Cement Capex Plan Good, But Pricing Concerns Remain
Cement manufacturers have resumed their organic growth plans. Thanks to the recovery in rural and infrastructure demand, companies are reviving their earlier announced expansion plans and committing fresh infusions.
For instance, UltraTech Cement Ltd, which has a pan-India presence, announced 12.8 mtpa (million tonnes per annum) of new capacity expansion in the central and eastern regions. ACC Ltd expects its central India expansion to be commissioned in 2022. The Ambuja Cement Ltd management said its Marwar-Mundwa expansion is likely to be commissioned in mid-2021. Shree Cement Ltd expects its grinding units in Cuttack and Pune to go on stream this quarter. Regional cement makers such as JK Cement Ltd, Orient Cement Ltd, JK Lakshmi Cement Ltd and The Ramco Cements Ltd have also announced capacity expansions.
Analysts said the expansions show that cement makers are upbeat on the demand outlook. Other factors supporting their expansion plans are higher operating profits and lower cost of financing, added analysts. Having said that, muted prices amid rising cost pressure remain a concern. Latest dealer channel checks show that at an all-India level, cement prices remained flat at around ₹332 a bag in February. A cement bag weighs 50 kg.
While cement makers are yet to pass on the burden of rising cost pressures to partially offset the impact of cost inflation, they have reduced dealer discounts, the latest survey by Nirmal Bang Securities Ltd shows.
Cement companies have been waiting for a demand upcycle, so the pick-up in demand is positive. However, that needs to be accompanied by better prices. Volume growth can compensate for weak realizations only to a limited extent. Petcoke and coal prices continue to inch higher. Cement makers have to protect margins and improve balance sheets, so prices need to strengthen. For now, we see muted prices as a near-term overhang for the sector.