DAM Capital Upgrades Indian Cement Sector, Foresees Price Hikes Amid Cost Pressures
Brokerage DAM Capital has upgraded India's cement sector to a 'Buy' rating, signaling a potential shift for manufacturers aiming to navigate rising costs. The firm anticipates price hikes of ₹30-50 per bag, which it believes will help counter significant inflation estimated at ₹400-500 per tonne for FY27. These cost pressures are largely driven by geopolitical tensions impacting fuel and packaging prices.
The brokerage has also factored in tempered volume forecasts, projecting a 4% growth, and reduced EBITDA estimates. Despite these adjustments, DAM Capital views current valuations across the sector as attractive. However, the market's immediate reaction has been mixed, with some cement stocks recently trading lower, signaling investor caution. Concerns persist over future capacity additions and the sustainability of margins, although some technical indicators suggest certain players might be oversold.
Demand for cement remains robust, with projections of 7-8% growth in FY27. This is primarily fueled by government infrastructure spending and a recovery in rural housing, supported by initiatives like PMAY. The Union Budget has reinforced this outlook, allocating substantial funds to roads, railways, and defense, which boosts long-term demand visibility.
However, the sector faces significant input cost inflation. The conflict in West Asia has driven up prices for imported pet-coke and coal, with estimates pointing to a ₹175-200 per tonne cost increase for the industry. Packaging costs have also surged due to rising polypropylene prices, linked to crude oil. To maintain profitability, cement manufacturers may need to implement price increases of 4-5%, a move currently being tested in the market. Historically, sharp fuel cost spikes have squeezed cement company margins for several quarters, as seen in 2022 following the Russia-Ukraine conflict, with similar risks now emerging.
Competition is intense, with UltraTech Cement leading due to its scale and extensive presence. Shree Cement is recognized for its efficient, low-cost operations. JSW Cement is aggressively expanding its capacity, particularly in green cement, while Dalmia Bharat is also focusing on its green cement strategy.
A major concern for the industry is the impending wave of new capacity, with 140-150 million tonnes expected by FY28. Combined with current utilization rates below 70%, this could lead to oversupply. Such a scenario might limit pricing power, especially in the South, East, and Central regions.
This potential oversupply poses a significant challenge to the brokerage's optimistic view. The sustainability of price increases is questioned amid a competitive landscape and substantial new capacity coming online. Companies like JSW Cement, Ramco Cements, and India Cements have higher leverage and lower interest coverage ratios, making them more vulnerable to prolonged cost inflation and margin pressure compared to stronger players like UltraTech, ACC, and Shree Cement.
Furthermore, the cement industry faces ongoing regulatory scrutiny regarding environmental compliance and potential competition law issues. The reliance on imported fuels also exposes the sector to currency volatility and supply chain disruptions, as highlighted by the current geopolitical situation's impact on shipping and fuel availability. Recent attempts to increase prices have faced resistance, indicating that the market might not readily accept full cost pass-throughs, especially with sluggish real estate launches and potential economic slowdowns indicated by PMI data.
Looking ahead, the industry must carefully balance cost management with pricing strategies. Analysts anticipate price recoveries starting April, with some regions showing better resilience. The success of these price hikes will be crucial for profitability, particularly for companies heavily exposed to imported fuels and packaging. Investors will be watching upcoming quarterly results for signs of margin pressure or successful cost pass-through, alongside the execution of government infrastructure projects, which are vital for sustained cement demand. Ultimately, investors must weigh DAM Capital's positive valuation calls against significant supply-side risks and volatile input costs.