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Cement manufacturers have seen their net debt come off meaningfully in the last three years. Of course, demand uncertainty because of the covid pandemic led to a slowdown in capital expenditure (capex). Even so, strong profitability helped companies lighten their balance sheets. Post pandemic, cost rationalisation measures and softer input costs had till lately led to better operating margins for the industry.
An analysis by Kotak Institutional Equities shows the average Ebitda for cement companies under its coverage in FY2020-22 was 40% higher than FY2019. This was mainly led by higher margins.
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Consequently, cement makers are refocusing on capacity addition, especially in the wake of rising competition with the entry of the Adani Group.
“With decade low leverage, 0.1X net debt/Ebitda, and buoyant demand outlook, producers are lining up capacity additions, and we estimate a 5.5% compound annual growth rate (CAGR) in capacity over FY2022-26E versus 3.9% CAGR over FY2019-22,” said the Kotak report dated 2 September.
UltraTech Cement Ltd, Shree Cement Ltd and Dalmia Bharat Ltd are among the companies that have announced expansions at various locations across the country.
Strong balance sheets give incumbents headroom for capacity additions, concurs Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. After the covid pandemic started easing, the sector’s operating cash flows have risen at a much higher rate than capex requirements, he said.
As many cement companies continue to focus on keeping debt under control in spite of expansions, for most of them net debt is expected to ease further. However, ACC and Ambuja Cements are likely to be exceptions. “We expect the Adani Group to deploy the excess cash on the books of these companies (ACC and Ambuja) to add more capacity as it aggressively aims to build its position in the industry,” Bhadang said.
Capacity expansion would aid the sector’s long-term volume growth outlook. However, with capacity additions in full swing, cement demand must improve adequately. Else, it would weigh on the sector’s capacity utilization levels.
In the near-term, the focus of investors in shares of cement companies remains on cost inflation trends. Expectations are that operating margins will gradually improve and demand would pick-up in the second half of FY23 as the monsoon recedes. Consequently, cement prices will get a boost, thus aiding the sector’s realisations growth.
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