In recent years, Ambuja Cement has been encouraged by investors to expand its capacity. The company has been a bit more aggressive in recent years. But now it looks like the street is a little nervous about their recent plan. Ambuja cement must feel damned when it does and damned when it doesn’t too.
Ambuja Cement was under pressure in reaction to his T4CY21 results, but it also seemed like the street was a little apprehensive about his aggressive push into East India.
Ambuja expansion announcement
The board has approved, in principle, an investment of Rs 3,500 crore for a cement milling expansion plan with a potential of 7.0mt at existing milling units at Sankrail and Farakka and greenfield site at Barh, in Bihar. This will be supported by a 3.2 million tonne brownfield clinker expansion at their existing integrated plant in Bhatapara, Chhattisgarh.
Why was the street nervous?
The expansion is entirely in the Eastern market, which could create additional excess capacity in the region and concerns about the expanded capacity margin profile. Additionally, VAC has plans for the center and east. So the street was perplexed as to ‘why such a concentration in one area?’
Management responded to the concern on the call stating that the main reason for the expansion of the eastern market in the region is that it is expected to grow by 8-9% and also believes that it has a share higher IHB (individual-house-builder), mixed cement and low per capita consumption.
Clear the impact on other players in East India
The street is still worried and that was evident as Ambuja corrected with companies that are exposed to East India like Dalmia, Ramco, Nuvoco, Shree Cement & Ramco. Remember that these companies have a large exposure to the eastern part of India varying from 25% to 70%.
Dynamics of the cement industry in eastern India
Owns nearly 18.5% of India’s total cement capacity which is expected to grow to 22% by FY22. The main attraction for East India is consumption and production. Growth was at a rapid pace of 9.5-10% CAGR between FY17-FY21.
What is fear then?
The main reason is that capacity addition in Eastern India is expected to grow at a CAGR of 8.7% over the next four years, twice the rate of addition in the cement industry.
Time will tell if this aggression in eastern India will pay off for cement companies and Ambuja Cements as well. At the moment, the street seems a bit temperamental, as additional capacity could put pressure on prices in the neighborhood and then on profitability.