With the cement industry expected to witness a demand bounce back and make a firm recovery in the upcoming fiscal year, UBS has turned optimistic on the sector. The brokerage firm is positive on the sector, on the back of structural cost savings, price stabilization after an 8 per cent decline in 9MFY25, and sector consolidation led by UltraTech Cement and Ambuja Cement. UBS upgraded Dalmia from Sell to Buy, given its attractive valuation and the sector’s demand and margin tailwinds. “We are not modelling the company’s aggressive guidance on capacity or volume growth and expect Dalmia to outperform the industry only marginally on volume growth,” it said. UltraTech Cement and Ambuja Cement were also upgraded to a Buy call. ACC too retained its Buy rating.
According to an analysis report by UBS, all key cement demand drivers – housing (rural and urban), infrastructure and commercial – are in place and should drive robust sector volume growth – at 7-8 per cent CAGR or 1.0-1.2x real GDP growth – over the medium term.
Consolidation in cement industry
The cement industry is undergoing a consolidation, which, according to a report by Crisil Ratings, will accrue three significant benefits to the acquirers over the medium term: wider geographical reach, access to crucial limestone reserves and economies of scale. These benefits, it added, will more than offset a marginal increase in the financial leverage of the acquirers and thus support an improvement in their credit profiles over the medium term.
The consolidation began in fiscal 2024, with 51 MT of capacity acquired to date and an additional 14 MT worth of buyouts announced, which are likely to be completed by the first half of fiscal 2026. While the cement industry, as the Crisil report stated, has a record of buying capacities in quick succession, the current phase, with about 11 per cent of the installed capacity changing hands, is the highest ever in a block of two years.
Manish Gupta, Senior Director and Deputy Chief Ratings Officer, Crisil Ratings, “The recent spate of acquisitions is providing the acquirers an opportunity to scale up quickly and strengthen their market position, as well as access to captive limestone mines more economically. Additionally, ~92 per cent of capacity being acquired will enable acquirers to expand footprint in their existing regions and result in lower lead distance.”
Per Ankit Kedia, Director, Crisil Ratings, one of the major drivers of the surge in acquisitions recently is reasonable valuations. “The average enterprise value of Rs 8,000-9,0004 per tonne in this round is comparable to the cost of setting up a greenfield integrated cement plant.”
Crisil maintained that over the medium term, consolidation may also reduce competitive intensity, enhance pricing power and improve players’ ability to manoeuvre commodity cycles, which could improve margins. Ultratech and Ambuja have led the acquisition spree with 73MTPA and 31MTPA grinding capacities acquired over the past decade, respectively.
Pricing trends
According to Yes Securities, all-India average cement prices rose Rs 5/bag MoM in February 2025 with region-wise impact as: East (+Rs 10/bag), Central (+Rs 5/bag), West (+Rs 4/bag), North (+ Rs 4/bag, South remained flat. It further said that despite initial hikes of Rs 10-30/bag, most players rolled back prices partially within 3-4 days due to weak market acceptance. Per the brokerage firm, the price hike was driven by increased demand from the real estate sector, driven by better labour availability post-festive season, and an increase in orders from the infrastructure sector due to government push. It maintained that no significant price hikes are expected in March 2025 and that the rise in energy costs could impact profitability near-term.
Now in terms of energy costs, Elara Capital maintained that the overall trend in coal prices is expected to be bearish, barring a major geopolitical event. Lower gas prices, expected surplus in the gas market, and likely slowdown in global GDP (driven by tariff uncertainty) should slow down coal demand, it said.
While, as Elara Capital maintained, it may not be possible for all the cement companies to shift completely to coal in the short term, particularly for companies having poor quality of limestone, INR depreciation coupled with vanishing of petcoke discount versus coal is likely to increase the cost for cement companies in the upcoming quarters. “However, cost inflation is likely to be transitory in nature. Thus, from a near-term perspective, the industry’s margin may peak out in Q4FY25,” it added.
Key risks
UBS said, “We believe the key risks to our sector outlook are an unexpected drop in cement prices and an increase in input costs, such as those for coal or freight. Other risks include: 1) deteriorating GDP growth, the investment cycle and inflation as these could adversely affect the cement demand outlook; and 2) a significant increase in coal or diesel prices or raw material (sand, fly ash) availability issues.”