UltraTech expansion plans suggest higher competition likely in cement biz

Other key players have also announced plans to significantly raise capacities

The entry of the Adani Group into the cement sector, with its buyout of Ambuja and ACC, is bound to have major repercussions. Adani would hold the second-largest market share once the acquisitions are completed in the next 6-9 months.

The largest player in the industry, UltraTech Cement, is gearing up for stiffer competition by clearing the capex for an addition of 22.6 million tonnes (MT) of capacity. The UltraTech board has just cleared a capital expenditure plan of around Rs 12,900 crore (working out to approximately Rs 5,700 per tonne). This will include both greenfield and brownfield expansions. 

UltraTech’s current grey cement capacity is 120 MT (including 5.4 MT overseas). The expansion will add 11 MT of clinker and about 16 MT of cement capacity in financial year 2022-23 (FY23), increasing total grey cement capacity to 136 MT. The management guidance is for an addition of 4 MT in the September quarter (Q2FY23) and around 12 MT in the second half of FY23. Commercial production is expected to go on-stream in a phased manner, increasing grey cement capacity to 159 MT by FY25. 

After this is completed, its pan-India market share will be close to 21 per cent, with a 13-15 per cent share in the south and east, 22 per cent in the north, and 35 per cent in the central and western regions. UltraTech’s capacity utilisation was around 77 per cent in FY22.

Other companies (including the Ambuja-ACC combine) also have expansion plans and around 80-90 MT by FY25. Media reports indicate that the Adani Group may seek to double the capacities of ACC and Ambuja over the next five years. Shree Cement also has stated plans to double capacity.

UltraTech’s strong balance sheet will ensure this planned expansion without stress. The net debt stood at Rs 4,000 crore, with a net debt-to-Ebitda ratio of 0.32x as of March and some analysts believe the company would be debt-free by FY24 end. However, the capex plans could delay UltraTech’s ability to go net cash positive by FY24 and the company may achieve that only by FY26.

The Q4FY22 results of the 33 listed cement producers showed that while aggregated revenue expanded to Rs 56,801 crore from Rs 53,321 crore the previous year, Ebitda fell to Rs 10,336 crore from Rs 12,496 crore a year ago. The weak realisations are due to muted demand, high power, and transport and raw material costs. The Adani Group’s entry could imply more competition and, hence, more margin pressures. This may be a negative factor when it comes to valuations.

The short-term trends remain poor for the industry with sustained rise in energy costs likely to impact through the next several months, and there are likely weaknesses in demand, with Q1FY23 despatches showing a volume decline of 15 per cent QoQ. While Q1 is usually seasonally weak compared to Q4, this volume decline is higher than normal.

The UltraTech stock hit a 52-week low of Rs 5,608.80 on Friday, before making a small recovery to Rs 5,677.40 on the BSE as the news was discounted. It’s down 13 per cent in the last month and down 13.9 per cent in the last year. Clearly sentiment is poor at the moment.