Sustaining price hikes, demand uptick key for cement companies' stocks

The operating profit margins of cement companies should have seen a recovery in the fourth quarter of 2024-25 (Q4FY25), owing to seasonal demand supported by 2-2.5 per cent quarter-on-quarter (Q-o-Q) price hikes and better operating leverage. On average, operating profit per tonne may rise by over 25 per cent Q-o-Q but may still be somewhat below the Q4FY24 levels. Due to volume gains estimated to be in the range of 6-7 per cent year-on-year (Y-o-Y), aggregate operating profit should rise by 10 per cent Y-o-Y and by over 50 per cent Q-o-Q.

 

Among companies, Shree Cement and JK Cement may register the highest operating profit  gains, while UltraTech may enjoy gains from integration of its recent acquisitions.  In April, cement companies hiked prices month-on-month.  This should help offset an uptick in input prices, possible revision of limestone royalty rates, implementation of mining tax in Tamil Nadu and continued weakness in the South. The South saw the least pricing growth in Q4FY25. 

 

All-India cement demand rose by 6-7 per cent Y-o-Y in Q4 after growing 4 per cent Y-o-Y in the first nine months of FY25. UltraTech and Ambuja, with their acquisitions, may grow volumes by 20 per cent Y-o-Y and 15 per cent Y-o-Y respectively. JK Cement and Star Cement may also hit double-digit volume growth while Shree Cement will grow at about 5 per cent owing to price focus. Dalmia Bharat and Ramco Cements may see declines.

 

Industry profitability may improve sequentially with Ambuja likely to register the highest gains in margins due to a low base. Prices remained largely stable in March and were hiked in April, and dealers expect the South to see a large price hike of ₹30-50 per bag. Given higher demand and stronger pricing performance with stable costs, Q4FY25 could be an excellent quarter. Cement spreads in April should be at a 17-month high, given further price hikes.

 

Going forward, it is a key monitorable if price hikes sustain in the South. The levy of mineral-bearing land tax (₹160 per tonne) by Tamil Nadu makes it crucial that hikes are sustained to pass on the cost. Unavailability of labour may have impacted demand in March and April but demand should be driven by government projects in 2025-26 (FY26).

 

During Q4FY25, cement players faced rising input costs, mainly due to increasing energy expenses. Domestic pet-coke prices rose 6-7 per cent Q-o-Q, while imported pet-coke and coal prices also rose Q-o-Q. Average imported pet-coke (US) prices were down 5 per cent Y-o-Y and up 15 per cent Q-o-Q at $111 in Q4FY25. 

 

However, the average imported coal price was down 1 per cent Y-o-Y and 13 per cent Q-o-Q at $96 in Q4FY25. Domestic e-auction coal prices climbed 8 per cent Q-o-Q in Q3FY25 while diesel prices were stable. High-cost energy inventory may compress margins in Q1FY26.

 

Players with a wide geographic mix, higher capacity utilisation, captive fuel sources, and a track record of successful capacity expansions (organic or via acquisition) will be better-placed in the coming competitive scenario. Given profitability improvement sequentially, led by sustained price hike of December, 2024 and new hikes in April, positive operating leverage, and controlled fuel prices, the sector is looking to be in better shape. However, operating profit per tonne may still be lower on a Y-o-Y basis in Q4FY25, because of steep declines in cement prices in the first half of FY25 (H1FY25).

 

Valuations are tricky. Ambuja is at a premium to its historic ratio of enterprise value per tonne and Ultratech is also at a lesser premium of the same ratio. Shree Cement is at a small discount to the same ratio.