How do you see the decision by Ultratech to invest $1.7 billion in expanding cement capacity? Why did cement stocks fall on that news?

With Adani taking over ACC and Ambuja from Holcim and also making an open offer, it emerges as the second largest player. With the deal, Adani gets control of nearly 70 MTPA of cement capacity and has paid a whopping $10.50 billion for the same. It is now the second largest cement player in India, above Shree Cement and second only to Ultratech. That is what has obviously made the Aditya Birla group jittery about holdings leadership.

The gap is still huge. Adanis have 70 MTPA capacity while Ultratech has nearly 120 MPTA. But knowing the way the Adani group moves, Ultratech is almost certain that they would have mega plans for acquisition. That is the reason, Ultratech has also embarked upon a massive expansion plan. It will expand its capacity by 18-20% over the next three years. That would meaningfully widen the gap in capacity between Ultratech and Adani group.

As per the latest plan laid out, UltraTech will invest a sum of Rs12,886 crore or around $1.7 billion to enhance its existing cement capacity by 22.6 million tonnes per annum (MTPA) over next 3 years. The expansion will be a combination of brownfield and greenfield expansion and will consolidated its national presence. What is the big kill bill factor is that the fresh capacity addition comes at an extremely competitive cost of $76 per tonne.

Currently, there are capacity additions already underway at Ultratech. That will be done and dusted by the end of FY23 while the current Rs12,886 crore expansion plan will be completed by the close of FY25. That means; between FY22 and FY25, Ultratech cement capacity in India will increase from the current 119.50 MTPA to 159.25 MTPA by FY25. Of course, any inorganic or NCLT deal in between will be icing on the cake.

Ultratech learnt two things early on that it has to have a pan India presence and the cost should be very low. Just look at the numbers. Ultratech is undertaking the current capacity expansion at a cost of $76/tonne. Now compare that with what Adani is buying. Ambuja Cement capacity is valued at $299/tonne while ACC at $131/tonne on open offer price basis. This is the advantage that Ultratech would really want to build on and also highlight.

Let me come to the last part of your query on the stock correction. You are right that the large cement players like Ultratech, its holding company Grasim and Shree Cements saw a sharp correction on Friday. The reason was the fear of a supply glut. There are already concerns of a slowdown in the economy. A glut of supply would lead to lower prices and a dent on the prices of cement. That is what spooked cement stocks on Friday.