The West Asia conflict is significantly impacting India's cement sector, raising not only fuel prices but also causing shortages and price surges in packaging materials. While companies managed the impact in the March quarter, the current rising costs and potential softening demand create a challenging outlook for the current fiscal year.
Key input costs have risen sharply. Imported fuels like petcoke and coal, essential for production, have become more expensive due to Middle East tensions. At the same time, the cost of polypropylene (PP) bags, used for packaging, has nearly doubled. This is because refineries are diverting operations to LPG production amid global supply chain issues. This dual cost increase is estimated to raise production expenses by ₹150 to ₹200 per tonne. Analysts project operating profit per tonne could fall by 6–11% in FY2027, to ₹820–870, down from an estimated ₹900–950 in FY2026.
Cement companies face limitations in passing these higher costs to customers. Expected price increases for FY2027 are projected at only 2–4%. This is due to significant market overcapacity and competitive pressures that restrict pricing power.
Despite cost pressures, the construction sector is forecast to see 6-8% volume growth in FY2027. This growth is supported by government infrastructure projects and housing demand. However, broader economic impacts from ongoing geopolitical instability could introduce downside risks, particularly if inflation affects consumer spending.
Larger cement producers, such as UltraTech Cement, with a market capitalization exceeding ₹3 trillion and P/E ratios around 40-49, are better positioned due to their scale and operational flexibility. In contrast, companies like ACC, with a market cap around ₹25 billion and a P/E of approximately 9.4, show a different valuation. ACC's stock performance has been challenging, down 23.6% in the last year.
Past periods of rising input costs, like those seen in 2021-2023 for petcoke and diesel, show the sector's vulnerability. While companies absorbed some impact in the March quarter through inventory management, current pressures are more persistent. The West Asia conflict also impacts India's supply chains, potentially disrupting imports of crucial minerals like limestone and gypsum. Companies are looking for domestic fuel alternatives, but reliance on imports for key inputs remains a strategic weakness.
Analysts are watching if price increases announced for April will stick, especially with potential diesel price hikes after state elections. Recent analyst ratings show strong positive sentiment for JK Cement, with over 82% recommending a 'Buy'. Valuations vary: Shree Cement and UltraTech Cement trade at high P/E ratios around 46-63 and 40-49 respectively. Ambuja Cement, with a P/E of about 26-31, appears more attractively valued. Ramco Cements and JK Cement trade at P/E ratios between 35-44.
A significant challenge is the cement sector's substantial overcapacity, which fundamentally limits the ability to raise prices, even as input costs climb. Any price hikes are likely to face resistance if demand growth slows. Companies heavily reliant on imported fuels like petcoke and coal are highly exposed to geopolitical volatility. The shortage and price surge in polypropylene bags further adds to operational cost vulnerability. A deeper look at company balance sheets is crucial to identify those with large debt burdens, which could become unsustainable if revenues fall and interest costs rise.
The market has already factored in some of these concerns. Over the past year, Ambuja Cement (-12.54%), ACC (-23.6%), Shree Cement (-23%), JK Cement (-23%), and UltraTech Cement (-6%) have all shown negative returns. Ramco Cement and JK Cement managed modest positive returns of 1% and 3.3% respectively over the same period, though other reports indicate negative returns for JK Cement. This highlights the need to examine individual company performance carefully.
ICRA forecasts 7-8% volume growth for the Indian cement sector in FY2027, driven by sustained demand in housing and infrastructure. However, profitability is expected to be lower, especially in the first half of FY2027, due to ongoing cost pressures and potential freight rate increases. Analysts will monitor the success of April price adjustments and geopolitical stability in West Asia, which could impact raw material sourcing and logistics.