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NEW DELHI : Shares of Adani group cement producers—Ambuja Cements Ltd and ACC Ltd—have fallen 17-25% since 24 January after US short seller Hindenburg Research levelled allegations against the conglomerate. This contrasts with gains of 5.5-8.5% recorded by other cement manufacturers such as UltraTech, Shree Cement, and Dalmia Bharat during the period.

Some of the gains of Adani’s peers can be attributed to falling coal prices and a revival in cement demand. Sentiments have also improved with easing concerns around aggressive capacity expansions by the Adani group and associated pressure on cement prices, impacting other firms.

Graphic: Mint
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Graphic: Mint

The Adani group, which forayed into the cement business through its acquisition of Ambuja Cements and subsidiary ACC, had also shown its intent on doubling the capacities of the two firms over the next five years to around 140 million tonne per annum (mtpa). This had increased fears that the industry would face aggressive strategies on consolidation and market share gains, thereby leading to intense competition.

With the group embroiled in the turmoil, it may take a pause on aggressive expansions, said analysts. They added that the group may also find it difficult to raise capital for expansion plans. Meanwhile, a good demand outlook is likely to keep prospects for the cement sector positive, the analysts said.

Ambrish Baliga, an independent market expert, said cement demand is likely to stay strong led by increased government spending on infrastructure. He said the Adani group’s expansion plans in the cement business are now unlikely to happen in the next 8-24 months. Baliga kept a positive outlook on the sector and said overall capacity expansions have lagged growth in cement demand.

Mangesh Bhadang at Centrum Broking expects incremental capacities of about 85 MT and 87-90MT increase in cement demand over FY23-25. With capacity additions in line with demand growth, the outlook remains positive.

Meanwhile, rivals that had unveiled their own expansion plans following Adani’s move may now take it easy.

An investment manager at a domestic securities firm said other cement producers may sober down on their aggressive expansion plans. The consolidation in the industry, however, can continue with leaders such as UltraTech, Shree Cement, Dalmia Bharat and JSW Cement still looking for capacities for geographical expansion and market share gains.

How Ambuja Cements approaches its capacity needs though will be watched keenly by analysts looking at the ongoing fiasco. However, the company has adequate cash on books to provide for equity in case it is looking to raise funds. Ambuja and ACC (Adani group cement entities) were net cash positive companies, with a cumulative cash balance of 10,300 crore in FY23 (at the end of September quarter) as per analyst data. Ambuja is yet to declare its December quarter results.

Sanjeev Kumar Singh at Motilal Oswal Financial Services said that post the recent corrections, valuations of the two Adani group cement companies have become reasonable.

Analysts noted that even post the acquisitions, Ambuja Cements and ACC haven’t resorted to any pricing disruption and that may be the case moving forward as well since both may choose to protect their margins.

While demand has improved from November and was further better in January, cement prices remained under check.

All-India average cement prices have remained flat sequentially in January and no meaningful price hike announcement for February has been seen, Jefferies India Pvt. Ltd said in a 2 February report.

Demand, however, remains strong in the infra segment, though sluggish in the retail housing segment. The analysts maintained a positive demand outlook on pre-election spending (backed by strong capex growth allocation in the Union budget) and declining coal prices though narrowing window for price hikes is a risk for estimates.

ABOUT THE AUTHOR
Ujjval Jauhari
Ujjval Jauhari is a deputy editor at Mint, with over a decade of experience in newspapers and digital news platforms. He is skilled in storytelling, reporting, analysing and writing about stocks, investment ideas, markets, corporates and more. He is based in New Delhi.
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