BackUltraTech's new capacity expansion is good but could weigh on cement prices
Analyst caution that fierce competition in the East would mean cement companies could start chasing volumes at the expense of realizations, which would impact their margins
PremiumUltraTech Cement Ltd has laid out a three-year capacity expansion plan. The company, which is upbeat on the sector’s demand prospects, will increase the clinker capacity by 9.1 million tonnes (mt) and the grinding capacity by 12.8mt by Q4FY23. This is in addition to the ongoing capacity expansion of 6.7 mt and 2.3 mt for grinding and clinker, respectively.
UltraTech, which is pan-India focused, is considered a proxy for the cement sector. As such, this announcement bodes well for the industry’s long-term demand outlook. The incremental expansion will help the company achieve its long-term volume growth target of 8% compound annual growth rate (CAGR).
“We believe that the announcements made today have added a new growth narrative as the execution of the earlier targets such as integration and profitability improvement of the acquired plants and deleveraging of the balance sheet seem to be achieving targets," analysts at Emkay Global Financial Services Ltd said in a note on 3 December.
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That said, it could mean near-term pricing pressure, especially in the eastern region, which is already grappling with oversupply. Nearly 52% of UltraTech’s additional capacity is focused in the east as the company aims to save on logistics costs. India’s per capita consumption of cement has risen from 190kg to 227kg in the last three to five years, according to the management. However, in the east, consumption is lower at 203kg. So the market could absorb capacities without impacting pricing, the management said.
Still, analysts have sounded caution about downward pressure on cement prices given the spree of capacity addition by other large cement makers. In a report on 4 December, analysts at Jefferies India Pvt. Ltd said UltraTech’s announcement raises concern on industry pricing power in the medium term. “We have already seen players (Shree, JK Cement) announcing expansions that may cloud medium-term visibility on cement pricing," the note said.
Further, analysts are of the view that UltraTech’s low capital expenditure cost may prompt the company to prioritize volumes. UltraTech would incur a total capital outlay of ₹5,480 crore funded through internal accruals.
Analysts said this works out to a capex cost of $58/tonne, which is significantly below the benchmark range of $75-80/tonne. The reason for a low capex per tonne is that 70% of this expansion is brownfield in nature, which is more cost-efficient than greenfield expansion, analysts said.
There was another key takeaway for investors. The management expects the company to be debt-free by fiscal year 2023 despite its overall growth capex plans of ₹6,500 crore.
Analysts say, deleveraging could help UltraTech bridge the valuation gap with peer Shree Cement Ltd, which is the most expensive listed cement stock and debt-free company.
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