Adani Group is not seeking for external capital to fund cement expansion in 2023

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In the pre-election year, the Indian government announced a significant capital expenditure in the construction and infrastructure space. As a result, cement is expected to benefit from high construction and infrastructure activities in India in 2023-24. To capitalize on the projected growth in cement consumption, several players have announced their plans to expand their production and manufacturing capacities over the last few years. This also includes Adani Group, which acquired Ambuja Cements and ACC, in 2022.

However, for funding the expansion plans, Adani Group is not seeking any external capital. Instead, the firm has announced a road map for cost reductions, through which its plans to reach the goal of becoming the most profitable cement manufacturer in India. Through the optimization of manufacturing, logistics, and other overhead costs, Adani Group announced that it will be able to save INR 400 per tonne. Notably, the firm is planning to fund the expansion of cement capacity through these internal accruals.

• Following the acquisition of Ambuja Cements and ACC in September 2022, Adani Group announced that it will double the production capacity to reach 140 million tonnes over the next five years. While the firm did not reveal the investment figures for its expansion goal, it informed the investors that the group had earmarked INR 70 billion as capital expenditure for Phase I expansion during FY 2024.
• Under Phase I, the firm is planning to expand the cement grinding capacity by 11 million tonnes. For the clinker integrated unit, the plans include an increase of 12.75 million tonnes on top of the current capacity.

The acquisition of Ambuja Cements and ACC is one of the largest-ever merger and acquisition deals in the infrastructure and materials space in India. Notably, the firm had acquired Swiss-based Holcim Group’s stake in Ambuja Cements and ACC for US$6.5 billion in cash. Through its subsidiaries, Holcim had a 63.19% stake in Ambuja Cements and a 54.53% stake in ACC.

Adani Group’s entry into the cement sector comes amid the projected growth in the segment over the next five years. The Chairman, Gautam Adani, had previously announced that there would be a five-fold increase in the demand for cement in India. This demand will be led by record-breaking economic growth and the infrastructure push announced by the government during the 2023 - 24 Union Budget.

Alongside cost-cutting measures, through which the firm plans to save INR 400 per tonne, Adani Group will also benefit from the projected increase in cement prices in Q2 2023. The current quarter is the strongest for the cement sector, as the industry benefits from high construction and infrastructure activities. Consequently, to improve their margins in 2023, cement producers are expected to announce a price hike of about INR 10 per bag in Q2 2023 2023. The potential increase in cement prices should aid the revenue growth for Ambuja Cements and ACC, thereby supporting their cash flow from the short to medium-term perspective.

• Over the past six years, Ambuja Cement and ACC combined had a cash and cash equivalent of INR 83.94 billion and INR 31.94 billion of net cash flow from operations. For the year ended December 2022, the cash and cash equivalent for the firms stood at INR 94.54 billion. This is an increase compared to INR 58.74 billion in 2017, but a decline compared to INR 113.58 billion reported in 2021. Furthermore, these firms have reported a negative net cash flow of INR 8.36 billion from operating activities in 2022. This is significantly lower compared to INR 53.09 billion recorded in 2021 and INR 34.16 billion in 2017.

The capacity expansion is expected to add to operating expenses over the next three to four years, however, the cost-cutting measures should be able to buffer in for the operating expenses. Consequently, with the projected growth in the demand for cement from the medium to long-term perspective, ConsTrack360 maintains a robust growth outlook for Ambuja Cements and ACC over the next five years in India. Alongside Adani Group, several other firms such as JK Cement have also announced higher capital expenditure to boost capacity. As a result, ConsTrack360 expects the Indian cement industry to record robust growth from the medium to long-term perspective.