Cement stocks: The next big opportunity?

Demand for Cement is expected to pick up in the second half of the year, particularly after the festive season in mid-November. (Priyanka Parashar/Mint)
Demand for Cement is expected to pick up in the second half of the year, particularly after the festive season in mid-November. (Priyanka Parashar/Mint)

Summary

  • Despite recent challenges, such as slowing demand, falling cement prices and profitability pressures, the cement industry has a lot going for it.

MUMBAI : When we talk about sectors with potential, the Indian cement industry might not be the first thing that comes to mind. But if you’re looking for value and long-term growth, it’s a sector worth your attention.

Despite recent challenges, such as slowing demand, falling cement prices and profitability pressures, the cement industry has a lot going for it. For savvy investors, it could be one of the most undervalued opportunities.

The demand slowdown: Why it’s not the end of the world

First things first: Demand growth in the cement sector has hit a bit of a speed bump. In the first quarter of 2024-25, the industry only managed a 3% year-on-year (y-o-y) growth, which is slower than seen in recent years (two-year compound annual growth rate, or CAGR, comes up to about 7-8%). Factors like extreme weather conditions (the heatwave in the summer) and the general elections have played a big role in this slowdown.

But here’s the thing—this isn’t a permanent setback. Companies with strong capacity additions, especially those with exposure in the northern and central regions, are still growing faster than the market. Meanwhile, the South is struggling a bit, but that’s not a story that will last forever.

Also Read: Super investor vs super investor: 5 stocks over which top investors disagreed

Demand is expected to pick up in the second half of the year, particularly after the festive season in mid-November. The monsoon season and delays in government projects have been a drag, but those are temporary issues. We’re talking about mid-single-digit growth in FY25 and a stronger 7% growth in FY26/27.

A bright spot

In FY24, India started with a cement capacity of 585 million tons and ended with 626 million tons installed. The estimated demand for the last fiscal year was around 425 million tons, which means the industry was operating at roughly 70% capacity utilization. However, not all capacity is created equal—some plants are inefficient or even non-operational. Factoring that in, the real capacity utilization is closer to 76%.

Moreover, cement demand is closely tied to gross domestic product (GDP) growth and the rising demand from housing and infrastructure sectors.

..
View Full Image
..

The government’s massive $3 trillion infrastructure and housing investment, backed by initiatives like the National Infrastructure Plan and PM Gati Shakti, is set to supercharge the industry.

We are looking at a strong surge in cement demand, with 11.11 trillion earmarked for capital expenditure in the Budget 2024-25—3.4% of GDP—and the launch of phase 4 of the Pradhan Mantri Gram Sadak Yojana, which aims to provide all-weather connectivity to 25,000 rural habitations.

Also Read: Here are 5 smallcap stocks breaking out on charts now

So, while the cement sector has hit a few bumps, the future demand scenario looks solid. Whether it’s the government’s infrastructure push or the strategic capacity expansions by industry leaders, the pieces are falling into place for a strong rebound.

Profitability pressures: Short-term pain, long-term gain?

Let’s not sugarcoat it—profitability has taken a hit. The industry level Ebitda (earnings before interest, taxes, depreciation, and amortization) per ton (Ebitda/t) fell 17% quarter-on-quarter (q-o-q) to 850 in the first quarter, an 8% drop from the year-ago period. Lower realizations and the challenge of absorbing fixed costs with reduced volumes are the main culprits.

And it’s not just about the past quarter. Spot cement prices are still 2-3% below the Q1 average, even after some recent hikes in certain regions. There’s a good chance these price increases won’t stick, which means the second quarter could be another tough one.

However, the long-term outlook is more optimistic. Ebitda/t should grow over FY24-27. The road ahead might be bumpy, but the potential for recovery is there, especially as demand starts to pick up again.

Consolidation: It’s happened before, and it’s happening again

Consolidation is nothing new in the cement industry. We’ve seen it happen before, and we’re seeing it again. The big players are getting bigger, and that’s not necessarily a bad thing.

