Rising fuel costs, margin fears put cement stocks on a weak foundation

Cement demand is likely to improve, but higher fuel, packaging and logistics costs could weigh on margins and delay earnings upgrades until the fourth quarter of FY27

Cement volumes are estimated to have grown by 6–7 per cent year-on-year in Q2FY27, and some companies such as Shree Cement, JK Cement and UltraTech may have improved their market share. Realisations may also have improved by 1–2 per cent quarter-on-quarter, due to price increases in August and September. But higher crude prices and higher petcoke prices present challenges. Rising raw material and logistics costs hurt margins, and earnings before interest, tax, depreciation and amortisation (Ebitda) may fall appreciably quarter-on-quarter.

 

Volume growth in a seasonally weak quarter was a positive surprise. Prices declined slightly in July–August 2026 and recovered in September, with increases sustained by demand. Ebitda per tonne will fall sequentially as well as year-on-year for most companies.

 

Imported petcoke prices have risen by 30–35 per cent quarter-on-quarter, and this may also affect Q3FY27 costs, given long-term inventory. Thermal coal prices also rose 1–2 per cent quarter-on-quarter. Packaging costs have also risen due to the impact of high crude oil and gas prices.

 

Volumes should grow in H2FY27, and price increases could be sustained, given busy-season demand. Pricing picked up across regions in September, and more increases may be implemented in Q3 if demand recovery is visible. But analysts are concerned about rural demand tapering due to an erratic monsoon. Construction activity in Q3 will be moderated by the festive season and by pollution-related bans in North India.

 

Margin compression could continue until there’s a resolution to the conflict in West Asia. Fuel (crude and coal) costs can be visible with a long lag of three months or more. Cement spreads (realisations net of fuel and freight costs) indicate a significant decline in margins. Companies with longer inventory cycles may see the impact of high Q2FY27 fuel costs on their financials through Q3FY27. 

 

Pricing discipline will be crucial until demand recovery is clearly visible. It is tempting for companies with surplus capacity to start a price war, but this would hurt the industry. Rural demand may be uneven given monsoon patterns, but government-budgeted infrastructure spending, with execution across roads, railways and metros, and some private corporate capex could keep demand ticking over. The Index of Industrial Production (IIP) trends indicate double-digit year-on-year growth in cement output through July–August. Overall FY27 demand is expected to grow by 7–8 per cent year-on-year, which is supported by the trend in Q2 volumes. In the longer term, the industry is assumed to see steady annual volume growth of 6–8 per cent during FY27–FY29. 

 

The sustainability of recent price increases would be critical if inflationary price trends affect the industry through Q3FY27. Dealer inventory and non-trade demand are other factors to monitor, along with regional differences in demand and pricing.

 

Maintaining margins will be challenging, although a pickup in demand is likely. The industry has surplus capacity, which is growing given the expansion plans of all major players. Earnings upgrades will be gradual in H2 and may not be seen until Q4FY27, unless tensions in West Asia ease.

 

The long-term structural narrative is simple. India is growing at a reasonable pace, and government spending on infrastructure is a big part of the story, with investments across infrastructure, urban development and logistics, and policy incentives for manufacturing and affordable housing. Areas like data centres, renewables and uptake of production-linked incentive (PLI) schemes for manufacturing should drive private sector capex. All this will sustain cement demand.

 

Within the industry, consolidation has been a theme for two to three years, and it is continuing. This should improve pricing discipline. Most players are also investing in renewables, waste heat recovery systems (WHRS) and alternative fuels, and improving operational efficiencies. These are cost-saving initiatives that should push up margins as and when input cost pressures ease. Scale is a must to exploit rising demand and also to lower operational costs per tonne, and capex has been ongoing.

 

However, this story and the positive outlook will only play out over the medium to long term. In the near term, earnings are being dragged down by high fuel costs, which are dependent on geopolitical tensions and thus unpredictable.

 

Some investors have started to experience fatigue since they have been holding cement exposures for a long period without receiving much in the way of returns. A lack of share price appreciation has also led to corrections, which may make valuations more attractive.

 

The factors that investors should look for are relatively easy to identify. A pan-India market presence is a must. Higher exposure to infrastructure is useful. Efficient internal cost optimisation and scale are mandatory. This means the induction of renewables and WHRS. Domestic coal and coke linkages are a big bonus. Strong balance sheets with low debt will help in funding expansions. Few companies check all the boxes.