Core sectors producing the key starting materials for economic activity are critical indicators of an economy’s glide path. The amount of coal, oil, steel, cement, power and others produced in a country is an indication of the downstream demand and bears significantly high multiplier effect as well.
For quite a while there has been a narrative that the private sector must pick the capex baton from the Central government to take the economy forward. How ready is it?
To get a perspective, we analysed listed stocks in the core sectors. By considering the listed stocks in the core segment — fertilizers, cement, crude oil and natural gas, power, refineries, steel and coal — we can, to an extent, gauge the strength of the capex and productivity growth in the economy. Apart from analysing the aggregate numbers, which can smooth over several outliers, we have also picked the top three companies in the most visible sectors — power, steel and cement — to assess how each company is positioned on the growth curve. Here are our key takeaways.
Key findings
The aggregate numbers point to stable fixed assets (including CWIP) growth and high IIP (Index of Industrial Production) growth. The 79 core sector companies on our analysis reported fixed asset growth of 10.3 per cent CAGR post Covid, marginally above the pre-Covid years. This rate of growth has hovered above the growth for overall universe, both pre and post Covid. But the gap is closing, despite the higher rate, implying better growth from non-core sectors as well.
The big change post Covid has come from the IIP index. Compared to 3.6 per cent CAGR pre-Covid, the core sectors have reported double the growth at 8.6 per cent CAGR post Covid. The same holds true for overall stocks as well. The trailing measure of the capacity utilisation rate published by RBI is also reaching the critical 75 per cent levels, which supports the high capital investment rate the core sector companies are preparing for.
Analysing individual companies, the high capital investment theme continues to ring true. Power, cement and steel companies point to high-capacity addition by the 2030-32 timeframe.
Power: Double by 2030
The Central government has a clear target of doubling power generation capacity to 900 GW by 2030. It also envisages that half of that demand be met from Renewable Energy (RE). With a clear target as such comes a favourable policy mix as well. This started with the ₹3 lakh crore power package announced in FY21 Budget to clear dues, smart metering and financing of the project to improve credit metrics at discoms and a good tariff visibility ensuring 15.5 per cent RoE for regular and 17 per cent for hydro projects.
The current run rate seems healthy to secure the targets. The current RE capacity stands at 44 per cent of the total 442 GW, and, for the first time, thermal share in installed capacity dipped below 50 per cent in May 2024. The incremental capacity addition in FY24 was 76 per cent RE, which implies a healthy PPA signing and/or merchant demand. The top three players by market capitalisation also indicate a similar momentum in capacity addition.
NTPC accounts for 17 per cent total installed capacity in India at 76 GW and has plans to add 60 per cent more capacity in the medium term. In line with the national plan, RE will account for a large portion of the addition. The 3.6 GW RE capacity on ground will grow with the 8.4 GW in construction and 11.2 GW under tendering process in committed part of the plan. Land bank to accommodate another 11 GW addition has also been identified.
Overall, NTPC plans on an RE installed capacity of 60 GW by 2032 and may look to list its RE subsidiary with a fresh issue-based IPO and retaining its control. The thermal segment will continue with 15.2 GW expansion under consideration for tendering, in addition to 9.6 GW thermal capacity already under construction. The ₹3-lakh crore market capitalisation company is looking to spend 5-10 per cent of that every year for the next three years in capex.
Adani Green, as the name implies, is turbo-charged on RE-based power generation, including solar, wind, and even pumped hydro storage. After adding 25 per cent to its existing capacity, Adani Green exited FY24 with 10.9 GW capacity. The company looks to add 6 GW in FY25 and is targeting 50 GW total capacity by 2030. This includes the 30 GW project currently under way at Khavda, the largest single-location RE facility spread across 538 sq km and expected to be commissioned by FY29.
With a 75 per cent operating margin on ₹10,000 crore revenue (Q4FY24 exit rate), a strong group support for raising funds, Adani Green is confident of tying up finances and supply infrastructure and land bank for the project. On the slower PPA tie-ups, the company expects that demand from merchant side in view of decarbonisation regime should ensure an above-average profitability.
With generation scaling, so would transmission. Power Grid, which accounts for half of the country’s power transmission, has targeted ₹2 lakh crore of capex till FY32. The company has current projects worth ₹86,700 crore in progress in March 2024 and expects to double capitalisation rate to ₹15,000 crore per year from FY25.
Steel and Cement: Buoyed by GDP growth
The tailwinds for cement and steel are secondary demand from the broad economic growth in India. The National Infrastructure pipeline projects of $1.2 trillion, 50,000 km of highways along with dedicated freight corridors by 2030, four-lane highways and state highways, upgrading railways with high-speed service, government capex cycle (although tapering) and renewed focus on affordable housing are the broad macro tailwinds that come with policy support.
