UltraTech Cement, India’s largest cement manufacturer, indicated that capacity addition in the sector in the coming years poses little threat to pricing power in the industry.
“My guess is that all the organic supply will get absorbed easily because India as a story will see a huge amount of cement consumption happening next few years,” Ajay Dagga, executive director and chief financial officer, told investors in a post-earnings call on October 19.
Adani Group’s recent acquisition of ACC and Ambuja Cements from Holcim gave rise to fears that it could trigger a fresh price war in the sector as cement makers seek to win market share.
Shares of cement companies have fallen by up to 17 percent since the announcement of the acquisition in mid-September.
Ambuja Cements has already raised more than Rs 5,000 crore by allocating convertible warrants to Adani Group family unit Harmonia Trade and Investment, which analysts believe could be used for more acquisitions or to add new capacity.
UltraTech itself proposed in June to invest Rs 13,000 crore to add 22.6 million tonnes per annum of additional capacity by financial year 2025.
Dagga asserted that India as a market is still a “long distance away” from reaching a saturation point given large capital expenditure drive of the government over the next decade, not counting any uptick in private capital expenditure.
Investors have been concerned that the new wave of capacity addition could lead to a glut if demand proves to be unsustainable.
UltraTech has guided that volumes will grow in double-digit terms in 2022-23 and 2023-24 after they rose 23 percent year-on-year in the September quarter at the consolidated level.
“Total capacity is a myth because there are lots of capacity that are non-operational. Effective available capacity is lower than the nameplate capacity that everyone is tracking,” Dagga said.
India had total installed cement capacity of 538 million tonnes as of 2021.
UltraTech also suggested that the pricing environment for the company could be favourable as the industry looks to pass on high fuel costs, aided by strong demand environment.
“There is no reason why the industry will not take prices up. Demand has been good and that is the most heart-warming factor,” Dagga said.
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