Incremental investments in cement sector will happen only if profitability improves: report

New Delhi (India), December 27 (ANI): The Indian cement industry needs to significantly improve its profitability with EBITDA crossing Rs 1,000 per tonne to justify the absolute minimum return on capital employed (ROCE) for future investments, says a report from IKIGAI Asset Manager.

Reaching this profitability threshold would require significant price support, highlighting the sector’s challenges despite robust demand and consolidation.

The report illustrates current margins and outlines an example where the industry achieves an EBITDA of Rs 800 per tonne. Adjusted for a capacity utilization of 80 percent and taking depreciation into account, the ROCE after taxes is only 3 percent. For incremental investments, the report emphasizes the need to double profitability.

The combined market capitalization of listed cement companies of over $100 billion means that the industry would have to permanently sell over 150 billion tonnes of cement at a reduced price. Such high expectations increase pressure on companies to increase efficiency and improve their pricing strategies.

By fiscal year 2027, the four largest providers are expected to account for over 75 percent of capacity additions, with their combined capacity share rising to 65 percent.

However, with more than 25 percent of limestone mines shutting down by 2035, a significant challenge looms, making limestone availability a key factor for future acquisitions.

The cost of renewable energy is proving to be a game-changer for the sector. Electricity from renewable sources is 40-50 percent cheaper than grid electricity, while waste heat recovery systems are 70-80 percent cheaper.

Increasing the share of green energy in cement production could help reduce operating costs and improve margins. India is the second largest cement market in the world with an installed grinding capacity of 659 million tonnes, second only to China (1,640 million tonnes).

Despite its size, cement remains one of the cheapest raw materials in India. The price is 5-7 rupees per kg, which is significantly lower than the price of other essential goods such as sugar, steel and milk. Additionally, cement accounts for only 6 percent of a home’s construction cost, highlighting its affordability.

The report shows that while cement demand has historically grown in line with GDP, pricing power remains weak. Over the last decade, the price of a 50kg bag of cement has increased by just 50 percent (compound annual growth rate of 3 percent), while the price of a cup of tea has increased by 400 percent. The industry has seen an annual increase in cement prices of just 1 percent over the last decade.

India’s cement industry is notable for being largely promoter-driven, with major players such as UltraTech Cement, Ambuja Cement and Shree Cement leading the consolidation. UltraTech and Ambuja have acquired milling capacities of 73 MTPA and 31 MTPA respectively in the last decade.

The industry’s next phase of growth depends on balancing demand dynamics, pricing strategies and cost optimization through the adoption of renewable energy.

As the report notes, every Rs 1 increase in the price of cement per bag could increase the EBITDA of the top 10 companies by Rs 67 billion, making pricing a crucial lever for sustainable growth and ensuring long-term profitability. (ANI)