Gautam Adani faces off against Kumar Mangalam Birla over cement in India

Gautam Adani’s meteoric rise to the world’s ninth-richest person began with a port on India’s west coast in the 1990s and an abiding friendship with a politician who’s now prime minister. The rest has been all about finding the next industry that will make his debt-fueled empire a little bigger.
 

The port brought in coal, liquefied gas and palm oil — and so Adani got into them and adjacent businesses. For example, once he had begun supplying coal to power plants, he entered mining — in India, Indonesia and Australia — and his own electricity generation and distribution. He supplied piped gas to Indian cities, and set out to harvest solar and wind power. Extending his dominance in logistics to owning airports, grain silos and data centers was only logical; as was selling a cooking medium to Indians to fry their samosas: He just had to refine the Indonesian palm-oil landing at Indian ports, of which he now owns 13.

Finally, if a single company was going to create so much infrastructure, didn’t it make sense for it to also produce cement? It is with this most recent expansion — Adani is paying $10.5 billion to acquire Holcim Ltd. which is a Swiss building-materials specialist, entire India operations — that the businessman from Prime Minister Narendra Modi’s home state of Gujarat has met some resistance. The challenger isn’t arch-rival Mukesh Ambani, the only Indian tycoon currently richer than Adani. Another billionaire has risen up.

Kumar Mangalam Birla comes from old money, unlike Adani, a first-generation entrepreneur. His great-grandfather, who diversified from textile trading to jute manufacturing and a lot else besides, was a confidante of Mahatma Gandhi’s during India’s freedom struggle. Birla’s father —  stymied by the socialist turn in post-independence economic policies — globalized the commodities conglomerate by expanding in Indonesia, Thailand and the Philippines. Birla, who turns 55 this month, built on that when he bought the US-Canadian Novelis Inc. in 2007 to become the world’s largest aluminum-rolling company.

But then Birla had to deal with the 2008 financial crisis, followed by a boom-bust in China’s commodities demand and a long, expensive entanglement in telecom, an industry disrupted by Ambani’s 2016 foray with cheap data and free voice calls. While a government-backed rescue for Vodafone Idea Ltd. has prevented the telco from going belly up, a new battle has begun. Adani, pursuing his strategy of entering adjacent industries, is challenging Birla in the latter's family turf of cement.

No surprise then that Adani’s Holcim India acquisition evoked a quick response. Birla-controlled UltraTech Cement Ltd. recently announced a capital expenditure of 129 billion rupees ($1.7 billion) to increase its cement capacity by 22.6 million tons per annum. That works out to $75 per ton. Meanwhile, Adani is paying almost double that per ton for taking over an estimated 73 million tons per annum capacity this year at the two Holcim companies, Ambuja Cements Ltd. and ACC Ltd. If Adani is going to buy scale at a premium, Birla will build cheap. The game is on. 

Birla, who was worth $6.5 billion in early 2013 when Adani wasn’t even a billionaire, is now almost $85 billion behind. But he knows his cement: UltraTech’s current capacity of about 120 million tons per annum gives it a market share of 20%, ahead of the 12% that Adani just acquired. It isn’t, however, an assured lead. As Mumbai-based Kotak Institutional Equities has noted, Adani has the option of increasing his capacity to 100 million tons through relatively inexpensive expansion: by spending $80 to $90 per ton. That should cut his acquisition cost. 

UltraTech also has a $3.20-$3.90 advantage over Holcim in how much Ebitda — earnings before interest, taxes, depreciation and amortization — it can eke out per ton. Kotak says that Adani can close the gap by eventually merging the two acquired firms, ending royalties to Holcim and saving costs via waste heat recovery. But Birla isn’t without options. He, too, will enter adjacent industries to strengthen his moat. One area is paints, where the group wants to be a strong No. 2 player in India in five years. 

It’s too early to say who will win India’s building-materials war, though one thing is certain: Birla won’t take another new challenger lightly. In 2017, when he decided to merge his Idea Cellular Ltd. with Vodafone Group Plc’s India business, he may have thought that scale —  the merged entity began as India's largest telco by subscribers  — would protect him from relentless pricing attack by the telco owned by India’s biggest billionaire, Ambani. It didn’t. The government won a case in the Supreme Court over past dues from cellular firms, putting Vodafone Idea’s very survival in doubt; customers fled the joint venture in which Birla owns a significant minority stake. Finally, New Delhi had to offer a bailout to prevent the telco market from becoming an Ambani-led duopoly.

Cement isn’t as highly regulated as telecom. But Birla must still rue the ease with which Adani beat his rival bid — and one more by another Indian billionaire — for Holcim’s assets by agreeing to take over any liability emanating from a price-fixing case brought by India’s trustbuster. 

The real question before Birla, however, runs deeper. If Adani has decided to dethrone him as the king of cement, what’s the right response: Fight or flight? His great-grandfather, the patriotic Ghanshyam Das Birla, bet on Gandhi, and won against the British rulers and their companies like Andrew Yule & Co. Going up against Adani — who also views himself as a nationalist businessman — may be no less a gamble in Modi’s India.