Growing urbanisation and connectedness, automobile demand, and increasing disposable income are the constant drivers, which are at an elevated state in last three years. Both steel and cement industries are cognizant of the low double digit growth in anticipated demand in the next decade. While organic growth plans are in place, consolidation primarily in cement has also been a constant feature.
While demand is a key driver, commodity costs also influence these sectors. Energy costs are mildly waning led by coking coal which should cushion earnings in FY25. Finished steel and cement prices are also low but can anticipate marginal improvement with demand.
Substantial increase in steel capacity
Steel consumption in India grew 14 per cent YoY in FY24 to reach 136 mtpa and is expected to drive industry players’ expansion plans.
Jindal Steel and Power expects to invest ₹7,500-10,000 crore per year over the next two-three years to increase its capacity from 9.6 mtpa to 15.9 mtpa per annum by 2030. It is also focused on improving its product mix from semi-finished to finished products within the same expansion plan and has secured 64 per cent of its revenue from such products in FY24. The company, and broadly the industry, is also focused on securing raw material supply lines in coal mines, auctions and iron ore linkages.
Tata Steel has two broad divisions, Europe and India. Expansion plans are squarely focused on India, with consolidated capacity expected to reach 40 mtpa by 2030 from 21 mtpa reported in FY24 end. The European operations, which are loss making, are in for a makeover too. The company plans to invest Euro 725mn €725 million along with the UK government’s €500 million contribution for the modernisation project by moving from coal furnace (slowly shutting down) to electric arc furnace using scrap steel.
JSW Steel will invest the equivalent of 30 per cent of its current market cap or ₹65,000 crore in the next three years to increase its capacity to 50 mtpa by 2032, from 28.2 mtpa now. Since a large portion of the project is brownfield expansion, with coal and iron ore linkages, the headwinds to execution are lower. The company has acquired a coal mine in Mozambique and additional iron ore mines in Karnataka, Odisha and Goa to supplement its backward integration. It expects to improve its output by 8 per cent in FY25 itself, having commercialised two expansion projects in FY25.
Cement: Race to consolidate and expand
Consolidation of smaller entities has become a crucial tool for larger companies in their quest to expand operations. Vintage plants, high competition in South and West markets and strained liquidity positions to either expand or service existing demand are the headwinds to smaller operators. The elevated cost of coal and suppressed cement prices have hit profitability of smaller operators with less than 15 mtpa capacity.
Scale is essential to secure raw material supply chains, and investing in logistical, production or marketing efficiencies. Penna and Sanghi Cement acquisition by Ambuja and Kesoram and India Cements (23 per cent non-controlling stake purchase) by UltraTech Cement are recent examples. The transaction range at $80-100 per tonne indicates the competition amongst acquirers more than the profitability or scale of the sellers currently.
UltraTech Cement, the largest operator, also has the largest expansion plan. From 146 mtpa capacity, the company expects to reach close to 200 mtpa by FY27. This includes recent acquisition of Kesoram’s 11 mtpa, greenfield expansion of 20 mtpa and brownfield expansion of 7 mtpa in the next three years. The capex expected is at ₹10,000 crore for each of next two years.
The Adani Group, via Ambuja Cements has announced an expansion plan of increasing its capacity to 140 mtpa by 2028 from the current 80 mtpa capacity and reaching 100 mtpa by FY26 as a mid-term target. The recent Penna and Sanghi integration to play a part apart from organic expansion. The company is net debt free and well positioned to fund the 65,000 crore capex till FY28. With group companies in power generation, cost savings from captive power generation is also part of its expansion plans.
Shree Cement, reputed as a profitable operator, also plans for strong expansion. The company will invest ₹4,000 crore per year for the next three years to increase its capacity from 56 mtpa to 80 mtpa capacity. The capex is also aimed at green energy, captive coal mining, and increased rail freight mix to retain its low cost operator status along with the topline expansion.
Keeping in mind capacity expansions, a strong undercurrent of demand and policy support for capex push, bl.portfolio has been writing on stocks in this space in the last 1-2 years. We have outstanding ‘accumulate’ calls in Jindal Steel, NTPC and JSW Steel and ‘hold’ calls on Tata Steel and Ultra Tech cement. Our ‘accumulate’ call on Power Gird in January 2024 though was followed up with a ‘partial book profit’ recently. While tailwinds are strong, valuation expansion outpacing earnings growth also needs to be watched.