Why Cement Stocks are Falling

Shares of cement companies extended their losses for the second day today after UltraTech Cement, the largest player in the industry, announced a capex plan worth Rs 129 bn.

The company plans to add 22.6 MT (million tonnes) of capacity via this plan.

UltraTech Cement's Rs 129 bn Capex Plan

Upon completion, its capacity will grow to 159.3 MTPA, making it the third largest cement company in the world, outside of China.

The expansion will be a mix of brownfield and greenfield capacity across the regions to cater to future growth.

The new capacity will be added through integrated units, grinding units and bulk terminals, and will be funded through a mix of debt and internal accruals.

UltraTech's current expansion program is on track and estimated to be completed by the financial year 2023.

Commercial production from these new capacities is expected to go on stream in a phased manner by the financial year 2025.

After this is completed, UltraTech's pan-India market share will be close to 21%, with a 13-15% share in the south and east, 22% in the north, and 35% in the central and western regions.

The company's strong balance sheet will ensure this planned expansion without stress. The net debt of the company stood at Rs 40 bn as of March 2022. However, the debt-to-equity ratio stands low at 0.2x.

The only problem is that the capex plans could delay UltraTech's ability to go net cash positive by 2024. It is likely that it may achieve that only by the financial year 2026.

Analysts believe the company will be debt-free by the end of the financial year 2024.

How does this impact other cement companies though?

Analysts believe that in times of weak demand and high fuel costs any significant capacity announcement is a negative.

Variable costs of cement companies are likely to increase by 10-15% sequentially in the June 2022 quarter which could impact margins.

Input costs have remained elevated for the past few months and cement companies haven't been able to pass on the cost increase.

Besides this, aggregate free cash flow generation has declined due to working capital blockage and an increase in capex during the financial year 2022.

UltraTech's move may also trigger a race towards maintaining or increasing capacity share.

The Adani Group recently acquired ACC and Ambuja Cement from Holcim for US$ 10.5 bn.

The combined capacity of these companies is 70 m tonnes per year while that of the Aditya Birla group, which owns UltraTech, is 120 m tonnes.

The deal is expected to increase competition along with a possibility of price wars.

The Adani Group has indicated that it may seek to double the capacities of ACC and Ambuja over the next five years. Shree Cement also has stated plans to double capacity.

How have the shares of cement companies performed recently

After falling between 3-10% on Friday, cement stocks continued to fall on Monday, 6 June. Many such as Shree Cement, Ultratech Cement, and JK Cement even hit their 52 week lows.

Shree Cement fell over 3% to hit Rs 19,913 while UltraTech Cement fell 1.7% to hit Rs 5,575. JK Cement fell 2.7% to hit Rs 2,072.

In the past one week, these stocks have slumped between 8- 13%. In the last year, they are down 15-30% and more.

For more details, you can check out Equitymaster's powerful stock screener to find the top cement stocks in India.

And to know more about the sector, you can have a look at the cement sector report on our website.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...