Cement firms likely to see profits halve in September quarter

Domestic cement producers are likely to see their profits halve year on year in the September quarter as lower-than-usual volume growth and over three-year low prices of the building material hit realisations, analysts said.

While lower pet coke prices will provide some respite to the cement makers, it will be inadequate to offset the impact of pricing on operating margins.

Given that intense competition in the sector is expected to keep prices subdued in the near term, earnings downgrade is likely for the players, they added.

The September quarter is generally weak for cement producers as demand is lower on account of the monsoon rains, which slows down construction activities. While volumes were 1-2% higher than the year-ago period, led by a pick-up in the last leg of the quarter, the overall quarter remained weak, with prices lower by 5-8% on year.

“Multiple factors like delayed government spending post general elections, strong monsoon activity and flooding across multiple regions are likely to impact demand adversely,” Centrum Broking said in a note.

The domestic cement sector is currently seeing heightened activity in the country as the two largest players – UltraTech Cement and Adani Cement – are rapidly adding to their capacities through a combination of buyouts and capacity expansion. This competitive intensity has taken a toll on prices, which are down for the third consecutive quarter now.
On an average, prices across regions are 2.5% lower sequentially, due to price cuts in the initial month and the fact that price hikes at the end of August had to be rolled back in September. While prices in Southern India have seen the sharpest decline, those in Central India have seen the least, data from Kotak Institutional Equities showed.Southern India also happens to be the highest consumer and producer of cement.

Revenue for cement producers is seen 7-9% lower on year, while operating profit is seen plunging by nearly a fourth. As a result, operating margins of most companies are seen 200-300 basis points (2-3% points) lower.

“Pricing pressure is likely to continue, therefore we don’t see any meaningful price hike in the near term on account of the increase in competitive intensity due to new capacity additions and consolidation from larger players,” Yes Securities said in a note. “Also, the pre-general election demand has ended, and we don’t expect any high mid or teen-digit volume growth for FY25E/ FY26E.”

While pricing may not bring any cheer, the sector is seen benefiting from higher demand as infrastructure projects resume amid improved weather conditions. “Q3FY25 is expected to be a pivotal period for cement demand, with the base effect from Q3FY24, which saw subdued demand, setting the stage for potentially stronger double-digit growth,” Axis Securities said.