsaria also suggested Ambuja hire twenty-five marketing representatives. These representatives would be spread all across the state of Gujarat and will be in regular touch with the dealers and stockist understanding the market requirements. He insisted they wear a tie like the pharma reps did because in India, any man with a tie or suit was respected more. Mr. Sekhsaria always challenged conventional ways of doing business and figured out ways to make it more efficient. While the typical credit cycle for the industry was 30 days, Ambuja was also able to reduce the same to 7 days. This also helped the dealer to receive early payments from their customers, which improved the cash flow in the entire system.
Fearing risk of regional concentration, Ambuja started planning their expansion in North. Himachal Pradesh, with its rich limestone reserves was an ideal choice but also a difficult one considering the topography of the place. However, ACC’s success in commissioning their Gagal plant was a reference and so despite all challenges, Ambuja’s plant was set up in the village of Darlaghat in Solan district. This was also the pre-computer era, and all the mapping and recording work had to be done on paper which made the process all the more tedious. The grinding unit for Darlaghat’s clinker was identified in Punjab. Punjab also had a problem with the disposal of fly ash, which Ambuja would utilize to manufacture Portland Pozzolana Cement (PPC).
Ambuja was known for its OPC in West and to make PPC cement a success in North, advertising had a huge role to play. The very popular Ambuja ads with Boman Irani and Great Khali today are a testimony to the efforts of the company on this front.
Despite growing ambitions, Ambuja cement was also one of the most cost efficient company and focussed on curtailing pollution even before ESG was a thing. The story behind Ambuja starting their coastal transportation operations from Gujarat to Navi Mumbai is also quite interesting and close to home! Mr. R.C. Sinha, then MD of the City and Industrial Development Corporation (CIDCO) was charged with developing the Navi Mumbai project. He had been instrumental in developing the NRI complex in Seawoods. Mr. Sekhsaria’s cordial relationship with R.C. Sinha helped Ambuja get a land for Port in Navi Mumbai and also a buyer in CIDCO for their bulk cement.
The second half of 1990s saw a wave of consolidation across the country with the abolition of licensing and dilution of the MRTP (Monopolistic and Restrictive Trade Practices). ACC acquiring Modi Cement; India Cement acquiring Visaka Cement; L&T acquiring Narmada Cement; Lafarge acquiring the cement division of Tata Steel and Raymond Ltd were some of the deals that happened.
ACC also acquired DLF’s 1.5mt unit in Rabriyawas (situated in Pali district of Rajasthan) with the help of Mr. R. V. Pandit. Mr. Pandit, an ally of Mr. Atal Bihari Vajpayee held strong swadeshi nationalistic views and approached Mr. Sekhsaria after reading about a possible takeover of DLF by Lafarge. ‘How can you let a multinational buy an Indian company?’ was his question to Mr. Sekhsaria. Post the DLF acquisition, Ambuja also bought Tata’s ~14.4% stake in ACC at INR 370 per share, which was met with a lot of criticism from the media.
In 2001, Grasim had acquired the 10.45% stake that Reliance Industries owned in L&T and had further increased its holding to 14.9% through market purchases. To ward off a hostile bid on the whole company, L&T had agreed to sell its entire 16mt capacity cement division to Grasim. [1] With market getting competitive and fearing a hostile takeover of ACC, Mr. Sekhsaria eventually approached Holcim to buy its shares in ACC. Holcim agreed to pay an EV of INR4,500 per tonne for the ACC share (20% higher than what Grasim had paid to L&T).
On the personal front, Mr. Sekhsaria was diagnosed with mouth cancer and had to undergo multiple surgeries. Keeping his health in mind, he eventually decided to sell his stake in Ambuja as well to Holcim for which Holcim agreed to pay INR9,000 per ton of EV. Mr. Sekhsaria resigned as soon as Holcim bought stake in Ambuja in 2006 and was succeeded by Mr. Singhvi.
Cut to May 2022, the Ambuja and ACC assets of ~70mt have found a new owner in the Adani group. The value and purpose this deal can serve to be a discussion for some other day.
References
[1] Page 290, ‘The Ambuja Story’ by Narotam Sekhsaria
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Pradnya Ganar was a Research Analyst in the Equity Investment Management team at UTI AMC Ltd.
