What UltraTech's Rs 12,886 cr capex plan means for cement stocks

NEW DELHI: UltraTech Cement's decision to invest Rs 12,886 crore to ramp up its capacity by FY25 may only add to fears of margin erosion in the sector that is marred by weak demand, low pricing power, high fuel cost and the entry of a new aggressive player Adani Group.

Analysts said while the capex announcement itself is not a surprise, it is a few months ahead of its expectation. With other players also looking to ramp up capacity, near term pressure on cement stocks is all but likely, they said.

"While the low capex cost of $74 per tonne (against the perceived replacement cost of over $100-120 per tonne with recent inflation) is a positive for UltraTech, in times of trouble, it could imply a low ask rate for Ebitda margins. With chances of peers also joining the capex drive, we maintain a cautious sector stance," Edelweiss said while suggesting a target of Rs 5,996 on the stock.

UltraTech Cement has announced plans to add 22.6 mpta of capacity which would be nearly 17 per cent of its capacity post completion of projects on-hand by FY25. The cement maker, analysts said, had already hinted at plans firming up towards organic expansions and therefore the new capex announcement does not come as a major surprise.

The Street may view the expansion as UltraTech's move to retain its leadership after it lost out on Holcim’s India assets to Adani Group. It may trigger expectation of a race towards maintaining or increasing capacity share given that several peers have strong balance sheets and also the intent to add significant capacity, analysts warned.

"Under normal circumstances, the capex announcement would have been neutral or positive for UltraTech– as it endeavours to maintain market share with consistent volume growth visibility. But in times of sector headwinds, the capex is likely to hurt the sentiment further. Numero uno, UltraTech is doing what is best for all its stakeholders from a medium to long-term point of view," Edelweiss said.

Motilal Oswal noted that even Gautam Adani intends to double the capacities of ACC and Ambuja Cements over the next five years once the acquisition is completed.

Given the high cost of acquisition at $180 per tonne of Holcim’s stake in ACC and Ambuja Cements, it makes sense for the Adani group to increase capacities through brownfield expansion, which has a relatively lower capital cost, it said.

Among other players, Shree Cement had earlier said it will double capacity over the next five-to-six years. But it has not been very aggressive in placing orders over the last two years. Few other players like Orient Cement, Birla Corporation, JSW Cement, and Dalmia Bharat have also indicated their capacity expansion plans, Motilal said.

With the capacity addition plans, said CLSA, UltraTech has reinforced leadership through ROCE-accretive expansion. It finds UltraTech better placed in otherwise difficult macros and has a target of Rs 7,640 on the stock.

To get some perspective, 10 cement companies, accounting for 60 per cent of sector overall capacity, reported a 20 per cent YoY decline in Ebitda in the March quarter, owing to higher input cost inflation. In FY22, free cash generation of 10 cement companies that Emkay Global tracks declined 67 per cent YoY to Rs 6,200 crore after working capital blockage of Rs 2,400 crore and a 57 per cent YoY increase in capex to Rs 15,200 crore.

Emkay expects cement stocks to be range-bound given the lack of triggers in the near term. Any correction in input prices will be a key thing to watch out for, it said.

"While we are not changing our long-term positive view on the sector, we expect cement stocks to underperform in the near-term, given the sustained increase in energy costs, the entire impact of which should be felt in 1HFY23; the near-term weakness in demand and the partial rollback of the price hikes in May," Motilal Oswal said.

This brokerage has a target of Rs 7,825 on the UltraTech stock. Edelweiss finds it worth Rs 5,996. Emkay prefers Ultratech and Shree Cement in large-caps, Birla Corp in mid-caps and Sagar Cement in small-caps.

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