A high competitive intensity in a largely consolidated Indian cement industry led to inconsequential growth in the prices of cement in a seasonally strong quarter of Q4FY23. While the cement producers successfully achieved their goal of pushing volumes, margins were to be sacrificed. Albeit, cost deflation aided by the correction in petcoke, thermal coal and crude oil prices provided some cushion. Bringing respite to cement producers, imported coal price dipped in the past few months while imported petcoke price remained range-bound.

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This cyclical industry is in its strongest quarter now, benefiting from high construction and infrastructural activities along with CY2023 being a pre-election year where Government capex is usually at its peak.

Cost pressures are receding and focus now shifts to pricing. Recent dealer checks suggest a likelihood of escalation in cement prices by about Rs 10 per bag in April, varying across various regions in India. However, high level of inventories in distribution channel could tamper the full benefit of such price hikes.

Although, it shall be imperative to take adequate price hikes in April, compared with an average of about 2 percent discount offered in the month of March 2023 by cement producers to push volumes.

What could pose a risk to the cement price hikes this year is the commissioning of new capacities. Aggressive expansion plans by ACC and Ambuja Cement to increase its capacity to 140 MT by 2028 from the current 68 MT could create an unstable pricing environment. However, JPMorgan called these assumptions "too optimistic." JPMorgan India's Pinakin Parekh said the industry is witnessing a one-of-a-kind capacity expansion cycle and it is yet to be seen if the new capacity could create a lid on the price hikes this time around.

The timing of the merger of Adani Group's two cement companies could well be speculated, but it is noteworthy that a brownfield capex takes at least few months for successful execution. Hence, delayed timelines may imply that best part of the cycle is missed (pre-election year). Also, the company lays targets to achieve improvement in EBITDA per ton which could prompt at a low possibility of negative impact on industry pricing in the near term. What further works in favour of the cement industry today is the robust demand for urban housing which is at decadal low inventory. Nearly a quarter of cement demand is contributed by the urban housing segment, followed by another one-third demand from the rural housing segment. However, in a rising interest rate scenario it will be crucial for the current strong housing demand to continue gaining pace.

Brokerages do not expect a material earnings upgrade in the cement industry, however margins may recover in Q1FY24 amid cement price hikes and a drop in coal and petcoke costs. Evidently, construction and infrastructure activities need to continue their momentum in Q1FY24 so as to maintain the elevated demand for cement. The following quarter is seasonally subdued with the onset of monsoons and hence the possibility of price hikes then shall be slim. Amidst capacity additions, a balance in demand-supply needs to be optimal, so as to create a stable pricing environment for rest of the year.