Cement industry faces margin challenge despite 9% volume growth

India's cement industry is witnessing healthy demand growth, but rising input costs are putting pressure on profitability, with the ability of manufacturers to sustain recent price increases emerging as a key factor for earnings recovery, according to a report by Jefferies.

The report highlighted that the cement industry volumes grew around 9% year-on-year in the September quarter, reflecting an improvement from the growth run-rate seen over the previous three quarters.
However, higher operating costs weighed on margins, with aggregate earnings before interest, taxes, depreciation and amortisation (EBITDA) per tonne declining by ₹125 year-on-year to around ₹800.
The report said aggregate EBITDA of companies under its coverage declined 1% year-on-year in the September quarter, despite volume growth remaining strong.

"Vol growth was healthy at ~9%+ YoY, while pricing was flat in 2Q but improved in Sep/Oct, with 3QTD up ~4% QoQ. Cost inflation remains the major drag, with further pressure likely if fuel remains elevated," the report said.
Rising input costs were a major factor behind the margin pressure. Average cost per tonne increased 5-6% quarter-on-quarter, driven by higher variable expenses and negative operating leverage.

The report noted that cement companies have indicated a further increase of around ₹100 per tonne in variable costs during the third quarter, with additional pressure possible in the fourth quarter and the first quarter if fuel prices remain elevated.
"Cost inflation remains the major drag, with further pressure likely if fuel remains elevated," Jefferies said.

The increase in fuel prices has added to the industry's cost burden amid the prolonged West Asia crisis.
According to the report, the cost cycle could worsen during the second half of FY27, although improving cement prices and healthy volume growth may provide some relief.
On the pricing front, average realisations remained broadly flat quarter-on-quarter in the September quarter and increased 1% year-on-year. However, prices recovered from the August decline during September, with further increases in October.

Despite these concerns, companies remain confident of industry volume growth continuing in the second half of FY27, although rural housing demand in markets affected by weak monsoons could face pressure.
Jefferies has lowered its aggregate EBITDA estimates for FY27-FY29 by around 1-4%, factoring in higher cost pressures.
The report said the industry's earnings outlook would depend significantly on fuel prices, cost management and the ability to sustain recent cement price increases. - ANI