Overhang of capacity constraints lifts for ACC, Ambuja Cements2 min read . Updated: 14 Dec 2018, 02:04 PM IST
Lack of clarity about growth plans of ACC and Ambuja Cements had investors worried, given competitors UltraTech Cement and Shree Cement had been aggressively adding capacities
After a hiatus of more than a year, pan-India cement producers ACC Ltd and Ambuja Cements Ltd are expanding capacities. ACC will be incurring a capital expenditure of ₹ 3,000 crore to add 5.9 million tonnes per annum (mtpa) cement capacity and 3 mtpa clinker capacity in Uttar Pradesh and Jharkhand. The company’s existing cement capacity stands at 33.41 mtpa.
In a separate filing to stock exchanges, Ambuja Cements said that it will invest ₹ 2,350 crore for a series of capacity additions. These include a clinker unit, a cement grinding unit, and a captive power plant and waste heat recovery system. Following these expansions, its total cement capacity will increase to 31.5 mtpa.
Lack of clarity about growth plans had investors worried, given competitors UltraTech Cement Ltd and Shree Cement Ltd had been aggressively adding capacities.
That explains the Street’s positive reaction to the expansion plans of ACC and Ambuja Cements. The two stocks have gained 4.8% and 2.6%, respectively, since the capacity expansion news became public.
Although the timeline of commissioning of capacities is not known yet, the worry of capacity overhang is behind these stocks.
“Capacity constraint was a key concern for both ACC and Ambuja. With these expansions, that overhang will be over. Going by ACC’s free cash flow at current levels, from FY2018-2020, the company could generate ₹ 4,000-4,500 crore. So, internal accruals should be sufficient to fund the capex of ₹ 3,000 crore. Capital is not a constraint for both these companies," said Binod Modi, senior research analyst at Reliance Securities Ltd.
Since these companies had been abstaining from expanding capacities despite being flush with cash, some investors were worried that their parent firm LafargeHolcim might use these funds for further restructuring, points out another analyst.
He said because there was no plan on how their capital would be deployed, it gave peers UltraTech and Shree Cement an edge over them. On the valuation front, ACC and Ambuja Cements are trading at a discount to their peers.
However, analysts now expect these stocks to rerate and valuations to improve.
Meanwhile, from the industry’s perspective, these expansions would weigh on the demand-supply scenario, especially in central India. Overall cement demand is yet to catch up with the spree of capacity additions that have happened recently. And that has kept the sector’s utilization levels below 70%. Secondly, higher supply in absence of adequate demand growth, would delay the sector’s price recovery, which is already subdued.