Why Are Cement Stocks Falling? After falling between 3 per cent to 10 per cent in the previous session, cement stocks continued the downfall in their prices. Shree Cement, Grasim Industries, Birla Corporation, Dalmia Bharat, Ultratech Cement, and JK Cement hit their respective 52-week lows on the BSE in Monday’s intra-day trade. This panic selling comes on the heels of investor concerns around UltraTech Cement’s capital expenditure plans post the Adani Group’s acquisition of Holcim’s cement assets.
Ultratech’s board, on June 2, 2022, approved Rs 12,900 crore ($76/ton) capex plan for setting up 22.6mt of new cement capacity (17 per cent of its capacity post completion of ongoing projects). The expansion will be a mix of brownfield and greenfield capacity across the regions to cater to future growth. The new capacity will be added through integrated units, grinding units and bulk terminals, and will be funded through a mix of debt and internal accruals
In another development, most of the cement companies have mentioned that their variable cost/ton is likely to increase by 10-15 per cent sequentially in April-June quarter (Q1FY23).
Santosh Meena, head of research, Swastika Investmart Ltd., stated that “Post the Adani-Holcim deal, the cement sector is witnessing turbulent times with increased uncertainties. The deal will increase competition and lead to further consolidation along with a possibility of price wars. To protect their turfs and maintain market shares, the companies will expand their capacities and engage in acquisitions. Recently, Ultratech Ltd. announced its Capex plans, which were above the market’s expectations. This has unnerved investors and has led to a selloff in cement majors, as more companies are likely to follow. This incremental capacity in the current weaker demand scenario and high inflation will cause a major price war, affecting the cash flows and deteriorate leverage ratios of these companies.”
Mirroring similar views, Ravi Singh, ShareIndia, said: “Although infrastructure activities in India started booming again post-Covid pandemic, the cement companies are still struggling to keep a balance between demand and rising production cost. The sustained increase in energy costs and partial rollback of price hikes last month are weighing on companies’ profit margins. Also, the recent nod by Ultra tech cement on new expansion plan of Rs 12,886 crore is expected to cause a stiff competition in the sector.”
According to Emkay Global Financial Services, aggregate free cash flow generation of firms under its coverage declined 67 per cent year on year (YoY) to Rs 6,2 00 crore in financial year 2021-22 (FY22), due to working capital blockage of Rs 2,400 crore and a 57 per cent YoY increase in capex to Rs 15,200 crore.
“We believe that margin pressure is likely to continue in H1FY23E as variable cost/ton is expected to remain elevated due to an increase in input costs in the past few months and inability to pass on the cost increase. Cement stocks are likely to be range-bound given the lack of triggers in the near term. Any correction in input prices will be a key thing to watch out for,” analysts at the brokerage firm said in a sector update.
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