Cement company shares fell on Friday after UltraTech authorised a Rs 12,886 crore capital expenditure to enhance production. The announcement comes after Adani Group revealed last week that it will acquire a stake in Holcim.

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Ultratech Cement was down 2%, Ambuja Cement was down 0.3%, ACC was down 0.7%, India Cement was down 0.1%, Shree Cement was down 1.7%, Ramco Cements was down 3.1%, JK Lakshmi Cement was down 0.1%, Dalmia Bharat was down 3.7%, and JK Cement was down 2.5%.

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The scramble to increase capacity comes as the government prepares to invest a whopping Rs 7.5 trillion this year to develop highways and ports to spur growth.

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UltraTech Cement announced on Thursday a 22.6mtpa increase in grinding capacity through a combination of brownfield and greenfield. A combination of debt and internal accrual will be used to fund the investment. Despite the fact that the expansion plant has not indicated any specific sites for these expansions, experts anticipate that the clinker factories will be located throughout the regions.

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“We expect a clinker capacity expansion of 16mtpa. UltraTech Cement may set up four clinker plants of 12,000tpd, or five plants of 10,000tpd each,” Motilal Oswal Research said.  

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Analysts are particularly concerned about margin pressures due to growing input costs in the first half of the fiscal year 2023, as demand slows in May and the monsoon season approaches. As a result, cement companies will report reduced sequential volumes in the first quarter of FY23.

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Citigroup stated in a report that the lack of pricing strength might harm smaller cement makers. It also noticed an increasing prospect of mergers and acquisitions in the industry, particularly following Adani Group’s acquisition of Holcim and UltraTech’s growth – both brownfield and greenfield. The increased capital expenditure assures that Birla Group remains India’s largest cement manufacturer.

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Cement companies are already under pressure as a result of rising coal costs, with the full impact expected in the current fiscal year. Despite an increase in cement prices in April, economists believe it would not be enough to cover the increased input costs. The inability to completely pass on costs to customers remains the main source of worry.

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“While we are not changing our long-term positive view on the sector, we expect cement stocks to underperform in the near-term, given the sustained increase in energy costs, the entire impact of which should be felt in the first half of FY23, 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 the partial rollback of the price hikes in May 2022,” Motilal Oswal Securities report added.

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Many cement companies have recently revealed capacity expansion plans. Shree Cement had stated that it plans to expand capacity over the next five to six years. However, for the previous two years, it has not been especially active in placing orders. Other companies, such as Orient Cement, Birla Corp, JSW Cement, and Dalmia Bharat, have announced capacity growth plans.