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Capacity war begins in cement space with UltraTech’s new expansion announcement

ICICI Securities 03 Jun 2022

What's Buzzing

With two large cement players going aggressive on the capacity expansion front in a bid to retain leadership position, the industry is now bracing for higher competition and consolidation.

Context

UltraTech has just announced Rs 12,886 crore investment towards 22.6 MT capacity expansion organically across the country. The proposed plan along with ongoing expansions will take its domestic capacity to ~154 MT, reinforcing leadership position in India.

Our Perspective

Earlier, the company had guided to have ~160 MT cement capacity by FY30E that represented capacity CAGR of 4.3%, well below the long-term industry demand growth of (6-7%). Now with this announcement of new 22.6 MT capacity addition by FY25E, the pace of capacity growth by UltraTech has now accelerated to over 10.3% CAGR. While these new capacities are being added at much cheaper rate compared to replacement value (i.e. EV/tonne of $76/tonne), the move towards reinforcing the company’s leadership position in India in the wake of entry of new aggressive player (Adani) who is also aiming to double the cement capacity to 140 MT from 70 MT over five years (i.e. at 14.9% CAGR) may lead to heightened competition. Historically the industry has witnessed capacity CAGR of ~4-4.5%, looking at the past 10 year’s data (i.e. from ~351 MT in FY12 to over ~540 MT in FY22). With two major players (i.e. 34% combined capacity share) announcing aggressive capacity addition plans, the industry capacity growth may accelerate to over 6-6.5% by FY25E. This may have repercussion on the pricing environment.

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