Cement sector needs lady luck to smile on prices

The Indian cement sector is expected to perform better in the second half of FY25 (H2FY25) compared to the sluggish first half, particularly in terms of demand and prices. Two months into H2, there are positive developments regarding prices that have been stagnant recently.

Pan-India cement prices in the trade segment rose by ₹8 month-on-month in November to ₹342 per bag, showed a recent dealers’ channel check by Nomura Global Markets Research. Trade segment is where cement is sold by companies to dealers. The price hike was led by an increase of ₹23 per bag and ₹14 per bag in the east and north regions, respectively. Central and south witnessed a modest price hike of ₹2-3 per bag. Still, pan-India average prices in Q3FY25 have so far risen by a mere ₹2 per bag sequentially.

Recall that in H1FY25, the cement industry experienced muted demand growth, pricing pressure, and higher competitive intensity, leading to weaker-than-expected earnings performance. In the recently concluded September quarter, volumes were likely flat-to-negative year-on-year for the cement industry, and prices fell by around 2% sequentially, said Nuvama Research report on 14 November. For 15 major cement companies, aggregate Ebitda per tonne plunged around 25% sequentially to ₹614 due to tepid demand impacting operating deleverage and a weak pricing environment, it added. 

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Volumes vs realizations

Unsurprisingly, cement manufacturers are rooting for demand revival in H2FY25 aided by increased government spending on infrastructure projects. But a catch here is that most companies still continue to prioritize volumes over realizations which makes pricing prospects bleak.

For instance, UltraTech Cement Ltd’s management has guided for double-digit volume growth in H2FY25, outperforming the industry’s growth. Peer Ambuja Cements Ltd aims to increase its market share from around 15% currently to around 20% by FY28. Dalmia Bharat Ltd has reiterated its volume growth target of 1.5x of the industry growth. An exception here is Shree Cement Ltd, which is focusing on realizations over volumes, even so, it is on a capacity addition spree and aims to reach 80mtpa by FY28 versus 56.4mtpa currently. Given the ongoing consolidation in the sector, if demand fails to adequately recover as more capacities come on stream, it could lead to unfavourable demand-supply dynamics.

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“We estimate the sector to see an incremental supply of 5-6% in FY25; in comparison demand growth is expected not to be more than 5%. Regionwise, the eastern region is likely to have the highest capacity addition. In this backdrop, the sector’s overall capacity utilization is likely to remain sub 70% in FY25,” said Ravleen Sethi, director, CareEdge Ratings.

In short, the sector is exposed to the risk of further earnings downgrades in FY25. In October and November, cement demand wasn’t as robust, with the festive season leading to a labour shortage and the ongoing construction ban in the northern region.

On the bright side, cement companies are increasing their focus on using more green power and alternative fuels. This should help in long-term cost savings and reduce their carbon footprint. Another silver lining is the easing cost of petroleum coke and coal. Despite muted realizations, operational performance of the sector was buoyed by softening power and fuel cost in Q2FY25.

Meanwhile, the performance of shares of large cement companies has been mixed so far in 2024. Ultratech has fetched positive returns, while ACC Ltd, Ambuja, and Shree Cement have generated negative returns impacted by company-specific issues. Valuations have moderated, but given the sector headwinds, they are at risk of further correction.

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