Cement prices are at a multi-year low, and there’s more earnings pain ahead

The June quarter is usually seasonally strong for the cement sector. Demand tends to get a boost from home building and infrastructure projects. But this time around, hopes were low. Cement sales were hurt by heatwaves in some parts of the country and the general elections kept the government’s construction activities muted. The ongoing fight for market share among top cement makers also kept prices under pressure. Consequently, the June quarter (Q1FY25) was a washout for cement companies, with subdued realisations and unexciting volume growth.

On an aggregate basis, volumes of 11 major cement companies rose a mere 4% year-on-year (yoy) and fell 8% sequentially, said Nuvama Research. Realisations dipped by around 2.5% sequentially and 5.5% yoy in Q1FY25, added the Nuvama report dated 12 August. After a poor start to FY25, the sector’s path is unlikely to be smooth. Management commentaries of large listed cement companies point to weakness in near-term demand and a delayed revival in prices. Moreover, the September quarter (Q2) is seasonally weak for the sector as construction activity tends to be adversely affected by the monsoon, thus hurting demand and prices.

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At an all-India level, the average cement price fell around 3% month-on-month in July to five-year low of ₹313 per bag, according to IIFL Securities Ltd. One cement bag weighs 50 kilograms. Cement prices have fallen further in August in southern markets – by ₹10-15 a bag – while prices are steady in other markets, said the IIFL report dated 9 August. After hitting a multi-month high in October 2023, cement prices have been going downhill. Attempts to hike prices in April 2024 failed and had to be rolled back owing to subdued demand.

Expect a rough Q2

As things stand, the demand-supply mismatch could cause the sector’s realisations to fall further sequentially in Q2FY25. The impact may be accentuated for companies that have exposure to East and South India, where prices have fallen more than in other regions. Shree Cement Ltd, which has meaningful exposure to the East and North India markets, said in its Q1FY25 earnings call that prices were likely to remain weak in Q2.

With a spate of acquisitions and organic capacity additions by large cement makers, the pace of consolidation has accelerated in the recent past. In the most recent notable deal, Aditya Birla-led UltraTech Cement Ltd acquired a majority stake in south-focused The India Cements Ltd. Competitor Ambuja Cements Ltd also has completed its acquisition of Penna Cement Industries Ltd.

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Management commentaries of various companies suggest that previously announced capacity expansions are progressing well and are expected to begin operations on schedule. Shree Cement, UltraTech and Dalmia Bharat Ltd were among the companies that commissioned new capacities in Q1FY25. In short, the race for market share among top cement companies means price hikes are unlikely for now. This does not bode well for the sector’s near-term earnings outlook. To be sure, the second half of FY25 is expected to be better than the first half, driven by pent-up demand, especially from infrastructure projects and the sanction of additional houses under the Pradhan Mantri Awas Yojana. However, that has not prevented earnings downgrades.

Analysts at Motilal Oswal Financial Services Ltd have trimmed FY25 Ebitda estimates for ACC Ltd, Ambuja, JK Lakshmi Cement, Shree Cement, The Ramco Cement Ltd and UltraTech by 6-12% due to underperformance in Q1FY25. Amid the gloom, a bright spot for cement makers is the easing cost of key fuels petroleum coke and coal. Stable input costs could provide some cushion to the sector’s profitability. Cement makers are also increasing their reliance on alternative fuels and green energy to save on operating costs. But for now, these factors are overshadowed by weak pricing trends, making valuations unattractive.

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