Rising ESG focus is good, but cement stocks need alternate source of power

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Cement companies are sharpening their focus on decarbonisation by making fresh investments in waste heat recovery system (WHRS) installations. A WHRS traps the enormous heat generated during the manufacturing process and generates electricity, which can be used as an additional source of power. In simple terms, this method reduces carbon dioxide emissions by limiting the use of fossil fuels.

So, this not only cuts energy costs, but also helps cement companies to score better on the environmental, social and governance (ESG) parameter, analysts say. An analysis by Antique Stock Broking Ltd shows that power generation cost/ kilowatt-hour via the WHRS is 1/5-1/7th of the cost of power generation as compared to thermal power. When compared to grid power, it is less than 1/8-1/10th of the purchase cost, said the domestic broking house.

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In its recently announced capacity additions, cement major Ultratech Cement Ltd said it is adding 57 megawatt (MW) of WHRS across its clinker expansions. With that, the share of low-cost green power for Ultratech would increase to 34% from 13% currently, over the next three years. Peers Ambuja Cement Ltd and ACC Ltd, which operate under parent LafargeHolcim, are collectively investing over Rs780crore, to build a WHRS capacity of over 76MW. Shree Cement Ltd, Dalmia Bharat Ltd and JK Cements Ltd are among other cement makers who are investing in WHRS to boost their energy efficiency.

Globally, cement is among the sectors that have a significant carbon footprint. So, the ongoing WHRS investments are a step in the right direction.

While all this is good, the Street’s focus, currently, remains on demand growth and meaningful pick-up in realisation, say analysts.

“ESG is gaining prominence among cement companies, which is positive, but a valuation re-rating depends on how soon fundamental factors, such as volume growth, fall in place. The ESG concept is still evolving in India, it is unlikely for the market to assign these companies a higher valuation multiple just for being socially responsible. Investors don’t buy these stocks only because they are environmentally conscious. The latest order by the fair trade regulator alleging some cement companies of cartelisation is a dampener. So, negative developments like these mostly overshadow the long-term positives of being ESG-compliant,” said an analyst with a domestic broking house requesting anonymity.

In short, a rising share of waste heat recovery power in the overall fuel mix would aid cost savings. However, these benefits would take time to reflect in the balance sheets of cement makers. For now, higher input costs are expected to start weighing on operating margins from the March quarter onwards.

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