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To further expand grinding capacity by 22.6mtpa by FY25

Capex/t for these expansions works out to USD76

* UTCEM announced a 22.6mtpa increase in its grinding capacity via a mix of brownfield and greenfield expansions. Capex for this expansion stands at INR128.9b, translating in a capex/t of USD76.

* This will help it achieve a domestic Grey Cement capacity of 153.5mtpa by FY25. Grinding capacity expansion of 16.3mtpa is already underway (to 130.9mtpa by Mar’23 from 114.6mtpa).

* Though the company has not specified any locations for these expansions, we expect the clinker plants to be set up across regions, except the western region. We expect a clinker capacity expansion of ~16mtpa. UTCEM may set up four clinker plants of 12,000tpd, or five plants of 10,000tpd each.

* Earlier, the management said it had organic opportunities to achieve 160mtpa of grinding capacities and will keep on exploring inorganic expansion opportunities as well.

Behavior of other players needs to be observed

* The entry of the Adani group into the Cement sector, with a sizeable capacity (acquisition of Holcim’s stake in ACC and ACEM), can boost consolidation in the industry. ACC and ACEM are net cash positive. As per media articles, Mr. Gautam Adani, intends to double the capacities of ACC and ACEM over the next five years after the acquisition gets completed.

* Given the high cost of acquisition (USD180/t) of Holcim’s stake in ACC and ACEM, it makes sense for the Adani group to increase capacities through brownfield expansion, which has a relatively lower capital cost.

* SRCM had earlier said it will double capacity over the next five-to-six years. However, it has not been very aggressive in placing orders over the last two years. Few other players like ORCMNT, BCORP, JSW Cement, and DALBHARA have indicated their capacity expansion plans. We await further announcements by these players.

Valuation and view

* While we are not changing our long-term positive view on the sector, we expect Cement stocks to underperform in the near-term, given: 1) the sustained increase in energy costs, the entire impact of which should be felt in 1HFY23; 2) the near-term weakness in demand (channel checks indicate a volume decline of ~15% QoQ in 1QFY23 v/s a fall of 8-9% QoQ historically); and 3) the partial rollback of the price hikes in May’22.

* We have kept our estimates unchanged as of now; however; we expect UTCEM to turn net cash positive in FY26 (from FY24 earlier) after today’s announcement of fresh capex.

* The stock trades at 14.7x/11.4x FY23E/FY24E EV/EBITDA (v/s its 10-year average one-year forward EV/EBITDA of 15x). We value the stock at 15x FY24E EV/EBITDA to arrive at our TP of INR7,825 and reiterate Buy rating.

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