Cement industry stares at slowdown amid expectations of elections

Experts have sounded a word of caution for the Indian cement sector and thus needs to be taken quite seriously as they have cited three crucial factors about which one has to be wary of. The year so far has seen deficient rains, which can be a cause for demand slowdown. Besides, the upcoming general elections and the possibility of advancing them are also likely to result in a further reduction in demand. The operating costs in the Indian cement industry, which had hit lows, are gradually inching up, which is a good sign from the recovery point of view. And that's not all. The supply intensity is picking up pace. Market analysts believe that while lower inventory costs of fuel and resilient pricing is likely to keep earnings in good stead in 2QFY24, the consensus EBITDA estimates for FY25 face risk of downward revision and current valuations are factoring in growth adequately, as endorsed by Centrum.

Demand momentum post-Covid has been relatively strong in the country with three consecutive years of good growth starting from FY22. However, there is every possibility that this demand momentum would come to a halt, given the expected slowdown in construction activities in 4QFY24 before the general elections and its corresponding code of conduct and deficient rains, which will impact rural demand negatively. One has to keep in mind that rainfall from the South West (SW) monsoon this year is 10 % below its long period average till the first week of September.

While there is still some more time to make up for the deficiency this month, the El Nino effect is likely to keep rainfall below average thereby impacting rabi crop sowing. It is also expected that some portions of the government’s capex would be diverted to relief package or welfare schemes for farmers in case of continuation of deficient rains. It is projected that there would be a five per cent YoY growth in cement demand in FY25. Coupled with this, imported coal prices have increased by 15 per cent and pet-coke prices have increased by 28 per cent over the last three months.

Even though, both coal and pet-coke prices are still lower on YoY basis, the operating costs for the sector are likely to rise from 4QFY24.

As a result, during FY25, the sector’s demand growth is likely to be weak but it is also expected that costs would move up, putting pressure on both growth and margins. Interestingly, many cement companies are getting increasingly ambitious and optimistic about garnering larger market share in the wake of a better demand momentum in recent years and improved cash flow position in the sector. It is therefore perfectly understandable why many companies have already announced ambitious plans for capacity addition, which is likely to result in an addition of 310-340mn mt of capacity over the next six years. It is likely that there will be an incremental supply of 130mn mt against incremental demand of 86mn mt over FY23-26E.