NTPC, Adani Green, JSW Steel, Tata Steel, Ambuja Cement, Ultratech and others: How their investment plans impact India’s major sectors

Primary sectors producing key inputs to economic activity are critical indicators of the economy’s glide path. The amount of coal, oil, steel, cement, power and more produced in a country is an indicator of demand down the supply chain and also has a significantly high multiplier effect.

The narrative has been that the private sector needs to take the capex baton from the central government to propel the economy forward. How ready is it?

To gain perspective, we analyzed stocks across major sectors. By looking at stocks across the core segments—fertilizers, cement, oil and gas, power, refineries, steel, and coal—we can, to some extent, gauge the strength of capital expenditure and productivity growth in the economy. In addition to looking at the aggregate numbers, which can mitigate a few outliers, we 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 takeaways

The aggregate numbers indicate stable growth in fixed assets (including CWIP) and high growth in IIP (Industrial Production Index). The 79 core companies covered in our analysis grew fixed assets at 10.3 percent CAGR post-Covid, slightly above pre-Covid years. The growth rate remained above the growth of the universe, both pre- and post-Covid. However, the gap is narrowing, despite the higher rate, implying better growth in non-core sectors as well.

The big change post Covid has come from the IIP. Compared to 3.6 per cent CAGR pre Covid, core sectors have seen double the growth at 8.6 per cent CAGR post Covid. The same is true for general equities as well. The RBI’s capacity utilisation rate is also hitting the critical 75 per cent levels, confirming the high capital investment rate that core sector companies are gearing up for.

Looking at individual companies, the theme of high capital investment still rings true. Energy, cement and steel companies all point to high capacity growth by 2030-32.

Power: Doubling by 2030

The central government has a clear target of doubling generation capacity to 900 GW by 2030. It also envisages half of this demand to be met from renewable energy (RE). As such, a clear target also comes with a favourable policy mix. This started with the ₹3 lakh crore energy package announced in the Budget for fiscal 2021 for dues settlement, smart metering and project finance to improve credit metrics in distribution companies and good tariff visibility ensuring 15.5% ROE for regular projects and 17% for hydro projects.

The current pace of completions appears healthy to secure targets. Current renewable capacity is 44 percent of the total 442 GW, and for the first time, thermal share of installed capacity fell below 50 percent in May 2024. Incremental capacity additions in fiscal 2024 were 76 percent renewable, indicating healthy PPA signings and/or commercial demand. The top three players by market capitalization also indicate similar momentum in adding capacity.

NTPC accounts for 17 per cent of India’s total installed capacity of 76 GW and plans to add 60 per cent more capacity in the medium term. As per the national plan, RE will form a major part of this addition. The 3.6 GW of RE capacity on land will increase along with 8.4 GW under construction and 11.2 GW in the tender phase in the committed part of the plan. A land bank has also been identified to accommodate another 11 GW.

Overall, NTPC is targeting an installed RE capacity of 60 GW by 2032 and may consider listing its RE subsidiary through a fresh public offering based on issuance and retaining control. The thermal segment will continue with a 15.2 GW expansion under tender, in addition to the 9.6 GW of thermal capacity already under construction. The ₹3-lakh crore market capitalisation company intends to spend 5-10 per cent of this amount every year for the next three years on capex.

Adani Green, as the name suggests, is turbocharged by renewable energy generation, including solar, wind and even hydroelectric storage. After adding 25 per cent to its existing capacity, Adani Green ended FY24 with a capacity of 10.9 GW. The company aims to add 6 GW in FY25 and is targeting 50 GW of total capacity by 2030. This includes a 30 GW project currently under construction at Khavda, the largest single RE site spread over 538 sq km, which is expected to come online by FY29.

With 75 per cent operating margin at ₹10,000 crore revenue (Q4FY24 exit rate), strong group support in fundraising, Adani Green is confident of putting in the cash and providing infrastructure and land bank for the project. In case of slower PPA tie-ups, the company expects seller demand in the context of decarbonisation regime should provide above average profitability.

As generation scales, so does transmission. Power Grid, which accounts for half of the country’s electricity transmission, has planned a capital expenditure of ₹2 lakh crore by fiscal 32. The company currently has projects worth ₹86,700 crore in the pipeline as of March 2024 and expects the capitalisation rate to double to ₹15,000 crore per annum from fiscal 25.

Steel and cement: supported by GDP growth

The tailwinds for cement and steel are secondary demand driven by broad-based economic growth in India. The $1.2 trillion national infrastructure pipeline projects, 50,000 km of highways with dedicated freight corridors by 2030, four-lane highways and state roads, modernisation of railways with high-speed services, the government’s capex cycle (although declining) and a renewed focus on affordable housing are broad macro tailwinds that come with policy support.

