Cement firms may invest Rs 1.2 trn to add 145-155 MT capacity by FY27

The continuing demand for housing, accounting for 60-65 per cent of cement demand, and aggressive government investments in infrastructure will drive demand, nudging cement-makers to add 145-155 MT in fresh capacity at an investment of Rs 1.2 lakh crore by FY27, according to a report.

With 570 million tonne (mt) of installed capacity, India is the world's second-largest cement producer after China. Between FY12 and FY23, the installed capacity grew by a whopping 61 per cent to 570 MT from 353 MT in FY12 -- a net addition of 217 MT from 2013 to 2022 -- and FY22 saw the highest capacity addition of 34 MT.

Cement companies are expected to go on an expansion spree, and add 145-155 MT capacity between FY 2023 and 2027. That translates to a 4-5 per cent compound annual growth rate on a high base. A robust 6-7 per cent CAGR expected in demand over these five fiscals will encourage the growth in supply, Crisil said in a note.

The expected 145-155 MT of fresh capacity addition will entail a likely capex of Rs 1.2 lakh crore, with large producers accounting for more than half of the spending. They will be able to fund the capex through internal accruals, with comfortable gearing, giving them the financial flexibility to raise debt, the report said.

Given the strong demand outlook and acquisition of most of the smaller and financially weak companies, large producers are now focusing on organic growth. The top 5 will drive a lion's share of incremental capacity addition over the medium term.

Cement makers have been adding substantial capacity in the past too. In the five fiscals through 2017, around 108 MT were added, while in the next five fiscals through 2022, 109 MT were added despite pandemic-induced disruptions.

On the balance-sheet side, healthy post-pandemic demand recovery and strong profitability helped producers deleverage. Capex plans, which were on hold or delayed due to the pandemic, restarted in the latter half of fiscal 2021.

However, the agency expects the capacity addition drive to peter off fiscal 2023 and moderate to 30-32 MT, inclusive of grinding and integrated units, as higher input cost has hit their profitability, leading to slowing capex. And fiscal 2024 also looks tepid with an addition of only 30-32 MT. That is because policies may change because of general elections.

But once the hustings are over, the agency expects capacity addition to gather pace, supported by the rising demand amid a growing population and the government's infrastructure thrust.

Between fiscals 2013 and 2017, mid-sized producers aggressively added capacity organically and inorganically. As a result, their share of the capacity mix swelled to 44 per cent in fiscal 2017 from 41 per cent in FY12, while the share of large producers remained stable at 39 per cent.

Most of these capacities were added by regional players, especially in the South. This has mid-sized companies accounting for more than half of the capacity additions and capital expenditure during this period.

However, from FY18, consolidation began with large producers led by Ultratech Cement going in for more inorganic expansion, acquiring nearly 38 mt capacity from mid and small companies. Consequently, their share in the capacity mix rose to 46 per cent in FY22 from 39 per cent in FY17.

Also, the gap in the share of capacity addition between large and mid-sized producers widened sharply during this period -- the former's share bulged to 76 per cent from 41 per cent, including organic and inorganic expansions. On the other hand, the latter's contracted to 19 per cent from 50 per cent, and their share of the capacity mix dwindled from 44 per cent to 39 per cent in fiscal 2022.

Large players include Ultratech Cement, Adani Cement (ACC & Ambuja), Dalmia Bharat, and Shree Cement.

According to the report, the capacity augmentation push will be driven by grinding units. Being logistics-oriented, the cement industry has preferred to install more grinding units nearer consumption centres in the past decade for better market reach and freight cost rationalisation.

Grinding units are expected to account for 60-65 per cent of additional capacities being installed as against a lower share of integrated units at 35-40 per cent.

Most of the new capacity will come up in the eastern and central regions, which add almost 57 per cent of the new capacity, due to the rural housing and infrastructure boom in the areas. South and the North are expected to add 19 per cent each, while the west will add only 5 per cent of incremental capacities over the period.