Cement Sector Faces Profitability Hurdle for Future Growth
The future of investments in the Indian cement industry largely hinges on boosting profitability, with a crucial target of achieving an EBITDA exceeding INR 1,000 per tonne, according to a recent report by IKIGAI Asset Manager. Despite strong demand and industry consolidation, the report points out that achieving this level of profitability requires significant support from pricing strategies.
Currently, the cement industry’s EBITDA stands at INR 800 per tonne, with a post-tax return on capital employed (ROCE) of only 3 percent. After factoring in depreciation and capacity utilization, these figures underscore the need for substantial improvements to justify further investments. To attract incremental investments, the report suggests that profitability must double, which would help the sector meet its growth potential. The report highlights several challenges that could impede growth, particularly the expiration of over 25 percent of limestone mines by 2035. This is a key issue as limestone is a fundamental raw material for cement production. To address these challenges, the report recommends a greater emphasis on operational efficiencies, improved pricing strategies, and innovative ways to control costs.
One potential avenue for improving profitability is through renewable energy. With cheaper alternatives to grid power, the use of renewable energy sources could help reduce operational costs and improve margins for cement manufacturers. Despite this, the report points to weak pricing power in the sector. Over the past decade, cement prices have risen by just 50 percent, far behind inflation in other sectors, highlighting the difficulty in passing on cost increases to consumers. Looking ahead, the next phase of growth for the cement industry will depend on optimizing pricing strategies, increasing the adoption of green energy, and improving overall operational efficiencies. By tackling these areas, the sector can improve its profitability, positioning itself for sustainable growth and attracting future investments.
