Cement firms’ earnings are at risk even as input costs soften

Additionally, the costs of imported petroleum coke and coal, which are the key fuels required to manufacture cement, have also softened from recent peaks. Their costs are likely to remain stable hereon.

The benefits of low-cost inventory have helped cement makers improve their operating margins in recent quarters. But in the backdrop of sustained pressure on cement prices, lower input costs may not be of much help to the earnings outlook.

Cement prices have dropped in March for the fifth month in a row. At an all-India level, the average cement price is estimated to have declined 5.2% quarter-to-quarter to ₹380 a bag in Q4FY24, According to Kotak Institutional Equities report dated 18 March. The correction is driven by the east and south markets.

Despite Q4 typically being a seasonally strong quarter for the sector due to full-swing construction activities, cement prices have continued to weaken. 

But it’s not just about demand here. Elevated competition to garner market share amid massive capacity additions has weighed heavily on cement prices. Analysts also caution that cement companies tend to take price cuts in March to meet their year-end targets by pushing volumes.

The industry is set to add another 62 mtpa cement capacity in FY26, said ICICI Securities report. Increased supply may keep cement prices volatile. In this backdrop, the reduction in diesel rates offers cost savings of a mere ₹10-15 per tonne for the sector, and hence, may go in vain, the brokerage firm cautioned.

These factors are anticipated to have a bearing on the sector’s operating margins, which may have peaked in Q3FY24. “We expect margins to contract in Q4FY24E on sequential basis, an aberration in seasonally strong Q4, led by unseasonal price cuts only partly offset by cost deflation and operating leverage,” added the Kotak report dated 18 March.

The cement sector is expected to close FY24 with high single-digit year-on-year demand growth of 8-9%. However, going into FY25, Q1 may be soft due to the general elections, followed by seasonally weak monsoon in Q2, keeping volume growth muted. Therefore, the current scenario leaves the door open for downgrades of FY24 and FY25 earnings estimates, leading to further moderation in valuation multiples.

So far this calendar year, the market performance of key listed companies, including UltraTech Cement Ltd, ACC Ltd, Ambuja Cements Ltd, and Shree Cement Ltd, has been mixed amid varied triggers. Industry bellwether UltraTech has seen its share price decline nearly 10% during this period.