The Indian cement industry, facing relentless competitive pressures and a slowdown in demand, is making a bold move to stabilize its finances. In August 2024, cement companies across the country raised prices by INR10-20 per bag, signaling their intent to recover from months of financial strain. This strategic price increase, ranging from 3-6% compared to July 2024 averages, marks a decisive shift after nine months of price declines. As the industry grapples with muted demand caused by general elections and ongoing competition, these price hikes aim to protect margins and set the stage for a financial recovery.
The timing of these price adjustments is critical. For nearly a year, the cement sector has experienced consistent price erosion, driven by fierce competition and a slowdown in infrastructure projects linked to the election season. By July 2024, cement prices had fallen by 13% from their October 2023 peak, leaving companies scrambling to protect their profitability. The recent price hikes, therefore, represent more than just a response to immediate financial pressures—they are a calculated effort to regain control of the market and position the industry for future stability.
One of the key developments enabling these price hikes is the ongoing consolidation within the industry. Over the past few years, mergers and acquisitions have reshaped the cement landscape, with the top five players now controlling an increasing share of the market. Their capacity share is expected to rise from 54% in FY24 to 63% by FY26. This consolidation has granted leading companies greater pricing power, allowing them to implement price increases with less risk of being undercut by smaller competitors. The reduced number of players also fosters a more disciplined pricing environment, which could lead to long-term stability in the industry.
However, the success of these price hikes depends on more than just industry consolidation. The profitability of cement companies has been under pressure, particularly in the first quarter of FY25. Many firms reported lower-than-expected earnings, with EBITDA per ton dropping by 9% year-on-year. This decline was primarily driven by weaker-than-anticipated price realizations. The recent price increases are seen as a potential lifeline for the sector, offering a chance to recover lost ground in the second half of the fiscal year. Yet, the ability of these hikes to stabilize earnings will depend on how the broader economic environment unfolds, especially with the upcoming festive season and the impact of the monsoon.
Seasonal factors, such as the monsoon, have historically played a significant role in shaping cement demand. The monsoon disrupts construction activities across the country, leading to lower demand and often forcing companies to adjust their pricing strategies. This year, the monsoon’s impact has been compounded by the ongoing election season, which has further dampened demand. As the festive and marriage seasons approach, there are concerns that these cultural events will continue to disrupt construction projects, limiting the full realization of the recent price hikes. However, dealers have noted that companies may attempt further price increases of up to INR25 per bag in the coming weeks, depending on how the market responds to current conditions.
At the same time, cement companies are not solely relying on price hikes to recover profitability. Many have implemented cost-cutting measures, focusing on increasing the use of green power and alternative fuels to reduce production costs. These measures not only improve the sustainability of the industry but also provide a buffer against rising input costs. Logistics optimization is another area where companies are seeking efficiencies, reducing transportation expenses and enhancing overall profitability. These strategic efforts to cut costs align with the industry’s broader goal of improving operational resilience in the face of fluctuating market conditions.
Reflecting on the historical trends, cement pricing in India has seen significant volatility in recent years. After reaching a high in late 2023, prices began to decline, falling for nine consecutive months. By mid-2024, the industry was grappling with some of the lowest prices in recent memory, particularly in the southern regions of the country. The August 2024 price hikes mark a critical turning point, as companies strive to reverse this downward trend and regain financial footing. Whether these price increases will hold, and whether the industry can sustain further hikes, will depend on several factors, including demand recovery, the strength of the broader economy, and the success of cost-reduction strategies.
The cement industry’s recent price hikes are a strategic response to the financial pressures of a challenging market environment. With consolidation granting larger players greater control over pricing, and cost-cutting measures enhancing operational efficiency, the industry is positioning itself for a more stable future. Yet, the path forward is uncertain, as seasonal disruptions and economic conditions will continue to test the resilience of these price adjustments. As the sector navigates these challenges, the ability to maintain pricing discipline and recover profitability will be key to its long-term success.
Source: MOTILAL Oswal Financial Services Limited (MOFSL) Research Report
