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    Aggressive capacity expansion by large cement makers to impact smaller players, lead to consolidation

    Synopsis

    Large manufacturers, such as UltraTech Cement, Ambuja Cements and ACC, have better bargaining power given their scale which helps them achieve lower cost of production compared with smaller rivals. They also tend to have better distribution channels, which helps them improve their market share and capacity utilisation.

    Aggressive capacity expansion by large cement makers to impact smaller players, lead to consolidationReuters
    Experts believe that a rapid expansion in manufacturing capacity by large cement makers will further tip the scales in their favour.
    Aggressive capacity addition by large cement makers at a rate outpacing demand may lower industry-wide utilisation, possibly squeezing smaller players and further pushing consolidation in a freight-intensive sector where regional distribution reach is crucial for market dominance.

    Large manufacturers, such as UltraTech Cement, Ambuja Cements and ACC, have better bargaining power given their scale which helps them achieve lower cost of production compared with smaller rivals. They also tend to have better distribution channels, which helps them improve their market share and capacity utilisation.

    Experts believe that a rapid expansion in manufacturing capacity by large cement makers will further tip the scales in their favour.

    “Especially during Covid, larger cement makers used their financial muscle to expand market share and deleverage their balance sheets,” Hetal Gandhi, director at Crisil Research, told ET. “Once they deleveraged, they turned their focus toward capacity expansion.”

    Earlier this month, market leader UltraTech announced an ambitious Rs 12,886-crore investment plan to add 22.6 million tonnes per annum (MTPA) of manufacturing capacity over the next couple of years. At 22.6 MTPA, the largest cement maker in India will be adding the annual manufacturing capacity of the country’s sixth-largest cement maker Nuvoco Vistas, which is around 22.3 MTPA.

    The top five cement players have added 81.5 MTPA by way of capacity between FY18 and FY22, according to data from CRISIL. Their market share has increased from 50% to 55% during this period while their average capacity utilisations levels have also improved.

    The top five players include UltraTech Cement, Shree Cement, Dalmia Bharat, ACC Limited and Ambuja Cements.

    Experts believe new capacity addition by leading cement makers will only accelerate further over the medium term, especially after the acquisition of Ambuja Cements and ACC by the Adani Group. The growth in new capacity is expected to outstrip growth in demand.

    “This (capacity addition) will outpace demand growth, causing industry-wide utilisation to drop towards 65% from close to 70% we estimated in FY22,” Snehdeep Bohra of Fitch Ratings said in a research report this week.

    The decline in utilisation levels and subsequent margin erosion is expected to be steeper for smaller players.

    “Larger players will see lower margin contraction vis-à-vis smaller players owing to better pricing power and brand pull helping them pass on rising cost pressures,” Gandhi said. In the medium term, the rising market share of these players on the back of capacity addition and their higher utilisation levels backed by their vast supply chains will help them sustain higher margins, she said.

    Capacity addition will not be the only bane for the margins of cement makers. Higher input costs – especially on the logistics and fuel side – will further pinch their margins.

    Power, fuel and logistics account for two-thirds of the input costs for cement makers. The lack of availability of railway rakes has forced companies to switch to road transport for logistics, where high diesel prices are adding to costs.



    Separately, international coal prices have gone through the roof of late, while there is a shortage of domestic coal as most of the production gets diverted to the power sector. Power prices in the spot market have also shot up from an average of Rs 2-3 per unit to the price cap of Rs 12.

    Given these factors, analysts at Investec have lowered the price multiples and earnings projections for cement companies. They have lowered the target prices for cement makers by up to 38% and downgraded most stocks to sell or hold. Investec analysts have maintained ‘buy’ ratings for only UltraTech, Ambuja and ACC.


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