With Indian cement companies announcing new capital expenditure (CAPEX) plans amid cost pressures and weak demand, Shree Cement Ltd is the latest to join the bandwagon. The company is setting up a clinker and cement plant at Guntur, Andhra Pradesh at a total cost of 1.5 million tonnes per annum (MTPA) and 3 MTPA. 2,500 crore, it said on Saturday. The company aims to make the plant operational by December 2024. However, this did not excite investors much. On Monday, the stock initially hit a 52-week low on the NSE and closed nearly 2% higher than the previous close.
Nevertheless, there are many challenges in pursuing these plans. Also, capex in Andhra Pradesh is fraught with excess capacity. “This capacity addition will cost Shree Cement” 8,262 per tonne, which is much higher than the capital expenditure done earlier. Second, the plant is located in Andhra Pradesh, an over-supply region with low demand. Thus, the level of utilization is low. So this will be a ROCE dilution for Shree Cement,” said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities.
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This will be Shree Cement’s second unit in the south. “The long-term low utilization (50-60%) expansion in the southern region is particularly puzzling,” analysts at Jefferies India Pvt Ltd said in a report on June 19.
More than 50% of Shree Cement’s sales volume comes from North India, followed by the East. Its ongoing expansion also includes setting up of clinker plants, grinding units and solar power plants in various states. The company’s current cement capacity is 46.40 MTPA and it aims to achieve 80 MTPA capacity by 2030. Thus, announcements on the expansion were anticipated. UltraTech Cement Limited and JSW Cement Limited are also adding capacity in the South. Hence, establishing a footprint for Shree Cement will not be an easy task.
Jefferies India pointed out that the southern region is an extremely fragmented market, with the top five cement companies having a capacity share of 40-45% versus more than 70% in other regions. “This has resulted in highly volatile industry discipline on pricing and profitability. The profitability in Tamil Nadu and Kerala markets is relatively low compared to markets in Andhra Pradesh and Telangana,” Jefferies said.
“Ramco Cements Limited has recently added clinker capacity in this state, so it will be difficult for Shree Cement to increase its capacity beyond 50%,” Bhadang said. The recent pricing trends in the south have turned down and unless demand improves, he said, “meaning, aggressive capacity expansion by incumbents will see a near-term recovery in sector prices and impact on the longer-term pricing outlook,” he said. Will put Bags weighing 50 kg declined by 4% in June as compared to May. In a June 14 report, IIFL said that month-on-month, the average price of cement in the South in June was 1.8% compared to the previous month. was less.
“Despite efforts by India Cements and Ramco Cements to raise prices in Tamil Nadu and other markets, prices did not sustain as smaller players continued to be aggressive,” the report said. Meanwhile, the sector continues to grapple with severe cost inflation. Petroleum coke prices and coal remain high. Also, weak demand growth, especially in the individual housing segment, has weighed on cement makers’ ability to hike prices substantially.
These trading conditions have battered cement stocks in the recent past. Shree Cement’s stock has lost nearly 32 per cent in this calendar year so far. A similar decline has been seen in UltraTech Cement. In comparison, the Nifty 50 index has lost 11.5%. Analysts believe that the earnings outlook for the sector gets riskier if there is no significant moderation in raw material prices.