By Rasananda Panda and Pooja Bhatia, July 16, 2016 : Nirma – a brand that offers variety of products including detergent and FMCG segment – and a household name in India has unexpectedly bagged a large deal, leaving behind the rivals like Ajay Piramal’s Piramal Enterprise and Sajjan Jindal’s JSW cement to win Lafarge’s India portfolio of 11 million tonnes per annum for $1.4 Billion (Rs. 9400 crore). With this, Nirma made its presence in construction materials business. The deal, now subject to the clearance from the Competition Commission of India (CCI), will catapult Nirma – an erstwhile small player in the cement business till now – to one of the top 10 cement players (sixth to be precise) in India (Ultra Tech , Jaypee are at top).

Nirma already has its cement manufacturing unit at Rajasthan with capacity of 2 million ton capacity per annum (mtpa). This deal will enhance its capacity to 13 mtpa and with 72 ready mix sites now can aim to give strong competition to Chinese building material market. This acquisition is definitely an achievement and a transformational step for the group’s cement business. Nirma’s reputation in cement business will emerge with stronger footprints in Northern, Western and Eastern parts of the country. The group believes that with such a strong platform like Lafarge’s India business, they will continue to serve customers with the philosophy of better value for better living. It is also planning to spread its sales across 11 states in India.

On the other hand, the proceeds of this deal will help Lafarge Holcim to reduce its debt further and will divest Lafarge from its India market. It is a major step towards their divestment program and could conclude its global merger with Swiss’ Holcim. Looked differently, the present move by Lafarge is in sync with Indian government’s emphasis towards making the debt-ridden company to find out managerial ways towards its repayment to their banks and thereby enabling the financial wellbeing of the banks. It is understood that Nirma will fund the deal through equal proportion of equity and target-level financing. The proposed deal was in line with the group’s strategy to pursue organic and inorganic business expansion to develop strong operations across its diversified business verticals. It is an extension of the market and product expansion strategy by the Patel’s.

The recent moves by the Union government towards housing for all with increased emphasis on affordable housing and smart city projects shall make the Indian cement industry to grow exponentially. The push by the governments in Western and Northern Indian states to housing and infrastructure development provide the required credence to Nirma’s cement venture. The Patels are aggressive bidders as they anticipate the growth of cement industry in Modi-led infrastructure boost to the economy. The similar sentiment is also being echoed by other cement manufacturers in the country.

According to rating agency Crisil, Nirma with net sales of Rs 7240 crores reported a consolidated net income of Rs. 760 crore for the last financial year. Nirma is planning to sell bonds worth Rs. 4000 crore to fund this acquisition – a bravery that can only be shown by a serial Gujarati entrepreneur like Karshanbhai. The entire deal value is roughly around $127 per tonne – less than what Birla Corp bid last year in the aborted deal by Lafarge. This, again is a reflection of guts along with the benefits of conventional wisdom in doing business – leave aside the financial acumen in doing business with a debt equity ratio of 0.36. Now we can see more business vibrations at Nirma House their Corporate Office in Ashram Road, Ahmedabad as his management graduate sons, the new age entrepreneurs taking the helm of affairs

This deal has definitely raised a very pertinent question – will Nirma undercut the prices in cement to establish and consolidate its position in the entire country? We see a more organised cement industry here which acts in collision. Nirma may not be able to bend the rules. Cement industry is cyclical in nature and with its three-fourth of capacity in east, Nrma will have more constraints in bending the rules. Emphasis on infrastructure by the present government may be able generate enough orders for the cement industry. This is definitely a fodder for class room discussion on the product and industry life cycle looking at both the short term growth and long term vision behind the consolidation.

Nevertheless, let us not lose sight from the famous battle that Nirma had with HUL and P & G in detergent segment in late 80s and early 90s. This has become a classic text book case study in marketing in India and abroad. This is going to be one more interesting case from Nirma on mergers, acquisitions and financial restructuring; and strategic management for followers of market and business houses.

• Rasananda Panda and Pooja Bhatia are Professor and Research Assistant respectively in the Business Management Area, MICA. They can be reached on Email: Panda@micamail.in