Also Read: How Bitcoin ETFs can send Bitcoin prices to the moon in five years

UltraTech Cement Ltd and Ambuja Cements Ltd, two of the industry's giants, have been especially active lately. In South India, UltraTech has taken a majority stake in India Cements Ltd, and Ambuja has completed its acquisition of Penna Cement. This consolidation is expected to boost the market share of the top five players in the South to 57% within the next couple of years, up from 43% in FY15.

Adani Cement is aiming to boost its market share from the current 14% to an ambitious 20% by FY28. The company plans to achieve this by expanding its capacity from 89 million tons to 140 million tons, relying entirely on internal accruals and operating cash flows—no debt needed. Meanwhile, UltraTech isn't sitting still. It plans to ramp up its impressive 140 million tons of capacity in FY24 to 187 million tons by FY27, solidifying its position as a dominant player in the industry.
 

Cement sector: Inorganic acquisitions

Source: Company reports
View Full Image
Source: Company reports

However, it’s not all smooth sailing. The acquisition of Jaiprakash Associates Ltd’s cement assets by Dalmia Bharat Ltd is looking increasingly uncertain, especially now that Jaiprakash Associates is heading to the National Company Law Tribunal (NCLT).

Still, there is no doubt that consolidation often leads to better efficiencies and stronger pricing power, which could benefit the industry in the long run.

Price increases: A critical factor for future growth

For the cement sector to meet FY25 estimates, price increases are going to be key. While current estimates imply an increase in profitability in the second half of FY25 compared to the first half, it's a pretty ambitious target, and it’s going to be tough to hit without significant and sustained price hikes. While lower power and fuel costs will help, they might not be enough on their own.

This presents a downside risk, but it also means that if the industry can pull off these price increases, there’s potential for a significant upside.

Strong balance sheets and cash reserves add to the allure

The cement sector's financial health is impressive. Most companies in the industry have solid balance sheets, with debt-to-equity ratios that reflect their strong financial footing—larger players are comfortably within a healthy range, while even the smaller players are holding their own.

Despite being in a capital-intensive business, many of these companies are sitting on substantial cash reserves, built up during periods of high margins and steady growth. This financial muscle gives them a competitive edge, positioning them not only to weather any downturns but also invest in future growth opportunities.

...
View Full Image
...

Valuations: Is the market missing something?

Despite the challenges, the cement sector is trading at a premium to the historical median in terms of enterprise value to Ebitda (EV/Ebitda).

UltraTech and Ambuja are trading above the median, which makes sense given their aggressive strategies to gain market share. Moreover, their regional spread gives them a leg up. Meanwhile, Dalmia looks cheaper, but the uncertainty around its growth prospects could be keeping investors on the sidelines.

For readers, this could be one sector to track that’s crucial to India’s growth story.

Also Read: Gold or silver: Which is a better long-term bet?

UltraTech stands out as a solid pick with its strong market position and strategic acquisitions. On the flip side, Dalmia offers an attractive opportunity for those willing to take on a bit more risk, especially if the uncertainties start to clear up.

The bottom line: A sector with undervalued potential

In conclusion, while the Indian cement sector presents a compelling long-term opportunity, it’s not without its share of risks.

On one hand, the demand slowdown, profitability pressures and uncertainty around price increases are immediate challenges that could weigh on performance in the short term. The current environment calls for caution as companies navigate these headwinds, and the potential for further downsides cannot be dismissed.

On the other hand, the sector’s strong fundamentals—ongoing consolidation, likely demand recovery and improving cost efficiencies—offer significant upside potential for those willing to take a long-term view.

For readers, the key will be balancing these short-term risks against the potential for long-term gains. As the industry adjusts and adapts, those who are patient may find themselves well-rewarded, but only time will tell if the risks are worth the reward.

Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. 

Manvi Agarwal has been tracking the stock markets for about two decades now. During this period, for about 8 years, she was a financial analyst at a value-style fund managing money for international investors. Presently, she is devoting her time to writing on potentially ignored, and/or misunderstood investment opportunities in the Indian stock markets.

Disclosure: The writer or his dependents may or may not hold the paper stocks as per Sebi guidelines.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS