UltraTech's new capacity expansion is good but could weigh on cement prices
UltraTech Cement has laid out a three-year capacity expansion plan. The company, which is upbeat on the sector’s demand prospects, will increase the clinker capacity by 9.1 MT and the grinding capacity by 12.8 MT by Q4FY23. This is in addition to the ongoing capacity expansion of 6.7 MT and 2.3 MT for grinding and clinker, respectively.
UltraTech, which is pan-India focused, is considered a proxy for the cement sector. As such, this announcement bodes well for the industry’s long-term demand outlook. The incremental expansion will help the company achieve its long-term volume growth target of 8% compound annual growth rate (CAGR).
“We believe that the announcements made today have added a new growth narrative as the execution of the earlier targets such as integration and profitability improvement of the acquired plants and deleveraging of the balance sheet seem to be achieving targets," analysts at Emkay Global Financial Services said in a note on 3 December.
That said, it could mean near-term pricing pressure, especially in the eastern region, which is already grappling with oversupply. Nearly 52% of UltraTech’s additional capacity is focused in the east as the company aims to save on logistics costs. India’s per capita consumption of cement has risen from 190kg to 227kg in the last three to five years, according to the management. However, in the east, consumption is lower at 203kg. So the market could absorb capacities without impacting pricing, the management said