Growing urbanization and connectivity, demand for cars and rising disposable income are the constant drivers, which have been at a high level in the last three years. Both the steel and cement industries are aware of low double-digit growth in the expected demand in the next decade. While organic growth plans are underway, consolidation, mainly in cement, is also a constant feature.

While demand is the key driver, raw material costs are also weighing on these sectors. Energy costs are declining slightly, mainly due to coking coal, which should cushion gains in FY25. Finished steel and cement prices are also low, but a slight improvement can be expected with demand.

Significant increase in steel production capacity

Steel consumption in India grew by 14% year-on-year in FY24 to 136 million tonnes per annum, which is expected to impact the expansion plans of industry players.

Jindal Steel and Power expects to invest ₹7,500-10,000 crore per annum over the next two-three years to increase its production capacity from 9.6 mtpa to 15.9 mtpa per annum by 2030. It is also focusing on upgrading its product mix from semi-finished to finished products as part of the same expansion plan and has secured 64 per cent of its revenue from such products in FY2024. The company, and the broader industry, is also focused on securing raw material supply lines across coal mines, auctions and iron ore tie-ups.

Tata Steel has two major divisions: Europe and India. Expansion plans are focused on India, with consolidated capacity set to reach 40 mtpa by 2030 from 21 mtpa reported at the end of fiscal 2024. The loss-making European operations will also undergo a makeover. The company plans to invest €725 million, along with a €500 million contribution from the UK government, in a modernisation project, switching from a coal-fired furnace (which is being phased out) to an electric arc furnace using steel scrap.

JSW Steel will invest the equivalent of 30 per cent of its current market capitalisation or ₹65,000 crore over the next three years to increase its production capacity to 50 mtpa by 2032, from 28.2 mtpa at present. Since a large part of the project is brownfield expansion, with coal and iron ore tie-ups, the headwinds are lower. The company has acquired a coal mine in Mozambique and additional iron ore mines in Karnataka, Odisha and Goa to complement its backward integration. It expects to improve its production by 8 per cent in fiscal 2025 itself, after commercialising two expansion projects in fiscal 2025.

Cement: The Race for Consolidation and Expansion

Consolidation of smaller players has become a key tool for larger companies in their quest to expand their operations. Legacy plants, intense competition in southern and western markets and strained liquidity positions to expand or service existing demand are headwinds for smaller operators. High coal cost and depressed cement prices have hit the profitability of smaller operators with a capacity of less than 15 mtpa.

Scale is essential to securing raw material supply chains and investing in logistics, manufacturing or marketing efficiencies. Recent examples include Ambuja and Kesoram’s acquisition of Penna and Sanghi Cement, and UltraTech Cement’s acquisition of India Cements (23 percent non-controlling stake). The range of deals at $80-$100 per tonne indicates competition among buyers more than the profitability or scale of incumbent sellers.

UltraTech Cement, the largest operator, also has the biggest expansion plan. From a capacity of 146 mtpa, the company expects to reach almost 200 mtpa by FY27. This includes the recent acquisition of 11 mtpa by Kesoram, a greenfield expansion of 20 mtpa and a brownfield expansion of 7 mtpa over the next three years. The capex is expected to be ₹10,000 crore for each of the next two years.

The Adani Group, through Ambuja Cements, has announced an expansion plan that will see it increase its capacity to 140 mtpa by 2028 from the current 80 mtpa and reach 100 mtpa by FY2026 as a medium-term target. The recent integration of Penna and Sangha will play a role in addition to organic expansion. The company is net debt-free and well-positioned to fund Rs 65,000 crore capex by FY2028. For the group’s power generation companies, cost savings from generating power at its own plants is also part of the expansion plans.

Shree Cement, known as a profitable operator, is also planning a strong expansion. The company will invest ₹4,000 crore per annum over the next three years to increase its production capacity from 56 mtpa to 80 mtpa. The capex is also being targeted towards green energy, captive coal mining and increasing the mix of rail freight to retain its low-cost operator status along with revenue expansion.

Keeping in mind the capacity expansion, strong demand momentum and policy support for capex, bl.portfolio has been writing about stocks in this space over the last 1-2 years. We have prominent ‘accumulate’ calls on Jindal Steel, NTPC and JSW Steel and ‘hold’ calls on Tata Steel and Ultra Tech Cement. However, our ‘accumulate’ call on Power Gird in January 2024 was recently supplemented with a ‘partial book gain’. While the tailwinds are strong, valuation expansion outpacing earnings growth should also be watched.