As infrastructure spending ramps up, the Indian cement sector is seeing the rise of powerful new players with deep pockets. The recent acquisition of ACC and Ambuja Cements by Adani Group has put the cement industry on notice - this giant family conglomerate is coming after their business. The Adani Group's ambitious plans to double its capacity by FY28 have prompted major cement manufacturers to increase budgets and capex to protect their market share. 

Adani’s entry comes at a difficult time for the industry, which is already facing increased competition from smaller players, and the challenges of fluctuating fuel and freight costs. As India solidifies its position as the world’s second-largest cement producer, brokerages like CLSA, Jefferies and Motilal Oswal have started closely tracking this sector. Against this backdrop, the cement and cement products industry has risen 9%, outperforming the broader Nifty 50’s 1.9% growth over the past 90 days.

Cement gets an election-driven infra boost

As the May 2024 elections approach, the government’s pre-election spending is expected to add momentum to infrastructure development. Infrastructure projects consume nearly 35-40% of the cement produced, while housing accounts for 55-60% of cement consumption. In the FY24 budget, the government raised the capex outlay by 33% to Rs 10 lakh crore, with a budgetary allocation of Rs 80,000 crore for the Pradhan Mantri Awas Yojana (for housing projects). Cement firms are aligning with this infra push and targeting an 8-10% volume increase for FY24.

Capacity expansion to drive market share for players 

The Adani Group, the new owners of ACC and Ambuja Cements, have unveiled plans to double the combined entities’ capacity from the current 70 MT to 140 MT over the next five years. This has started a capex war among major cement manufacturers, who are now increasing their capacity by 8-10% annually for the next 2 to 3 years.
 

As a result, the overall cement industry capacity is expected to reach 664 MT in FY25, up from the current 576 MT. However, large players are facing pricing competition from the unorganised sector, raising concerns about potential market share loss.

Capacity expansion is crucial for cement manufacturers to capture a larger market share.  For instance, Ultratech Cement doubled its capacity between FY14 and FY23, which increased its market share from 16% to 26%. Following its lead, other large players are also expanding their capacity. Currently, organised players account for nearly 72% of the market.

While the clinker capacity utilisation for large cement manufacturers stood at nearly 90% in Q4FY23, additional capacity is expected to lower utilisation levels, and increase depreciation and variable costs.

Rising competition makes price increases a tough call

Cement prices are highly sensitive and drive demand, rather than demand dictating prices. In the first half of CY22, the industry saw a surge in raw material costs, prompting cement manufacturers to implement price hikes. However, this led to a fall in demand. 

Subsequently, major cement manufacturers reduced their pricing, which helped revive overall demand. Post that, cement firms have implemented small price hikes, with major discounts in the last quarter of FY23. Higher cement prices allowed smaller players to capture market share through localised selling strategies.

Consequently, despite the price hikes undertaken in Q4FY23, cement manufacturers had to reverse their decisions by offering discounts. This resulted in a decline in all-India cement prices during the same period. 

In April 2023, cement prices recovered by Rs 5-10/bag. South Indian cement consumers, known for their price sensitivity, reacted strongly, resulting in lower consumption. Consequently, prices in South India declined by 12-14% from their peak in December 2022.

Looking ahead, cement manufacturers are unlikely to implement substantial price increases as it would negatively impact volumes. Instead, they are prioritising passing on the benefits from lower fuel prices to retain their market share.

Declining coal and pet coke prices a boon for bottom lines

Fuel and freight costs, which account for nearly 50% of revenue, have declined since their peak in December 2022. Imported coal prices decreased by nearly 20% in Q4FY23, and pet coke prices, previously above USD 200/tonne until Q3FY23, have now dropped below USD 180/tonne. 

Cement manufacturers typically maintain 50-60 days of fuel inventory. The average energy cost is expected to decrease by approximately USD 1/tonne in Q4FY23, and further decrease by USD 3/tonne in Q1FY24 due to lower coal and pet coke prices.

Domestic coal and pet coke prices are high compared to imports, driving cement manufacturers to import fuels to reduce costs. India witnessed a 32% YoY increase in coal imports from April 2022 to February 2023. 

Prices of coal and pet coke are expected to cool off in H1FY24. Manufacturers are adopting green energy solutions like solar and wind power plants to reduce coal dependence. Ultratech Cement, for example, aims to meet 30% of its fuel demand through green initiatives by the end of FY24.

Margins to expand, but Adani’s entry set to keep growth muted

The margins of cement manufacturers will see an expansion in FY24 and FY25, driven by lower fuel and freight costs. The price of diesel, a crucial raw material for cement production, has a significant impact on the margins of manufacturers. Diesel costs account for nearly 20-30% of the freight cost for coal transport, 50% of road transportation charges for cement, and are also essential for limestone mining. Variation in diesel prices impacts the margins of cement manufacturers.

Diesel prices have remained stable over the past three quarters despite the decline in crude oil prices from a peak of USD 120/barrel in June 2022 to USD 75/barrel by the end of March 2023. Going forward, it is unlikely that diesel prices will see a significant increase. 

The combination of lower coke and coal prices, along with stable diesel prices, will help margin expansion. However, heightened competition, triggered in part by the Adani group’s entry into the market will lower price realisations. The average price realisation for cement manufacturers in FY23 stood at Rs 5,266/tonne, and it is expected to be around Rs 5,238/tonne in FY24 and Rs 5,276/tonne in FY25.

The lower price realisation will offset the margin expansion achieved through lower fuel and freight costs. As a result, the margins in FY24 and FY25 will likely hold at FY22 levels. Despite this, major cement manufacturers remain optimistic about volume growth, with an expected increase in cement consumption ranging from 13-15% in FY24. Cement firms are counting on  consumption to grow in the range of 8-10% in FY24, which is keeping the mood upbeat.