Changing dynamics of cement industry

India is one of the world’s largest demands driven economy and also the second largest cement market in the world after China.  India’s overall cement production capacity was nearly 545 million tonnes (MT) in FY22 which has grown by 85% from 294 MT in FY21. Cement is also a business that is inextricably tied to economic growth, especially in a developing economy like India. With changing dynamics and most of the cement stocks nearing their 52-weeks low, it becomes important to understand the reason for current trends in this sector. Let’s look at fundamentals of top 4 cement manufacturers in India.

UltraTech Cement, only player with positive YoY % change in Net profits

The cement sector in India has historically demonstrated an oligopolistic character with few big players dominating almost more than half of the cement manufacturing in India. Domestically, Top four cements manufacturers in India include UltraTech, Shree Cements, Ambuja & ACC. UltraTech is the largest cement manufacturer with a Market cap of Rs 171,000 crores and installed capacity of 120 MTPA (million tonnes per annum) and is followed by Shree cements having market cap of Rs 79,000 crores and installed capacity of 44.4 MTPA. And lastly, we have Ambuja cements and ACC, both of which were subsidiaries of Holcim and were recently acquired by Adani group for $ 10 Bn. They have combined capacity of 70 million tonnes per annum and are now owned by the Adani Group.

UltraTech has the largest cement manufacturing capacity which is even greater than the combined capacity of other three players

From the Q4FY22 results for these companies, it is seen that all four of them have experienced positive revenue growth, but only UltraTech has experienced positive profit growth, with the rest of them experiencing a negative trend in earnings.

Revenues grow YoY for the top 4 cement manufacturers in India in Q4FY22

Analysing the data from Q4FY22 results, UltraTech and Ambuja  have shown robust growth in sales in this quarter when compared on YoY basis but on the earnings front it is only UltraTech with 47.61% YoY growth in profits when compared with the other three.

UltraTech only player to record positive YoY growth of 47.61% in profits in Q4FY22

The primary reason for the declining margins is increase in input costs in the past few months and inability to pass on the cost increase to the consumers. Another significant development in the sector is the entry of Adani Group in the cement industry. From having a zero-market share in cement industry to becoming the second largest player in the Industry after UltraTech has created an unprecedented change on the competitive scenario, with almost all the other players getting cautious and looking to capital expenditure for increasing their current capacities.

Adani becoming the second-largest cement player in the country after a single acquisition

The Adani Group recently won the race to acquire Swiss cement major Holcim’s stake in Ambuja Cements and its subsidiary ACC for $10.5 bn. This is the largest ever acquisition ever made by Adani as well as India’s largest-ever M&A transaction in the infrastructure and materials space.

“Our move into the cement business is yet another validation of our belief in our nation’s growth story,” said Gautam Adani, chairman of the group.

This is one strategic acquisition made by Adani and although Adani is a new player in the market, competitors still fear this move. The reason is the big portfolio of Adani which is going to make the industry way more competitive than it used to be.

Both Ambuja and ACC will benefit from synergies with Adani’s comprehensive infrastructure platform, particularly in the areas of raw materials, renewable energy, and logistics, where Adani’s portfolio firms have extensive experience and knowledge. The two companies are expected to increase their margins and ROCE (return on capital employed) as a result of this.

The current market share of major participants of cement industry (ACC and Ambuja together makes 29% & are now owned by Adani)

Adani has the second highest market share behind UltraTech post acquisition of  ACC & Ambuja Cements from Holcim

Robust Capacity Expansion plans for next 5 years

Due to changing competitive profile of the industry all the players are speeding up their capacity expansion plans in a bid to counter Adani. With this UltraTech has recently announced a capex plan of Rs 12,886 crore to expand their capacity by 22.6 MTPA through brown field and green field projects. This would entail setting up integrated and grinding units as well as bulk terminals across the country. The capacity expansion would be undertaken at a cost of $76 per tonne of cement and will be a significant milestone in the ongoing transformational journey of UltraTech, as said by company officials.

Shree Cements, on the other hand, intends to invest Rs 4,750 crore in expanding its capacity across multiple products as well as establishing a captive solar facility. A total of Rs 4,750 crore would be spent on increasing cement capacity, Rs 500 crore on establishing a state-of-the-art solar power plant, and Rs.700 crore on increasing clinker manufacturing capacity.

Post the acquisition, Adani, is planning to double the capacity within 5 years to reach 140 MTPA. Adani has already invested $10 Bn to acquire stake in Ambuja and ACC and is further planning to invest even bigger amounts to compete with its biggest rival UltraTech.

With increasing growth of infrastructure, the cement production in India is expected to be 800 MT by 2030, according to the Ministry of Power’s Bureau of Energy Efficiency (BEE).

Our view:

The margin pressure is likely to continue in H1FY23 as variable cost/ton is expected to remain elevated due to an increase in input costs and inability to pass on the cost increase.

Most of the stocks like UltraTech & Shree Cements are already trading at 52-week low. Investors can consider investing in UltraTech, given its ambitious capex plans and strong financials with a target of Rs 7100 according to some of the brokerages. While taking about the long-term view, investors need to keep a strong check over any correction in Input prices as this will have a significant impact on EBITDA margins and bottom line of the companies.

With the acquisition of Holcim by Adani, the cement sector has come into focus. Will UltraTech retain its leadership position or will Adani challenge that position in a few years is something that market participants will be watching out for.

With the high demand in the country and capacity expansion plans across the board, the next few quarters are likely to be highly competitive for the cement sector with each player trying to gain higher market share.