Margin Worries Likely To Persist For UltraTech To Shree Cement
Aggressive capacity expansion plans to maintain pressure on the cement industry.
Poor pricing power, a slow recovery and rising costs have hurt cement makers’ profitability. Analysts expect the pressure to persist.
The industry’s margin narrowed over the last four quarters, with the sharpest contraction for Shree Cement Ltd., as companies could not fully pass on the higher raw material costs to consumers because of tepid demand. That restricted price hikes, and even led to rollbacks.
Yet, India’s largest cement maker UltraTech Cement Ltd. announced an aggressive capacity expansion plan, following billionaire Gautam Adani’s foray into the sector. That added to existing plans to boost production capacity.
Concerns over heightened competition hurt the market sentiment as evident from a 13-21% drop in share prices of large producers such as UltraTech, Ambuja Cements Ltd., ACC Ltd., Dalmia Bharat Ltd. and Shree Cement in the last three months.
The cement industry, according to Nirmal Bang, has lined up capacity addition of about 70 million tonnes per annum by FY25.
UltraTech Cement has announced a capex of Rs 12,886 crore to expand capacity by 22.6 MTPA by the fiscal ending March 2025.
Adani Group, having acquired ACC and Ambuja Cements, aims to double the total production capability to 140 MTPA in the next five years. Shree Cement Ltd., too, plans greenfield expansions.
Such an aggressive push by the industry comes when higher costs have hurt realisation or what a cement maker earns on every tonne of the commodity. A steep increase in operational costs have caused the industry’s margin to contract. Prices of pet coke and imported coal more than doubled between FY20 and FY22.
“Rising expenses amid weak pricing power should continue to hurt industry margins throughout FY23,” HSBC said in its June 10 report. It downgraded Ambuja Cement and ACC to ‘reduce’ from ‘hold’ on higher debt obligations and lower rewards when compared to risk.
Nirmal Bang too cut price targets for the cement companies. Goldman Sachs expects the sector’s profitability to decline sequentially in the ongoing first and the following quarter due to lower-than-expected volumes and prices in April-June and monsoon in July-September.
HM Bangur, managing director at Shree Cement, had indicated that price hikes this year are unlikely to be as high as the previous year.
The industry usually increases cement prices by 3-5% every year but surging petcoke and coal prices led to a 7-8% jump in 2021, Bangur told BQ Prime in an earlier interview. This time the companies’ efficiency in protecting margins will drive hikes more than rising costs.
Ritesh Shah, research analyst at Investec Securities, said cement firms “face a trilemma on market share, profits, and valuation”. That’s because of Adani’s cement scale plus scope of better cost curve positioning, scale aspirations of other top players, 44% clinker addition announcements over FY21-24 from beyond the top five cement players, he told BQ Prime.
Disclaimer: Adani Enterprises is in the process of acquiring a 49% stake in Quintillion Business Media Ltd., the owner of BQ Prime.