Strong Demand, But Rising Costs Cloud Cement Sector Outlook

The Indian cement industry is set for strong quarter-over-quarter growth in Q4 FY26. This boost comes from seasonal demand and better prices. PL Capital forecasts revenue, operating profit, and net profit to climb around 14%, 27%, and 52% respectively from the previous quarter. Demand is picking up across regions, especially in the South and West, with overall industry volumes expected to grow about 7% year-over-year.

Price Hikes Planned to Offset Soaring Material Costs

However, a major challenge is the sharp rise in costs for essential materials like coal, pet coke, and diesel. These are driven by geopolitical tensions in West Asia and make up 30% to 45% of cement production costs. India Ratings and Research estimates total costs could jump by ₹175-200 per tonne in Q1 FY27. To cope, companies plan to raise prices from April. PL Capital and DAM Capital predict increases of ₹30-50 per bag. Yet, analysts from ICRA and India Ratings warn that companies might only be able to raise prices by 2-4% or mid-single digits, which may not be enough to cover the rising costs.

Ambuja Cements' Valuation Compared to Rivals

Ambuja Cements currently trades at a Price-to-Earnings (P/E) ratio of about 26.3 to 31.36 times on a trailing twelve-month basis. This is notably lower than its larger competitors, UltraTech Cement (P/E around 41.89-50.1) and Shree Cement (P/E around 46.92-48.67). Ambuja Cements' market value is around ₹1.03-1.07 trillion, significantly less than UltraTech Cement's ₹3.22-3.41 trillion. This valuation difference may indicate that investors are less confident in Ambuja Cements' ability to handle rising costs compared to its peers.

Risk of Shrinking Profits for Cement Firms

The main worry for the cement sector, including Ambuja Cements, is that profit margins could shrink. Even with strong demand from infrastructure and real estate sectors, companies may struggle to pass all cost increases onto customers. ICRA forecasts that operating profit per tonne could drop by 6-11% in FY27. While Ambuja Cements is expanding its capacity to 109 MTPA (with plans for 155 MTPA by FY28) and undertaking mergers, these require significant investment. Shrinking margins could strain this capital. Ambuja Cements' stock has fallen about 21.68% year-on-year. Its Q4 FY25 net profit also dropped 15.7% year-over-year, leading to an 1.80% stock decline after the results.

Looking Ahead: Profitability Hurdles Remain

The Indian cement sector is expected to continue seeing demand growth of 7-8% in FY27, supported by government infrastructure spending and housing demand. However, profitability looks uncertain. DAM Capital recently upgraded the sector to 'Buy' based on potential price increases. But ICRA predicts that operating profits will likely moderate, especially in the first half of FY27, due to continued high costs. For cement companies like Ambuja Cements to maintain earnings growth, managing these cost challenges through smart pricing and efficient operations will be crucial in the coming year.