Indian cement makers are increasingly opting for brownfield expansion over the greenfield route.
Cement demand is anticipated to improve in the coming quarters led by a pickup in affordable and rural housing, and infrastructure-related projects. An easier and cheaper way to capture that demand for companies is via a brownfield expansion.
Faster turnaround time, lower capital expenditure and better returns on capital employed are some advantages that are driving cement companies towards brownfield expansion.
The cement industry saw 62% of capacity addition through the greenfield route over fiscal years 2015-2018, said a 25 June report by domestic brokerage house Spark Capital Ltd.
However, now most companies have resorted to expanding through the brownfield channel in their existing areas or expanding clinker at existing locations and commissioning grinding unit in the end market, it added.
A slew of companies including Shree Cements Ltd, Sagar Cements Ltd, Ramco Cements Ltd and JK Lakshmi Cement Ltd have undertaken brownfield expansion.
As Chart 1 shows, almost 46% of new capacities planned over the next four years are though the brownfield route. And considering the number of brownfield expansions announced in the last one year, the sector’s supply estimates have changed significantly (see Chart 2).
However, a key concern for cement makers currently is lack of pricing power. Unless demand revives significantly, incremental supply in any form—greenfield or brownfield—would mean a further delay in overall price improvement.