Ultratech to Shriram Cement: Price hikes key trigger for cement majors

Cement had a slow quarter with volumes up 3 per cent year-on-year (Y-o-Y on average in the second quarter of the current financial year (Q2FY25). Seasonal weakness has hurt demand. Ultratech Cement saw volumes up 3 per cent, while Shriram Cement was the top volume gainer at 9 per cent, with Dalmia Bharat up 8 per cent. But aggregate realisations fell 7 per cent Y-o-Y and about 2 per cent Q-o-Q with prices falling sequentially.

 

Operating profit margin pressures may have been offset a little by lower fuel costs. But aggregate Operating profit/tonne fell by over 25 per cent Y-o-Y and Q-o-Q to Rs 645 from around Rs 890/tonne Y-o-Y and about Rs 840/tonne on a sequential basis.

  There may be demand pickup in the second half of FY25, aided by the Budget’s infrastructure push, normal monsoons, and improving rural sentiment. Supply is also up due to capacity additions. Early November price hikes were largely followed by partial or complete rollbacks. The all-India average retail price is flat month on month (M-o-M) at Rs 353 per 50kg bag. Prices have suffered three consecutive quarters of 3 per cent Q-o-Q decline and are down 10 per cent Y-o-Y.

  Factors that contributed to a slow November included festivals, limited labour availability, construction bans in Delhi, elections in Maharashtra and Jharkhand, and slow fund disbursements by state governments. Better demand in December could support attempts to hike prices again.  

  The industry has seen consolidation via acquisitions with Ambuja and UltraTech leading the way. The consoli­dation saw capacity share of the top 5 players rising from 45 per cent in FY19 to 62 per cent currently.  

  After the Penna Cement and Orient Cement acquisitions, Ambuja may have exhausted cash reserves, while UltraTech, after the Kesoram and India Cement deals, is likely to have a net debt of Rs 20,000 crore. Further acquisitions are unlikely unless there are NCLT deals. 

Current cement prices are near four-year lows. However, prices could revive, given seasonal improvements in utilisation and if low fuel costs sustain. A breakdown of M-o-M regional price movements indicates price recovery was higher in Central and North regions, followed by West. But prices in the East and South dropped. Channel checks suggest industry volume grew in high single-digits Y-o-Y in October-November 2024 as construction activities picked up. The East likely led the pack with over 20 per cent Y-o-Y growth on a low base. Demand in the South may revive with low single-digit Y-o-Y growth versus high single-digit decline in H1FY25, while the West may see mid-single digit Y-o-Y decline due to the Maharashtra election.

  Given that consolidation may have played out and that prices are at four-year lows with muted consensus expectations, contrarians would say the risk-reward seems favourable.  

The low base may result in high single-digit Y-o-Y industry volume growth for the rest of FY25, translating into 4–5 per cent Y-o-Y growth for a full year (FY25). However, due to low prices, while average operating profit/tonne may rise Q-o-Q by Rs 150–200/tonne due to lower costs, it may still decline on a Y-o-Y basis due to lower realisations. Average operating profit/tonne may decline from an average Rs 1,025/tonne in FY24 to Rs 875/tonne in FY25 before rebounding to Rs 1,025/tonne in FY26 and continuing to improve through FY27. Assuming the policy thrust about infrastr­ucture continues, and also assuming a private consumption rebound, price moves remain a key trigger for investors. Potential cost escalations are a serious concern. Large capacities, high operat­ional efficiency, an all-India footprint, and healthy balance sheets are all going to be differentiators for competitors in a sector that is still crowded post-consolidation.