Cement Q3 Preview: Declining demand, higher variable costs to subdue earnings

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26 Aug, 2025 12:21

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After a brief pick-up in October, the cement sector has seen a drop in demand across many regions as well as an increase in power and fuel costs which impacted margins for almost all players.

Decline in demand

Experts say that the sector started the December quarter on a strong note in October but soon lost steam across regions due to extended monsoons and ban on construction in some parts.

According to a Kotak Institutional Equities report, “Demand started on a strong note in October on higher pre-festive spends but has moderated on regional construction bans (Delhi-NCR), unseasonal rainfall (South) and poor availability of labor and sand (East)”.

We estimate a 5-7 percent year-on-year demand decline in the December quarter, the brokerage said. Demand from government infrastructure projects continues to offset weakness in trade demand.

The demand in non-trade channels was supported by infrastructure and housing projects backed by the central government. Rural demand, which was a torchbearer last time, was a laggard this time around as overall cement demand remained muted. Demand in urban and semi-urban regions got impacted as state governments couldn’t support their projects due to a paucity of funds.

Pressure on prices due to lower demand

Declining demand impacted price hikes implemented earlier as the manufacturers were unable to hold on to the higher rates.

“The companies hiked prices in October by Rs 15-40/bag to combat rising input costs as demand revived. However, demand slowdown in November led to roll-back of prices in that month as well as in December as a few industry players pushed the volumes to meet year-end targets,” said a report from Axis Securities.

On a sequential basis, the brokerage estimates realisations to be higher by 2-3 percent on the back of higher prices, except in East where price correction was steeper. On a year-on-year (YoY) basis, realisations are estimated to be higher by 4-6 percent.

Marginal revenue growth

Experts expect the sector as a whole to report a low single-digit on-year growth in revenues for the December quarter as benefits of marginal improvement in realisation are expected to be negated by a decline in volumes.

“We expect our coverage universe (excluding Grasim) to report a mere 2 percent YoY growth in revenue as benefits of higher realisation (gray cement realisation to improve by 6 percent YoY and 1 percent QoQ) will be offset by lower volumes (down 5 percent YoY),” said Motilal Oswal in its report.

Variable costs to impact margins            

Rising input costs remain a cause of concern. The increase in prices especially of pet-coke and fuel have dented margins and companies are expected to witness a fall in their EBITDA/ton.

Pet-coke and imported coal prices have cooled down from their peaks, but are still trading higher at $140-150/tonne and $130-140/tonne, respectively.

“On a YoY basis, prices of both pet-coke and imported coal are still at an elevated level. Diesel prices are lower by 12 percent from the peak level but are still up 15 percent YoY (even after the recent cut by the central and state governments),” said the report from Axis Securities.

Kotak also has a similar view on input costs and expects 10-15 percent QoQ increase in power-fuel cost led by higher pet coke/thermal coal prices in the last six months resulting in a 5 percent QoQ increase in costs/ton.

“We estimate overall EBITDA/ton to decline to Rs 994/ton (-20 percent YoY, -18 percent QoQ) led by a combination of higher variable costs and flat realisations,” it said.

Motilal Oswal expects average cost/ton for its coverage universe to rise by 15 percent YoY (+4 percent QoQ) on greater energy costs, higher other expenses and an increase in employee costs.

“We expect average EBITDA/ton for our coverage universe to decline by 16 percent YoY (13 percent QoQ) to Rs 1,012/ton. Aggregate EBITDA/profit for our coverage companies (excluding Grasim) is expected to decline by 20 percent/26 percent YoY,” the brokerage said.

Q4 Outlook

Experts are positive on the sector in the near-medium term and expect demand to improve going forward, led by government infrastructure activity and a pick-up in demand from the real estate sector. Seasonally also, this is the best quarter for the sector and the companies should see their margins improving from here.

Experts expect cement demand to outpace clinker capacity additions over FY2124E. This should lead to an improvement in clinker utilization and profitability for the industry.

“We expect clinker utilization, excluding South India, to be more than 90% in the January to March period of FY22-24E. This will boost the pricing power of manufacturers in that period,” Motilal Oswal said in its report.

Pet coke and international coal prices have softened from higher levels, providing some relief to the cement companies by alleviating concerns of a further hike in the operating costs.

Preferred Stocks

UltraTech, Grasim, ACC, Dalmia Bharat, Ambuja Cement, Shree Cement, Birla Corp, Ramco, Dalmia Bharat, JK Cement and Orient Cement are the preferred picks of experts in this sector.

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