Cement stocks: Smaller cement companies may come on M&A radar in hard market

Mumbai: Market participants are divided on the future dynamics of the cement sector following the entry of Adani Group. While one section expects aggressive capacity addition and higher competitive intensity that will keep sector profitability muted, others believe profitability will be prioritised over volumes, thus keeping realisations steady or better.

But the bottomline is that the smaller players will find the going tough.

Cement stocks, excluding a few such as

and Ambuja, have corrected by 25-40% over the last six months, driven by a muted pricing scenario in a cost inflationary environment. But the current trading multiple of the sector is higher than the long-term median multiple. Still, analysts remain positive on , Ambuja, ACC, , and .

“The larger players are expected to experience a tug of war for market share and the push on volumes, which will drive decline in profitability as the players undercut each other,” said Sandeep Tulsiyan, analyst, . “The smaller players are expected to witness deterioration in their fundamentals – cash flows and return ratios – thereby derailing their capacity expansion plans. Further, with the deterioration in the fundamentals, smaller players with a strong regional presence could become acquisition targets.”

Adani Group’s entry into cement space is expected to expedite capacity addition plans for ACC and Ambuja. The industry is expected to add over 90 mtpa in capacities over FY2023-25 per plans announced by major players. This implies 5% compounded annual growth rate (CAGR) in installed capacity, while demand is estimated to post 6-7% CAGR over FY2023-25. Apart from organic expansions, the industry may undergo inorganic expansions with a realigning of the existing mid and large players.

With the rise in supply almost equivalent to demand growth, analysts expect industry capacity utilisation levels would stay almost flat at 67-68% over FY2023-25.

“We estimate weighted average Ebitda/tonne to grow at 4% CAGR during FY2022-24 although the same may remain lower than peaks seen in FY2021,” said Ronald Siyoni, analyst, Sharekhan. “Going by historical anecdotes, cement prices will remain in an uptrend despite capacity additions over the next three years.”

The smaller players would have a lower say in pricing products and have to mimic the pricing trend set up by mid and large players. According to analysts, they may face an intensely competitive environment in the wake of increased supply driven by capacity additions in their region of operations.