Cement company shares fell on Friday after UltraTech approved a capital expenditure of Rs 12,886 crore to expand its capacity. The news comes after Adani Group revealed last week that it will purchase a stake in Holcim.
Ultratech Cement was down 2%, Ambuja Cement was down 0.3 percent, ACC was down 0.7 percent, India Cement was down 0.1 percent, Shree Cement was down 1.7 percent, Ramco Cements was down 3.1 percent, JK Lakshmi Cement was down 0.1 percent, Dalmia Bharat was down 3.7 percent, and JK Cement was down 2.5 percent.
The scramble to expand capacity comes as the government promises to spend a record Rs 7.5 trillion this year to encourage economy by building highways and ports.
UltraTech Cement stated on Thursday that it has increased its grinding capacity by 22.6 million tonnes per annum (mtpa) through a combination of brownfield and greenfield projects. The money will be raised through a combination of debt and internal accrual. Analysts predict the clinker factories to be set up throughout regions, despite the fact that the expansion plant has not indicated any locations for these expansions.
“We expect a clinker capacity expansion of 16mtpa. UltraTech Cement may set up four clinker plants of 12,000tpd, or five plants of 10,000tpd each,” according to Motilal Oswal Research. This project will contribute to a domestic grey cement capacity of 153.5 million tonnes per annum by FY25. Grinding capacity is being increased by 16.3 million tonnes per year (from 114.6 million tonnes per year to 130.9 million tonnes per year by March 23).
Analysts are particularly concerned about margin pressures due to growing input costs in the first half of fiscal year 2023, as demand is dropping in May and monsoon is approaching. As a result, cement companies will report reduced volumes in the first quarter of FY23.
The lack of strength in deciding pricing trends, according to Citigroup, could damage smaller cement manufacturers. It also noted a growing likelihood of mergers and acquisitions in the industry, particularly following Adani Group’s acquisition of Holcim and UltraTech’s expansion – both brownfield and greenfield. The latest capex assures that the Birla Group remains India’s largest cement producer.
Cement companies are already under pressure as a result of rising coal costs, with the full impact expected in the current fiscal year. Analysts believe that despite the increase in cement prices in April, it will not be enough to cover the higher input costs. The inability to properly pass on costs to customers is still the main source of concern.
” While we are not changing our long-term positive view on the sector, we expect Cement stocks to underperform in the near-term, given: the sustained increase in energy costs, the entire impact of which should be felt in first half of FY23; the near-term weakness in demand (channel checks indicate a volume decline of 15 percent QoQ in 1QFY23 v/s a fall of 8-9 percent QoQ historically); and the partial rollback of the price hikes in May 2022,” says Motilal Oswal Securities.
Many cement companies have recently announced capacity expansion plans. Shree Cement has previously stated that its capacity would double in the next five to six years. However, in the last two years, it has not been extremely aggressive in placing orders. Orient Cement, Birla Corp, JSW Cement, and Dalmia Bharat are among the companies that have announced capacity expansion plans.