Cement firms look to turn to bulk buyers amid growing challenges from pricing, margins

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The cement sector is undergoing a 3-4 per cent shift from the trade to the non-trade or wholesale segment amid companies' aim to align sales with their expanded production capacities. Analysts maintain that this trend is largely pronounced among firms with aggressive capacity expansion plans. These companies are turning to bulk buyers such as large contractors and infrastructure projects to drive up sales growth and compensating for slower demand in the retail trade segment.

The sector is expected  to close at  630 million tonne (MT) of capacity by the end of this financial year, an increase of 43 MT.  Large players continue to consolidate and expand production in a bid to secure a larger market share. In July, market leader UltraTech acquired a controlling stake in Chennai-based India Cements adding 14.5 MT per annum capacity.

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"There is a noticeable shift towards the non-trade segment, which has lower margins. This shift has led to a decrease in  weighted average realisations for the cement industry. Realisations have seen a QoQ [quarter-on-quarter] decline, with some companies reporting significant drops," Nirmal Bang analyst Jyoti Gupta wrote in a research note dated August 31.  In the first quarter, realisations were down 3 per cent year-on-year (YoY).

Non-trade demand is expected to rise after the monsoon season, according to Axis Securities. However, the firm cautions that cement prices may face pressure, with a potential decline of Rs 200-250 per tonne anticipated in second quarter of the next financial year. Companies like Shree Cement  have reported growth in their non-trade business in the last quarter, reflecting the increasing reliance on bulk buyers, despite the pricing challenges ahead.

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Price hike announced, but absorption remains crucial

Prices for the building material are currently at a three-year low, observers say, owing to competitive intensity, oversupply in some markets, and a slowdown in demand since the beginning of the ongoing financial year.  Cement dealers in some parts of the country say that they have hiked prices in the range of Rs 10-20 per 50 kg bag of cement, effective from the first week of September, to arrest the continuing slide in prices.

The recent increase in the prices have faced opposition from politicians who have demanded a roll back. On September 8, Brijmohan Agrawal, the Raipur Member of Parliament (MP) from the ruling Bharatiya Janata Party (BJP),  raised objection over the "steep" hike in cement prices by its manufacturers and demanded intervention of both the Chhattisgarh government and the Centre for a rollback of the surge in the pricing mechanism.

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Prices for cement have increased by Rs 15-20 per bag in Delhi and some northern markets, and by Rs 10-20 per bag in Mumbai. In contrast, price hikes in southern markets have been slower and more fragmented, reflecting the region's competitive and localised market conditions.

"We have hiked prices across all of our stocked brands, Coromandel, Ramco, and UltraTech, by around Rs 10 per bag. The prices for most of our stock are at around Rs 280 to Rs 295 per bag," said Muthuraman Krishnan, director of SLT Cement Marketing, a large dealership based in Chennai. Coromandel belongs to The India Cements Ltd.

Some cement makers attempted price hikes of up to Rs 20 per bag in August, dealers say, but those hikes were rolled back due to muted demand.  Investors say that the demand is uneven across the country, and a repeat of the situation in April, when cement makers hiked prices and then rolled them back, looks a distinct possibility.

"The central, northern and western regions are reporting an improvement in demand. However, the eastern and southern regions continue to see weak demand and dealers lack confidence in seasonal price hike sustainability. They believe the hike in cement prices would erode demand further, resulting in price rollback, like the one in April," according to a report from InCred Equities.

Going ahead, while some improvement in pricing may be seen in the October to March period, cement prices are expected to be lower in the next fiscal by up to 3 per cent.

"With expectation of upswing in demand since the parliamentary elections and monsoon period, prices are expected to revive during second half of the fiscal with 1-2 per cent YoY rise, limiting overall price decline for full fiscal to 1-3 percent,” said Sehul Bhatt, the director of research at CRISIL Market Intelligence and Analytics.