Cement makers' gains hinge on higher volumes, lower fuel costs in H2FY27

Cement makers face surplus capacity and elevated costs, with stronger demand and lower fuel prices expected to drive earnings and valuations in the second half of FY27

The cement industry continues to experience surplus capacity, high competitive intensity and rising costs due to geopolitical tensions. While the second quarter of FY27 (Q2FY27) will be muted due to the seasonal monsoon impact, price hikes taken in April were partially sustained through Q1FY27.

 

Demand continues to be driven by infrastructure spending. Industry volume may have grown by 5 per cent year on year (Y-o-Y) in Q1FY27. Capacity utilisation was in the range of 70 per cent. Petcoke prices were high but moderated a little in June. If West Asia tensions ease, along with a correction in crude prices, further reductions in petcoke prices may be on the cards.

 

Capacity addition is creating more supply. Given surplus capacity, companies with footprints across regions, solid balance sheets, scale and low production costs are to be preferred. Companies with captive coal have better insulation against energy costs. Greater renewable energy (RE) usage will be another positive.

 

Trade demand in Tier-3 and rural markets is modest. A deficient monsoon implies rural demand will continue to be muted. Industry volumes may see significant seasonal declines in Q2FY27. This is normal, and it may be steep given a poor monsoon. The South and East may also see a sharper volume decline as infrastructure spending will be low until new state governments stabilise in Tamil Nadu and West Bengal.

 

In Q1FY27, the North and Central regions saw momentum, while the South, East and West witnessed weaker demand. Lower rainfall is a key risk for rural and semi-urban demand. Cement demand was strong in the second half (H2) of FY26, and H2FY27 may also see a rebound with better volume growth Y-o-Y despite the higher base.

 

Cement prices have not kept pace with inflation over the past several years, and this has meant low return ratios, with average return on capital employed (RoCE) at around the mid-single digits. Pricing power will be minimal until demand picks up, given current capacity utilisation. Companies have faced higher coal and petcoke prices, which may have pushed up fuel costs by around Rs 325-350 a tonne in H1FY27 (given inventory build-up). Average international petcoke prices increased to $144 a tonne (up 11 per cent quarter on quarter, or Q-o-Q), while domestic petcoke prices surged to around Rs 17,753 a tonne (up 30 per cent Q-o-Q). Higher diesel prices have also pushed up logistics costs, and rising polymer prices have raised packaging expenses.

 

But recent declines in petcoke prices may have reduced this impact. Nevertheless, at current rates, fuel costs are around Rs 270 a tonne higher Y-o-Y. This implies earnings before interest, taxes, depreciation and amortisation (Ebitda) per tonne declined by around Rs 50-100 Q-o-Q in Q1FY27, with higher packaging costs also likely to have had an impact. Price hikes in April would have partially offset this rise in costs and, despite price declines in May, the April price hikes have been partially sustained. Overall, average Q1FY27 prices were higher by around 4 per cent Q-o-Q than in Q4FY26.

 

Leading players are targeting cost reductions of around Rs 100-200 a tonne over the next two years, supported by various cost-efficiency measures, including increasing green power, a higher alternative fuels and raw materials (AFR) share, logistics optimisation, and investment in digitisation and automation to improve plant efficiency. Given competition, any cost benefits are likely to be passed on.

 

Capacity additions indicate the demand-supply gap may widen in the medium term, with capacity rising at around 8 per cent per annum between FY25 and FY28, while demand is growing at 6-7 per cent. The industry's average grinding capacity utilisation peaked at 72 per cent in FY24 and likely remained range-bound at 70-71 per cent over the next two years. Clinker utilisation is also estimated to remain range-bound at 75 per cent. Surplus capacity may lead to aggressive price wars to retain market share unless demand improves.

 

Net debt may be a concern as aggregate capex is now around 85 per cent of operating cash flows for cement majors, up from around 70 per cent between FY20 and FY24. Strong balance sheets are, therefore, a key differentiator for investors.

 

Some cement stocks have seen steep corrections since March 26 due to concerns over low profitability, high input costs and the West Asia crisis. The sector trades at an estimated one-year forward enterprise value (EV)/Ebitda multiple of 15 times, which is lower than its five-year average valuation. RoCE bottomed out at 5 per cent in FY25 and improved in FY26, but it may remain range-bound given higher supply. Lower fuel costs could lead to a rebound in H2FY27 valuations if volume growth also improves.