Let’s talk about the big news from the deal street the dhani group is set to buy wholesome india’s assets abuja simmons and acc for 10 and a half billion dollars in what will be the largest infrared materials deal in india and it all began with baffling media reports that halsim the world’s biggest cement maker may exit india a country.
Which makes up 23 percent of its global cement capacity arani taking the entire india inc by surprise by going ahead and very smoothly sealing that deal with open this would make it the largest deal in the indian cement industry and one of the biggest exits of an mnc from india hi everybody on 16th of may 2022 the.
Legendary business tycoon gotham adani won the race to acquire a major stake in ambuja cements and acc for 10.5 billion dollars and as soon as this deal got finalized the adani’s became the second biggest cement manufacturer in india and while every single news channel has told us the basic details of this deal the most important part that they missed.
Out on is the business strategy of the adanis so in this episode today let’s do a deep dive and try to understand why did the adani’s acquire a stake in ambuja and acc what exactly is their business strategy and most importantly as investors what do we need to understand about the changing dynamics of the cement industry of india and the.
World itself this video is brought to you by wind wealth but more on this at the end of the video the first and the most obvious reason for adani’s acquisition of ambuja and acc is something called backward integration now if you’re not an mba student it might be a little difficult for you to comprehend so let’s try to.
Understand backward integration using the simple analogy of a grocery store you see guys the supply chain of a grocery store looks something like this we first have the manufacturer then we have the distributor the distributor is the person who actually buys these products in huge quantities from the manufacturer and then we have small.
Retail shops who buy products from the distributors in small quantities eventually the retailer sells it to the customers this is the simple supply chain of retail stores in reality we also have wholesalers and local distributors but for our concept let’s use this simplified version now let’s say we have a businessman called mr.
Kothari mr kothari is a marwadi businessman who has 10 grocery stores in pune and one of the most profitable products he sells is a packet of ghee now he buys 10 000 packets of ghee per month at 420 rupees each and sells it at an mrp of 520 rupees now this is when he realizes that dude if he gets ghee at 420 rupees the distributor gets it at.
360 rupees right so if kothari himself became the distributor he could actually get it at 360 rupees and make more profits so you know what he goes on to acquire his own distributor and becomes a major distributor for all retailers in pune and now his own kirana stores become his distribution company’s clients.
And now the same 10 000 packets of ghee that he used to buy at 420 rupees he buys them from his distribution company at just 400 rupees and sells them at 480 rupees whereas two other retail stores his distribution company sells it at a normal price of 420 rupees because of which they would go on to sell it at 520 rupees so kothari’s distribution company.
First makes a 40 rupees profit when he sells it to his retail stores then his retail stores make a profit of 80 rupees per packet when he sells it to the customers and then when he sells it to other retailers he further makes a profit of 60 rupees so you see what happened a retailer became a distributor and started increasing his profit.
Margins but at the same time he is also able to sell the product to the customers at a much cheaper rate eventually he is able to compete with other retailers so if there are five local stores while all four stores will sell gear at 520 rupees kothari’s retail stores will attract a lot more customers why because he’s.
Selling his product at 24 cheaper cost similarly the same ketchup that he used to buy at 90 rupees he sells it to his own retail stores at 70 rupees eventually sends it to the customer for 120 rupees he sells shri khan to his retail stores at 160 rupees and sells it to the customer at 200 rupees so you see what happened mr kothari was able to.
Increase his profit margins by becoming the distributor and then he became his own client because of which he is able to control the prices better and lastly because his company is both the distributor and the retailer he is able to sell products at a cheap rate and at the same time have a competitive advantage over other kirana.
Stores in the locality this way tomorrow he can go on to expand his business to 20 30 40 retail stores and he would only keep making more money and the next step to this is when kothari realizes that dude being the distributor he already has a supply chain to push 50 000 packets of ghee three lakh packets of milk fifty.
Thousand packets of shrikhand and 000 packets of paneer so instead of buying these products from the manufacturer why doesn’t he himself become the manufacturer so then mr gothari would then go on to acquire a dairy company that would.
Produce all the dairy products and push those products to its distribution supply chain all the way up to his retail business and to the customers again he’ll get more margins more control and more expansion this is what we call as backward integration wherein a company goes on to acquire critical entities of its own.
Supply chain to become more profitable to have a competitive edge over other rivals and lastly to have a better control over the supply chain eventually expanding the business this is exactly what mr adani is doing with ambuja and acc as we all know the adanis are known to be builders and they have an enormous business in.
Construction in the infraspace wherein they are building thousands of kilometers of expressway thousands of crores worth of ports airports and power plants and on top of that they also have residential and commercial properties coming up and all these projects require a ton of cement and a ton of steel.
And now that adani has bought a major stake in ambuja and acc just like kothari’s retail stores became his own distribution company’s clients in this case all adani companies in the construction or related business will go on to become ambuja and acc’s clients in fact this is the reason why mr adani.
Said and i quote on the demand side we continue to execute on a massive number of construction activities that span every one of our infrastructure businesses i therefore expect us to be one of the largest customers of our own cement business so you see just like mr kothari was able to have.
Better control and better profits through backward integration mr adani and his company is expected to have better control over the prices of the cement better supply and more importantly an edge over their competitors were again building ports and buildings it’s just that instead of a packet of.
Ghee you have a bag of cement and just like kothari would make money by selling his dairy products like paneer milk and shrikhand mr adani would use and sell all kinds of cements like ordinary portland cement portland pozzolana cement and portland slag cement for their own projects eventually to increase their own profits and this.
Brings me to the second reason and this is something that you can literally find on every single news article on the internet which says that since the adani group takes up giant infra projects from the government itself in the next few years as a part of the pradhan mantri ava’s yojana we have 100 smart cities 200 airports housing for all and all of.
These will skyrocket the demand for cement eventually benefiting the cement industry of india so when the adanis build such projects the cement orders at ambuja and acc will increase eventually gauda madani’s goal of doubling the capacity of these companies is expected to be fulfilled this is the story behind adani group’s.
Acquisition of ambuja and acc now the question over here is if india is such a lucrative and profitable market why did wholesome sell its take to adanis and leave india all together because you see the stock price of ambuja is steadily appreciated by 200 in the past few years the profits of the company have risen steadily and it’s.
Already the second largest producer of cement in india then why did holsim sell and as investors why is it super important for you well the first reason for this is that wholesome is a swiss company and switzerland is one among the nations that have actually signed the paris agreement and switzerland’s goal is to.
Actually get to net zero greenhouse gas emissions by 2050 and if you look at the most emission intensive industries in the world you will know that even if the entire cement industry is considered to be one country it would still be the third largest greenhouse emitter in the world only behind china and the us secondly if you remember from our.
Hydrogen episode we have something called carbon border tax coming out which is literally bringing in a mega trend of decarbonization of industries carbon must have its price because nature cannot pay this price anymore the idea of a carbon border tax is gaining ground in the united states and.
The european union a carbon border tax to level the playing field for european products if other countries do not go as far as us or refuse to go in the right direction western countries don’t want to see companies packing up for places like china or india because of their less stringent environmental rules which make the goods produce there cheaper a.
Huge emitter of co2 that’s often overlooked is cement every year more than four billion tons of cement are produced accounting for around eight percent of global co2 emissions we have a carbon neutral vision for 2050 and we are very much aware now what kind.
Of steps we have to do in order to get there so long story short if your emission levels are beyond a certain limit you will be charged a surcharge on top of the cost of your product in the european union and other strict countries that apply the carbon border tax and when it comes to cement it is one of the most polluting commodities in.
The world so the cement industry in general is a very risky business to actually have in your portfolio with respect to vision 2050. as a result countries like swizzleland are pushing their companies to go green because of which they already have one of the highest carbon taxes in the world and wholesome is even ahead of sizzle and by.
The way they are literally building a world-class product as a substitute to cement itself and one of the best examples of the same is that eco-packed concrete which reduces carbon emissions by 3200 as compared to conventional concrete similarly they have eco planet green cement roofing solutions motors and a lot more coming up so as an.
Investor this is a very very big deal because it’s almost like volkswagen telling the world that they will produce only hydrogen fuel vehicles and they’ll stop producing petrol and diesel cars all together that is how big the green and clean industries are expected to become in the next 20 years and now if you look at.
Wholesome in india you will know that india alone contributed to 26 of their co2 emissions so merely by selling their cement business in india they will be reducing their carbon emissions portfolio by a large large extent in fact this is the reason why you will see that they did not just quit the indian market but they also quit brazil.
Northern ireland sri lanka malaysia and even russia so as investors this tells us one thing if the largest cement manufacturer in the world is so bullish that it’s quitting the emerging markets to bet on green concrete and green products it’s a revolution in the making and we need to pay attention to this.
And this brings me to the most important part of the episode and that are the study materials and the reference links that we need to study as investors before you invest into cement or infra stocks but before we move on i want to thank our partners wind wealth for supporting our content for full disclosure even.
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Cred and many more and you can check them out from the special link in the description moving on the first thing that i’m attaching is a mckenzie report on the emergence of green cement and the trajectory of the cement industry of the world itself read this very very carefully because it will give you a golden insight about the.
Future of our infraspace the second thing that i’m attaching is a clear tax link on what are the pros and cons of backup integration so if you want to understand the basics of backup integration that’s a very good link to refer to so the next time if a news comes out that somebody is doing backward integration you will have a.
Much better understanding of the same and lastly the one thing that absolutely blew my mind is that if you draw a comparison between ultra tech cement ambujan acc you will see that ultra attack has a capacity of 120 million tons per annum whereas amuja simmons installed capacity is just 31.45 million tons per annum and acc has a production.
Capacity of 34.45 million tons per annum so you see even together these companies have a total production capacity of only 65.9 million tons per annum which is nearly half of that of ultra tech so considering the fact that adani’s are known to be market leaders in any category they enter in.
The agani versus ultra attack battle is going to be super interesting to study as students of business so keep an eye on that that’s all from my side for today guys please have a look at your study materials if you learned something available please make sure that the like button in order to make beauty bubba happy and for more such insightful.
Business and political case studies please subscribe to our channel thank you so much for watching i will see you in the next one bye bye you