Indian cement corporations are asserting contemporary capital expenditure (capex) plans amid biting value pressures and subdued demand, with Shree Cement Ltd the most recent to hitch the bandwagon. The corporate is organising a clinker and cement plant with a capability of 1.5 million tonnes each year (mtpa) and three mtpa, respectively, in Guntur, Andhra Pradesh at a complete value of ₹2,500 crore, it mentioned on Saturday. The corporate goals to fee the plant by December 2024. Nevertheless, this has not enthused traders a lot. On Monday, the inventory dropped to a 52-week low initially on NSE and closed about 2% increased than the earlier shut.
Even so, a number of challenges are foreseen in pursuing these plans. Plus, capex in Andhra Pradesh is fraught with dangers owing to extra capability. “This capability addition would value Shree Cement ₹8,262 per tonne, a lot increased than the capex made up to now. Second, this plant is located in Andhra Pradesh, which is an oversupply area the place demand is muted. Thus, utilization ranges are low. So this shall be RoCE dilutive for Shree Cement,” mentioned Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. RoCE is return on capital employed.
This shall be Shree Cement’s second unit within the South. “Expansions within the extended low utilisation (50-60%) southern area is especially perplexing,” mentioned analysts from Jefferies India Pvt. Ltd in a report on 19 June.
Greater than 50% of Shree Cement’s gross sales volumes comes from north India, adopted by the east. Its ongoing expansions additionally embody organising clinker crops, grinding items, and solar energy crops in numerous states. The corporate’s present cement capability is 46.40 mtpa and it goals to attain 80 mtpa capability by 2030. Thus, bulletins on expansions had been anticipated. Ultratech Cement Ltd and JSW Cement Ltd, amongst others, are including capacities within the south as nicely. So, establishing a footprint wouldn’t be a simple activity for Shree Cement.
The southern area is a particularly fragmented market with the capability share of prime 5 cement corporations within the vary of 40-45% versus greater than 70% in different areas, Jefferies India identified. “This has resulted in extremely unstable business self-discipline on pricing and profitability. Profitability is comparatively decrease within the markets of Andhra Pradesh and Telangana versus these in Tamil Nadu and Kerala,” Jefferies mentioned.
“The Ramco Cements Ltd has just lately added clinker capability on this state, so it is going to be troublesome for Shree Cement to ramp up its capability past 50%,” Bhadang mentioned. The latest pricing traits within the south have been subdued and, except demand improves meaningfully, aggressive capability expansions by incumbents would weigh on the area’s near-term restoration in costs and long-term pricing outlook, he mentioned. A sellers’ channel verify by IIFL Securities Ltd confirmed that at an all-India degree the value of a cement bag weighing 50 kg declined 4% in June in comparison with Could. In a report dated 14 June, IIFL mentioned month-to-date, the common cement value within the south was 1.8% decrease in June than the earlier month.
“Regardless of makes an attempt by India Cements and The Ramco Cement to extend costs in Tamil Nadu and different markets, costs didn’t maintain as smaller gamers remained aggressive,” mentioned the report. In the meantime, the sector is battling extreme value inflation. Costs of petroleum coke and coal stay elevated. Additional, weak demand progress, particularly within the particular person residence constructing phase, has weighed on the power of cement makers to hike costs massively.
These enterprise situations have battered cement shares these days. To this point on this calendar yr, the Shree Cement inventory is down by practically 32%. Ultratech Cement has additionally seen the same fall. Compared, the Nifty50 index has declined by 11.5%. Analysts see elevated dangers to the earnings outlook of the sector if the costs of uncooked materials fail to melt considerably.
Supply: Live Mint