ACC, Ambuja Capex To Strengthen Hold In East

LafargeHolcim Ltd.’s Indian subsidiaries ACC Ltd. and Ambuja Cement Ltd. plan to increase production capacity in north, east and central India on expectations of rising demand.

The expansion will cost Rs 3,960 crore, according to their exchange filings. That follows the Swiss conglomerate’s November announcement to increase investment in India to expand and streamline capacity and improve efficiency. The investment plan included additional 6.5 million tonnes a year clinker and 8.5 MTPA cement capacity by 2022.

The move addresses a big investor concern around capacity constraints, Gunjan Prithyani, an analyst at JPMorgan, wrote in a note. It offers a scope for valuations to catch up with that of peers given the shift in strategy towards growth, she said.

• ACC will increase capacity by 5.9 MTPA in north and east India and by 3 MTPA in the central region at a cost of Rs 3,000 crore.
• Ambuja Cement will add 1.8 MTPA capacity the north, besides additional clinker expansion of 1.4 MTPA along with a captive power plant and waste heat recovery system. That will cost Rs 960 crore—in addition to the Rs 1,390 capex announced in February.
• Both ACC and Ambuja said they will fund the expansion through internal accruals.

Infrastructure and housing is expected to boost demand for cement in India.

The expansion by ACC and Ambuja is also aimed at consolidating their position in the eastern region while trying to catch up with market leader Ultratech Cement Ltd. in the north where the two LafargeHolcim subsidiaries lost momentum. After the expansion, they will overtake Ultratech in the eastern India with a capacity of 18.3 MTPA compared to Aditya Birla Group’s 16.1 MTPA.

The expansions are primarily in the lucrative regions of north and central India, Navin Sahadeo, an analyst at Edelweiss, said. It’s a positive for the companies because the industry’s clinker utilisations are at over 85 percent in these regions, he said.

Still, Ultratech will remain in the lead due to acquisition of Binani Cement in the north and will also stay ahead in the central region.

ACC was pursuing Jaiprakash Associates’ portfolio acquisition in central India and given the delay in its resolution, it was apt that the company shifts focus to organic growth, Citi analyst Raashi Chopra said in a note. The move puts to rest speculation about acquisitions.

ACC’s capex will translate into an enterprise value per tonne of $71, while that of Ambuja Cement at $85 a tonne, according a report by Citi.

Ambuja Cement’s valuation is higher due to higher integrated capacity of 1.8 MTPA compared with ACC’s 1 MTPA. JP Morgan said the cost of ACC’s expansion at $75-80 a tonne is fairly low.

Both ACC and Ambuja operate at 80 percent utilisation levels with lower valuations than peers. The increase in production capacity will help them narrow the valuation gap with peers, Chopra said. Cement margins should rise as cost pressures are abating and demand-driven price hikes are expected in the next few months, she said.