After a dip in cement prices for most of the year due to general elections, heatwave situation and excess rainfall in some states impacting demand, a report by Motilal Oswal Financial Services (MOFSL) stated that cement players have increased prices in the range of Rs 10-20/bag (up by around 3-6 per cent as compared to July 2024 average) across regions, with effect from the third week of August 2024. As a result of this, the all-India cement price is up by approximately 4 per cent from the July 2024 average and by around 1 per cent from the Q1FY25 average, it said.
Cement prices have corrected for the last nine consecutive months (Nov 2023 to July 2024) amid higher competitive intensity followed by a slowdown in demand. The all-India average cement price was down by around 13 per cent in July 2024 from its peak in October 2024, stated MOFSL while maintaining that “the average cement realization for our cement coverage companies was down ~8 per cent in Q1FY25 as compared to Q3FY24”. In most markets, cement price was at a multiyear low level, whereas in the South (particularly in Tamil Nadu and Kerala), it was at a decadal low level.
Cut to now, cement companies have recently announced price hikes in the range of Rs 10-20/ bag across regions. “Within regions, prices are increased by Rs 20/bag MoM (up ~6 per cent from July 2024 average) in the south region, Rs 15/bag (up ~4-5 per cent) in the east and west regions (each), and Rs 10/bag (up ~3 per cent) in north and central regions (each),” the MOFSL report said.
According to dealers, the price hike could partly be sustained as intermittent rains, higher competition, weak volume offtake in the non-trade segment and upcoming festive/marriage season would lead to demand disruption. They also talked about the possibility of companies attempting another price hike of up to Rs 25/bag in the coming weeks.
Price hikes necessary to restrict earnings downgrades
During the fiscal first quarter, most of the cement companies reported lower-than-estimates profitability, due to weak realization. As a result of this, the average EBITDA/t was down 9 per cent/18 per cent YoY at Rs 827 and due to persistent pricing pressure and guidance of soft cement prices by companies in the near term, MOFSL estimated a further decline of around 1 per cent QoQ in Q2FY25. “However, we estimated 4 per cent/1 per cent QoQ improvement in realization in Q3/Q4FY25, considering the expected improvement in cement demand after the monsoon season. We believe that the sustainability of the recently announced price hikes is necessary to restrict further earnings downgrades in the sector,” stated MOFSL’s analysis report.
Rising consolidation to benefit in the long term
Consolidation, MOFSL said, is rising with increasing M&A activities in the industry, and a larger part of capacity addition, over the next three years, would be done by the top five players, which would increase the capacity share of top five players to around 63 per cent by FY26E from around 54 per cent in FY24. Intensifying consolidation in the industry is expected to drive a strong pricing discipline in the long term.
Meanwhile, Macquarie noted that while consolidation in the sector bodes well for medium-term margins, near-term risks remain. Despite healthy demand and cost moderation, muted cement prices are expected to keep Q2 and Q3 earnings subdued, the brokerage said while maintaining that sluggish domestic demand significantly contributed to the muted performance in Q1FY25, and cement companies are unlikely to see a drastic improvement in Q2 as well.
In conclusion, MOFSL stated, “We believe that increasing consolidation in the industry, cost reduction measures by leading companies (increasing usage of green power, alternative fuel logistics cost optimization, etc.) and the focus on improvement in brand presence (most of the companies are improving brand architecture and internal control) are key positive factors for the sector.”