With capex plans delayed, cement sector could see better cash flows


The already struggling cement industry has been hit hard by the coronavirus crisis. Management commentaries on demand revival haven’t been very encouraging. So, many cement manufacturers have delayed their capital expenditure (capex) plans.

For instance, pan-India focussed cement company the Ultratech Cements Ltd has guided for a capex of 10 billion for fiscal year 2021 (FY21). This is lower than the 16 billion incurred in fiscal year 2020. In a post earnings conference call with analysts, the company’s management said that it has allocated any capex spend for Dalla Super in FY21. Also, it has deferred capex for the Cuttack grinding unit to FY22.

Its peer Shree Cements Ltd will decide on its large capex plan of doubling capacities in six years, after demand conditions improve. Speaking of demand outlook, the company’s management said that it expects more than 20% volume decline in fiscal year 2021.

While ACC Ltd is expanding its capacity by 18%, the management expects commissioning to happen by calendar year 2022 – this is after factoring in a likely delay of 6-12 months due to covid-19.

Not just pan-India focussed cement companies, a slew of regional firms such as India Cements Ltd, JK Cements Ltd and Orient Cements Ltd, have also postponed their capex plans.

According to analysts, leveraged balance sheets of many cement players, who have been on an acquisition spree, should get some breather from this.

“The operating cash flow generation has been strong in the recent past but the free cash flow generation has been impacted due to acquisitions and expansions. We expect the industry to focus on cash and, hence, capex would likely come off, which should support free cash flow,” said a report by Jefferies on 19 June.

Although recent cement dealers’ channel check is indicative of pent-demand, one is not sure whether the improvement will last.

“Our channel checks with dealers suggest that cement prices receded in June 2020 with easing supply-side constraints. Rural and pent-up demand has led to higher-than-expected volumes in May-June 2020 and the industry could just suffer ~40% yoy decline in 1QFY21E volumes, better than earlier expectations,” analysts at Kotak Institutional Equities said in a report on 24 June.

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