Cement Sector Set for Record Profits! Crisil Forecasts Huge Gains Amidst Rising Demand
Overview
Crisil predicts a significant 250-300 basis points profit growth for Indian cement manufacturers this fiscal year. This surge is driven by improved realisations from increased volume and premiumisation, even as selling prices remain steady and input costs are managed. Cement volumes are projected to grow 6.5-7.5% year-on-year, with a stronger rebound expected in the second half due to pent-up demand and better liquidity. Operating margins are set to expand to 18-20% from 16% last fiscal.
Cement Industry Poised for Strong Profitability Boost
Leading financial services and analytics firm Crisil has forecast a substantial improvement in the profitability of Indian cement manufacturers for the current fiscal year. The report anticipates a growth of 250 to 300 basis points in profitability, primarily driven by enhanced realisations stemming from increased sales volumes and a shift towards premium products. This positive outlook is sustained despite stable selling prices and controlled input costs.
Robust Volume Growth Expected
Cement sales volumes are on an upward trajectory, with Crisil projecting a year-on-year growth of 6.5-7.5 percent for the ongoing fiscal. This represents an acceleration from the 5 percent growth recorded last fiscal. The first half of the current fiscal saw a moderate 5 percent volume increase, a recovery after a flat performance in the same period of the previous year. Projections for the second half are even more optimistic, with an expected volume rise of 8-9 percent year-on-year. This surge is attributed to the release of pent-up demand from earlier in the year and improved liquidity conditions across the market.
Pricing Dynamics and Premiumisation Strategy
Average pan-India cement prices are forecast to remain relatively stable, trading within a narrow range of ₹354 to ₹359 per 50 kg bag, with a fluctuation of no more than one percent. While a reduction in the Goods and Services Tax (GST) rate from 28 percent to 18 percent is expected to exert downward pressure on retail prices, the industry's strategy of premiumisation is anticipated to counterbalance this effect. This premiumisation, coupled with higher demand, is expected to bolster realisations for cement producers.
Sehul Bhatt, Director at Crisil Intelligence, noted that while the first half saw a modest 3 percent year-on-year increase in average pan-India cement prices, the full impact of the GST reform will likely lead to a 4-5 percent decline in retail prices in the second half. However, Bhatt added that the industry is still set for higher realisations this fiscal, supported by healthy volume growth.
Excluding the GST component, cement prices are projected to rise by 3-4 percent year-on-year in the upcoming quarter. Manufacturers experienced a 5 percent increase in realisations during the first half of this fiscal. While this momentum is expected to moderate in the second half with realisations growing by a modest 0-2 percent, the full-year average improvement is still estimated at 2.5-3.5 percent.
Regional Price Trends and Cost Management
Regional price recovery is anticipated in the East and South of India, where healthy demand prospects and a low base are expected to support price increases of 0-2 percent this fiscal, following significant declines last fiscal. In contrast, prices in other regions are predicted to decrease by 2-3 percent.
On the cost front, power and freight expenses, which constitute about 54-55 percent of total expenses, are projected to fall by 2-3 percent and 1-2 percent, respectively, this fiscal. This follows substantial decreases in the previous fiscal. Raw material costs are likely to remain under pressure due to higher limestone prices, but overall cost stability is expected. This efficiency is projected to lead to an expansion in operating margins, reaching 18-20 percent from 16 percent in the last fiscal.
Future Outlook and Potential Risks
The outlook for the Indian cement sector remains positive, with strong domestic demand and strategic operational improvements supporting profitability. However, Crisil cautioned that any significant upswing in energy prices, potentially triggered by geopolitical uncertainties, regulatory shifts, or natural calamities, warrants close monitoring as it could impact cost structures and margins.
Impact
This positive forecast for the cement sector suggests a beneficial environment for construction and real estate development, potentially boosting related industries. Companies in the sector are likely to see improved financial performance, which could translate into better investor returns. The news signals underlying strength in the Indian economy and infrastructure development.
Impact Rating: 8/10
