As the Indian cement sector grapples with the paradox of turnover growth and decreased profitability, ICR explores the reason behind this phenomenon.

As per an estimate by CareEdge Research, India’s cement production ranged between 380-390 million tonnes in FY23, docking a growth rate of 8-9 per cent y-o-y. This growth in production is spurred by increased demand and this will continue in FY24, too, thanks to the upcoming general elections. However, that does not ensure higher profit margins. As is seen in the economic analysis, although cement production and consumption grew by 11 per cent in FY23 in the period from April to November on a year-on-year (y-o-y) basis, the EBITDA margins of cement players declined by almost 10 per cent y-o-y in H1FY23. Price hikes in per bag of cement failed to tackle inflation, resulting in cement companies grappling with restricted profit margins. This unprecedented anomaly has got trade pundits to reconsider the dynamics of the cement industry.
The cement players were not able to pass the input cost escalation entirely, which impacted the EBITDA margins in H1FY23. The power and fuel costs were expected to remain elevated in the near term due to concerns about global supply while the price hikes may not be sufficient to cover the elevated costs, thereby adversely impacting margins. The profit margin of the cement companies were expected to decline by 400-500 bps in FY23.
Cement is a cyclical industry, which means that fluctuations in the economy tend to adversely affect profitability. This has resulted in cement players facing the antithesis of high turnover and low profitability. This can be attributed to some of the major causes such as input costs and logistics cost that eat into the revenues. Let’s backtrack a little to the last quarter of the previous financial year to look at how trends have progressed in order to get a clear perspective of the current situation.

Taking Stock
As per a report by CareEdge Ratings, the operating profit margins of cement contracted by 320-380 basis points to 16.3-16.8 per cent in FY23 as input cost pressures remained constant. The surge in power and fuel costs as well as the escalation of limestone prices affected the cement margins considerably. But this trend changed as markets have witnessed a stabilisation of coal prices. A Motilal Oswal Financial Services report states, “As per our calculations, the average spread for cement companies should improve by ~INR300/t based on spot coal/petcoke prices and most of the benefits will start reflecting in Jun’23, as per companies’ commentaries, as they are carrying high-cost coal inventory.
“Current spot prices of US/Saudi Arabia petcoke and South African coal are at similar levels of 1QFY22 average. Though domestic pet coke prices seem to be higher than imported pet coke prices, we expect a reduction in domestic petcoke prices in coming weeks. Recently, IOCL reduced the petcoke price by 4-9 per cent on 23rd May’23 (total reduction of 11-17 per cent in May’23),” stated the report.
The favourable trend of fuel and raw material prices that the cement sector has witnessed is yet to reflect on the profit margins. However, input costs are not the only parameters affecting profitability of cement.

Demand Surge
One of the major highlights of the pre-election period in India is speedy mobilisation of infrastructure projects across the country. The Central Government is focussed on completion of major projects including the affordable housing schemes. This has called for a boost in demand for cement. So far expert analyses have predicted that Indian cement companies are geared up to meet the as cement supply is marginally surpassing projected demand. However, cement demand has been surging since FY23 itself as India’s cement production and consumption each grew 11 per cent year-on-year (YoY), according to a report by CareEdge.
In this tug-of-war between cost inputs and rise in demand, the former had an upper hand, resulting in lower margins for the cement companies. Although the demand is surging, it is not enough to battle the high input costs, especially of fuel, thereby being detrimental to the profit margins of cement companies. So, where does cement price figure in all of this?

Pay the price
It is a common practise for cement makers to hike prices for end-users during certain peak periods across the year. The pricing vastly differs in different states as cement is basically a sectoral industry. Depending on the location of the cement plants and the logistics expense, price per cement bag differs from state to state. Additionally, on a sectoral
level, pan-India brands have to compete with local ones and pricing becomes an important distinguishing factor. From an end-user’s perspective, cement as a product largely remains the same and there is no brand loyalty, therefore, price becomes an all-important factor.
While cement companies tried increasing price per bag in February-March 2023, these hikes did not translate into actual revenue for a number of reasons. Most of the hikes metamorphosed into discounts, price cuts or incentives, given the tough competition. So, when you look at the bigger picture of cement pricing across India, the last two quarters of FY23 saw a flat graph, with occasional negative dipping.
This meant that cement companies were unable to pass on the input costs to the consumer and had to internalise the same, resulting in negatively impacted bottom lines.
To summarise, the Indian cement sector is witnessing a rise in turnover due to robust demand fuelled by infrastructure projects and real estate development. However, profitability is being hampered by escalating input costs, rising costs of logistics and last mile connectivity, the inability to pass on the entire burden to consumers and intense market competition. However, the outlook remains positive as cement companies are already operating on the background of a sturdy turnover and the demand only going to increase going forward. Margin corrections will take place eventually as other factors fall in line, making FY24 a profitable year for cement. This forecast has kept the sector’s outlook positive, with sustained demand growth anticipated in the coming months, which could support improved profitability in the long run.