Near-term margins for cement companies to remain under pressure

Weak Q3 pricing persists despite Y-o-Y profit gains, as aggressive capacity expansion overshadows near-term demand

The projections in the cement industry are mixed. Prices and demand remained muted in the third quarter (October & November) and short term uptick doesn’t seem likely. 

However, the second quarter of the financial year 2026 (Q2FY26) was good year-on-year (Y-o-Y) for many cement majors aided by base effect, and some analysts expect acceleration in earnings and volume in the next financial year, again aided by base effect. 

November was weak, and price recovery is likely to be muted due to aggressive market share strategies by large firms and supply increases as new capacities come online. 

Higher petcoke costs and rupee depreciation may limit margin recovery. Demand is muted with slow construction activity, liquidity constraints, and delays in government fund flows. 

On an average, pan-India trade prices are down by ₹3 per 50kg bag in November and companies have not been able to sustain hikes. Prices were also down in October. December will probably see higher supply and dealers don’t expect price hikes until mid-Jan. 

However, many cement companies reported Y-o-Y improvement in profitability in Q2FY26, with aggregate net profit doubling Y-o-Y for some big listed companies, but profitability fell Quarter-on-quarter (Q-o-Q). 

The Y-o-Y jump came on base effect, as Q2FY25 had seen low volume and low margins. The management guidance and commentary after Q2FY26 indicates demand growth was at 4-5 per cent Y-o-Y. Industry’s average operating profit per tonne stood at ₹932, up 41 per cent Y-o-Y but down 17 per cent Q-o-Q. 

Industry volume rose 12 per cent Y-o-Y in Q2FY26, on a low base and on recent capacity additions. But volume contracted Q-o-Q due to prolonged monsoon and rollout of GST 2. Sequentially, volume contraction was in the range of 2-16 per cent Q-o-Q across most listed companies. The average cement realisation/tonne grew 5 per cent Y-o-Y but fell by about 1 per cent Q-o-Q, with South India witnessing more pricing pressure. Overall, average operating profit per tonne increased about 41 per cent Y-o-Y but contracted 17 per cent Q-o-Q. 

Some majors announced fresh capex plans for a combined 42 million tonnes of cement capacity. 

Ambuja Cement raised its FY28 capacity target from 140 million tonnes to 155 million tonnes, with 5.6 million tonnes scheduled by FY27 and the remaining 9.4 million tonnes by FY28. 

Ultratech and India Cements announced a combined capacity addition of 25 million tonnes. 

Of this, Ultratech will add 22.8 million tonnes and 15.68 million tonnes of clinker capacity. Star Cement announced a new 2 million tonnes grinding unit and postponed previously announced 2 million tonnes expansion in Assam. 

Capacity expansions amidst weak pricing and weak demand may be unusual but obviously cement players are betting on a long-term trend of demand growth. 

Construction activity may pick up across regions in Q4FY26. But prices and realisations may be stagnant though volumes may improve. 

Demand is expected to grow 6-7 per cent Y-o-Y in FY26, and growth across FY25-30 is projected at 7-8 per cent annually, taking demand to 630-635 million tonne by FY30. The demand drivers will be rural housing, infrastructure and industrial investment. 

But annual capacity additions were around 50 million tonnes in FY25 and total capacity is expected to reach 725 million tonnes by FY26 and 900 million tonnes by FY30. Hence, utilisation is estimated to remain subdued at 67-68 per cent despite demand growth and supply outrunning demand. 

The top 4 players hold 60 per cent capacity share while the top 9 hold 81 per cent. Current projections indicate that greenfield and brownfield capex (at $60-70/tonne) is now more cost-effective than acquisitions (at least $95-100/tonne). 

This supply overhang is likely to lead to further consolidation with price wars and companies fighting for market share. History suggests hikes can be sustained only if utilisation hits 75-80 per cent and that seems unlikely in the medium-term. While larger companies are better placed in this scenario, investors may have to wait quite a while longer for serious gains in profitability if we discount the base effect.