Cement Prices to Fall Further, Profitability Decline Forecasted for FY25
The Indian cement industry is set to face significant financial pressure in the upcoming fiscal year, with operating margins projected to shrink by 170-220 basis points, settling between 15-16 percent for FY25, according to a report by CRISIL. The decline in profitability is attributed to weakened pricing power and subdued demand, even as input costs remain under control.
Demand for cement, which had previously enjoyed a robust compound annual growth rate (CAGR) of 11 percent between FY2022 and FY2024, is expected to slow down significantly to just 4.5-5.5 percent in FY25. A variety of factors are contributing to this deceleration, including base effects, a prolonged heatwave, labour shortages during the general elections, and a reduction in construction activity in the first half of the fiscal year. Despite these challenges, the latter half of FY25 is expected to see some recovery. This is expected to be driven by an uptick in rural demand and an increase in government spending on infrastructure projects. These factors could help ease the negative impact of the first half’s slow growth.
Cement prices, which had reached an all-time high of INR 391 per 50 kg bag in FY2023, fell by 2 percent in FY2024 to INR 384 per bag. This trend is expected to continue in FY25, with prices likely to decrease by 5-6 percent as demand growth moderates and competition intensifies. Notably, the eastern region is forecasted to experience the sharpest decline in prices, with reductions of 11-12 percent due to sluggish demand and substantial capacity additions. Similarly, the southern region is expected to see a price drop of 5-6 percent, while the northern region is projected to experience a 4-5 percent decrease. The western and central regions will likely see more moderate price declines of 3.5-4.5 percent and 2-3 percent, respectively.
The cement industry has undergone significant capacity expansion over the past two years, with an additional 101 million tonnes (MT) added. An even larger expansion, ranging from 210-220 MT, is expected by FY2029, reflecting a 5.5-6.5 percent CAGR. While the capacity additions are expected to boost supply, they also intensify competition, further exerting downward pressure on prices. Although input costs such as power, fuel, raw materials, and freight surged in FY2022 and FY2023, a correction in energy prices in FY2024 has provided some relief. These cost reductions, expected to continue in FY25, offer a buffer against the negative impact of declining realisations. However, the ongoing challenges of weak pricing power and low demand growth are expected to pressure profit margins. While the second half of FY25 holds promise with anticipated government infrastructure spending and a potential recovery in rural construction, the cement sector faces a difficult start to the fiscal year. Manufacturers will need to carefully navigate these challenging market conditions to protect their profitability.
