Shares of cement manufacturers were trading mixed on Tuesday as an increase in production capacities despite depleting profits is worrying the Street. Concerns of a further increase in competition and consolidation in the sector have also made investors edgy.
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This was after JP Morgan said that if coal prices remained high there are chances of consensus earnings estimates being trimmed. The foreign brokerage firm has retained a ‘cautious’ stance on the sector taking into account the increased capacities of cement makers from the second half of 2023.
| Companies that announced capex | Declared capex plans |
| UltraTech Cement | To increase capacity by 22.6 metric tonnes per annum with a mix of brownfield and green field expansion for a capital expenditure plan of Rs 12,886 crore |
| Shree Cement | 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 Rs 2,500 crore |
| Dalmia Bharat | committed to a capex of over Rs 9,000 crore to expand its manufacturing capacity over the next few years to meet the growing demand |
Any sharp decline in Asian coal prices should drive the stocks higher, the brokerage firm said. It highlighted that, seasonally, demand recovers after the monsoon season in the second half.
Dalmia Bharat is top overweight as valuations are at a sharp discount to UltraTech Cement and Shree Cement.
As per Jefferies, the risk to earnings estimates stems from the increase in supply that is depressing prices.
The brokerage has already said that the "hikes are not sustaining and costs remain elevated", thereby, posting a downward risk on earning estimates.
Last month, CLSA said that listed cement companies reported 8 percent year-on-year (YoY) volume growth in the year ended 2022. Profitability fell 13 percent on a year-on-year basis during the year on the inability to pass on sharp cost inflation, according to the brokerage.
The cement industry is on the cusp of another round of consolidation with the Adani Group taking over Holcim group companies Ambuja and ACC, and UltraTech recently announcing more capacity expansion, it said.
"Large players, which continue to gain share and have stronger balance sheets to withstand lower profitability, are better placed," according to the CLSA report dated June 6.
The all-India average price declined 3 percent month-on-month in May 2022, CLSA said.
It also said that multiple markets saw a decline on account of weak demand, with the smallest drop being in the western region and the largest in the central region.
