As Consolidation Continues, Is The Indian Cement Sector About To See Better Times?

The Indian cement sector has been under pressure over the past few quarters as rising commodity costs have eaten into operating margins.

During the September quarter, these companies saw their margins undergo a massive compression.

Why is the Indian Cement Sector Facing Troubles?

Ultratech Cement saw its operating margins fall from 20 per cent in the first quarter of the financial year 2023 (FY23) to 13 per cent in the second quarter of FY23.

Similarly, Adani-owned Ambuja Cement saw its margins decline from 14 per cent in the first quarter to 5 per cent in the second quarter.

Ambuja’s sister company ACC saw margins decline from 10 per cent in the first quarter to nearly less than 1 per cent in the second quarter.

For the sector as a whole, the EBITDA (earnings before interest taxes depreciation and amortization) per ton had fallen from Rs 957 in the June quarter to Rs 583 in the September quarter – a sharp 39 per cent between the two quarters.

Before the inflationary period began, the EBITDA per ton figure used to stand upwards of Rs 1,100 for India’s cement sector. The raw materials for cement companies such as coal had been on the rise for the past few quarters, making it difficult for cement makers to pass on raw material prices.

As a result, margins and profits collapsed. According to a report by Business Standard, the combined net profits in the second quarter of FY23 for the listed players were the lowest in the past decade since 2013.

However, there are signs that the industry could do better from here.

Firstly, the cement manufacturing market is in a consolidation mode. ACC and Ambuja, both of which had been bought out by the Adani Group, have an estimated combined market share of 33 per cent combined – according to 2020 market share data provided by Statista.

On Monday, Dalmia Cement bought Jaypee Associated cement assets. The Dalmia Group already owns 35.9 million tonnes of cement production capacity, and the Jaypee acquisition will add another 9.4 million tonnes to its capacity.

In 2020, Dalmia Cement had a market share of 8 per cent. In markets where only a few players control significant market share, competitive intensity is relatively less, ensuring price stability and increased profitability.

As a result, the increasing concentration of market share in the hands of a few players would mean increased pricing power for the players.

Secondly, raw material prices have come down sharply giving manufacturers some breathing space.

During the month of November alone, prices of imported coal fell by 21 per cent. Energy costs are a significant component of cement manufacturers’ costs – and lower coal prices will bode well for the companies’ margins.

Further, diesel costs have stayed flat as well – implying that logistics costs are unlikely to rise significantly during the quarter. Cement is a low-value commodity, leading to logistics costs contributing to a significant portion of the total cost of a bag of cement.

Hence, lower diesel prices are positive for cement companies. At the same time, in order to make up for increased costs, cement companies are taking price hikes. While these price hikes are small (around 2-4 per cent last month), these are likely to help the companies’ bottom lines in conjunction with falling raw material prices.

Lastly, both private and public capital expenditures have been on the upswing which could help the cement sector recover quickly. CRISIL estimates that the cement demand would grow by 8-10 per cent led by the non-housing segment, which is expected to grow by more than 15 per cent.

CRISIL estimates that the government’s push on infrastructure, along with growing private investments in data centres and warehousing would help cement demand. Overall, the cement sector’s worst times appear to be behind it.

Also Read: Explained: Adani's $10.5 Billion Ambuja Cement-ACC Acquisition