Shree Cement’s new capex doesn’t excite


Indian cement companies are announcing fresh capital expenditure (capex) plans amid biting cost pressures and subdued demand, with Shree Cement Ltd the latest to join the bandwagon. The company is setting up a clinker and cement plant with a capacity of 1.5 million tonnes per annum (mtpa) and 3 mtpa, respectively, in Guntur, Andhra Pradesh at a total cost of 2,500 crore, it said on Saturday. The company aims to commission the plant by December 2024. However, this has not enthused investors much. On Monday, the stock dropped to a 52-week low initially on NSE and closed about 2% higher than the previous close.

Even so, several challenges are foreseen in pursuing these plans. Plus, capex in Andhra Pradesh is fraught with risks owing to excess capacity. “This capacity addition would cost Shree Cement 8,262 per tonne, much higher than the capex made in the past. Second, this plant is situated in Andhra Pradesh, which is an oversupply region where demand is muted. Thus, utilization levels are low. So this will be RoCE dilutive for Shree Cement,” said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. RoCE is return on capital employed.

Expanding footprint

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Expanding footprint

This will be Shree Cement’s second unit in the South. “Expansions in the prolonged low utilisation (50-60%) southern region is particularly perplexing,” said analysts from Jefferies India Pvt. Ltd in a report on 19 June.

More than 50% of Shree Cement’s sales volumes comes from north India, followed by the east. Its ongoing expansions also include setting up clinker plants, grinding units, and solar power plants in various states. The company’s existing cement capacity is 46.40 mtpa and it aims to achieve 80 mtpa capacity by 2030. Thus, announcements on expansions were anticipated. Ultratech Cement Ltd and JSW Cement Ltd, among others, are adding capacities in the south as well. So, establishing a footprint would not be an easy task for Shree Cement.

The southern region is an extremely fragmented market with the capacity share of top five cement companies in the range of 40-45% versus more than 70% in other regions, Jefferies India pointed out. “This has resulted in highly volatile industry discipline on pricing and profitability. Profitability is relatively lower in the markets of Andhra Pradesh and Telangana versus those in Tamil Nadu and Kerala,” Jefferies said.

“The Ramco Cements Ltd has recently added clinker capacity in this state, so it will be difficult for Shree Cement to ramp up its capacity beyond 50%,” Bhadang said. The recent pricing trends in the south have been subdued and, unless demand improves meaningfully, aggressive capacity expansions by incumbents would weigh on the region’s near-term recovery in prices and long-term pricing outlook, he said. A dealers’ channel check by IIFL Securities Ltd showed that at an all-India level the price of a cement bag weighing 50 kg declined 4% in June compared to May. In a report dated 14 June, IIFL said month-to-date, the average cement price in the south was 1.8% lower in June than the previous month.

“Despite attempts by India Cements and The Ramco Cement to increase prices in Tamil Nadu and other markets, prices did not sustain as smaller players remained aggressive,” said the report. Meanwhile, the sector is battling severe cost inflation. Prices of petroleum coke and coal remain elevated. Further, weak demand growth, especially in the individual home building segment, has weighed on the ability of cement makers to hike prices massively.

These business conditions have battered cement stocks lately. So far in this calendar year, the Shree Cement stock is down by nearly 32%. Ultratech Cement has also seen a similar fall. In comparison, the Nifty50 index has declined by 11.5%. Analysts see increased risks to the earnings outlook of the sector if the prices of raw material fail to soften substantially.

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