Will it rain on the cement sector’s parade, again?

Cement prices have finally been raised after unsuccessful attempts in April and May. Extreme heat across the country and a labour shortages due to the general election had muted cement demand in the previous two months, leading to price rollbacks. In June, however, at an all-India level, average price hikes of 8-10 per bag have been announced, according to a dealers’ channel check by Motilal Oswal Financial Services. One cement bag weighs 50 kg.

Having peaked in October, cement prices have been on a downtrend due to heightened competition for volumes and market share, severely impacting realizations. In the March quarter (Q4FY24), the cement industry saw a volume growth of 10.4% year-on-year but a 5% sequential decline in realizations, according to Centrum Broking. The south and east markets saw a relatively higher impact on realizations as they grappled with issues of oversupply.

Demand and cost dynamics

Additionally, demand prospects for H1FY25 are not bright, as highlighted by recent management commentaries. Cement demand tends to be subdued during the monsoon season when home building activities—a key demand driver—are muted.

It remains to be seen if the recent price hikes will sustain. With the general election over, overall business conditions are expected to normalize. However, the September quarter is typically weak for the sector, making it difficult to maintain price hikes. Furthermore, even if the June price hike sustains, it is unlikely to significantly boost realizations growth. Considering the latest price increase, the all-India average cement price is estimated to be flat sequentially in Q1FY25 (quarter-to-date), said the Motilal Oswal report dated 11 June.

Against this backdrop, cement makers’ continued focus on cost optimization measures, such as the use of alternative fuels and investments in waste heat recovery systems, is a positive. Also, costs of key fuels such as imported petroleum coke have declined sequentially so far in Q1FY25, and coal prices are stable. But this may not substantially improve the sector’s near-term earnings outlook. 

The industry saw an average Ebitda per tonne drop of 120-140 sequentially in Q4FY24, and a further sequential drop is likely in Q1FY25 due to negative operating leverage and weak cement prices, said Emkay Global Financial Services. Ebitda stands for earnings before interest, tax, depreciation and amortization.

Meanwhile, cement demand is expected to pick up pace from Q3FY25. Companies are poised to post better volumes in H2FY25 compared to H1FY25. That said, for now, the sector is likely to close FY25 with mid-to-high single-digit (5-8%) year-on-year volume growth. Larger companies are likely to maintain their capacity addition spree via organic and inorganic routes and gain better distribution reach. Consequently, supply is expected to exceed demand in most markets, limiting sharp price improvements.

UltraTech Cement Ltd aims to achieve around 200 million tonnes per annum (mtpa) overall capacity by FY27, including Kesoram Industries and its overseas capacity. Ambuja Cements Ltd plans to reach a capacity of 140 mtpa by FY28, while Shree Cement Ltd targets a grey cement capacity of 75 mtpa/80 mtpa by FY27/28, respectively.

In the last month, shares of pan-India focused cement makers ACC Ltd, Ambuja, and UltraTech have risen 9-11%. It is widely anticipated that the new government’s focus on infrastructure spending and capital expenditure will continue, boding well for long-term cement demand. However, a populist bias in the July Union Budget could dampen the outlook for cement stocks.

On the valuations front, shares of large cement makers are trading at FY26 EV/Ebitda of 10-18 times, showed Bloomberg data. EV is enterprise value. Unless prices improve meaningfully, the spectre of earnings downgrades for FY25 looms for the sector, thus making valuations less compelling.

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