Indian Cement Firms To Maintain Strong Pricing

The Indian Cement sector has embarked on a promising journey in 2023, marked by substantial growth in demand and profitability during the first half of the year. To add to this optimism, the sector is likely to witness an improvement in realizations, driven by pricing-led growth. 

Let’s explore more about the same:

Pricing Dynamics 

The cement industry’s pricing dynamics have not been favourable for most of the year, with weak pricing growth observed across various regions in India. Between April 2023 and August 2023, Cement prices across the nation witnessed a decline of approximately 2% to 3% (Rs 10 to 15/bag). However, there was a notable shift in the trend as September unfolded.

Here are region-wise price dynamics:

• East India: The prices have experienced consecutive hikes, two in September 2023 and another scheduled for October 2023, which will be the third revision in two months. This price surge in East India is setting the stage for the rest of the country.

• North & Central India: These regions have already attempted price hikes of Rs 10-15/bag.

• South & West India: A sharp spike is anticipated in these regions for October 2023 by approx Rs 30-50/bag.

Earnings Upgrade Potential

While these price hikes are encouraging, market observers are closely monitoring their impact on demand. Historically, the Indian Cement industry has struggled to sustain sharp price hikes beyond a few months. Analysts highlighted the importance of these price trends and suggested that if the hikes continue to hold, there is the potential for an earnings upgrade.

Sales Growth

Here are the details:

• July: The month faced disruptions due to heavy rains, Cement volume is estimated to have increased slightly by around 7-8% YoY in July.

• August-September: The months witnessed a strong rebound owing to reduced rainfall and resilient underlying demand.  A higher growth of around 10-12% YoY in August-September is estimated by market analysts.

Demand Drivers

The first half of FY24 exhibited robust demand growth, up to 15%, as reported by rating agencies.

The government’s focus on infrastructure development, combined with increased activity in both urban and rural housing, is expected to keep Cement demand strong. Government-led infrastructure spending accounts for approximately 30-32% of annual Cement sales, while housing contributes around 55-60%. 

India’s Cement demand is expected to grow by 10-12% YoY to reach approximately 440-445 million tons in FY24, as per reports.

Key Challenges

The Cement sector faces certain challenges:

• Raw Materials’ Rally: The recent rally in raw material prices such as Pet Coke, imported Coal, and Crude Oil prices, which has occurred over the past two months, could potentially impact the sector.

• Rising Fuel Expenses: Coal, Power, and Fuel costs constitute a significant portion of the industry’s production expenses (around 35-40%). Rising Fuel and Coal prices lead to increased transportation and input costs for the sector, albeit with some lag effect.

• Capacity Expansions: There are concerns regarding aggressive capacity expansion plans by Adani-owned Cement companies like Ambuja and ACC. These expansions have the potential to disrupt the supply-demand dynamics of the industry.

Market Outlook

The Indian Cement industry is witnessing a promising season with rising demand and price hikes. Despite earlier price dips, recent upward trends indicate a potential surge. Investors are eyeing opportunities, but challenges like Fuel costs and capacity expansion plans pose concerns in terms of sustainability of prices.

OFB’s Insight

The Indian Cement sector is poised for a season of growth and potential earnings upgrades, primarily driven by recent price hikes and robust demand. However, it must navigate challenges such as rising crude oil prices and competitive capacity expansion plans to sustain this positive momentum.