India's Cement Industry: Facing Profitability Challenges Amid Robust Demand

The Indian cement industry must boost profitability to sustain future investments, needing an EBITDA of over Rs1,000 per ton. Key challenges include pricing strategies, renewable energy adoption, and limestone availability. Despite being a low-priced commodity, cement has limited pricing power in the market.

According to a recent report by IKIGAI Asset Manager, the Indian cement industry must enhance its profitability significantly. The report indicates that an EBITDA of at least Rs1,000 per ton is essential to ensure a minimum return on capital employed (ROCE) to justify future investments in the sector.

The current profitability scenario is concerning. The report provides an illustration wherein the industry's EBITDA achieves Rs800 per ton. Considering 80% capacity utilization and factoring in depreciation, the post-tax ROCE hovers at only 3%. To attract incremental investments, the report argues that profitability would need to double.

In terms of market dynamics, the top four players in the industry are projected to account for over 75% of capacity additions by FY27, elevating their collective capacity share to 65%. However, the expiration of over 25% of limestone mines by 2035 is a looming challenge, requiring strategic acquisitions to secure limestone availability.

The report emphasizes that embracing renewable energy could substantially cut operational expenses. Renewable energy costs are significantly lower than traditional grid power, with waste heat recovery systems being even more economical. An increase in green energy utilization is vital for cost reduction and margin improvement.

The Indian cement industry is notably unique, heavily influenced by major promoters such as UltraTech Cement, Ambuja Cement, and Shree Cement, who continue to dominate consolidation efforts. The industry's growth trajectory is contingent upon managing demand supply dynamics, implementing effective pricing strategies, and optimizing costs through renewable energy use.

Ultimately, cement remains one of India's cheapest commodities, comprising only a fraction of construction costs. The report highlights that a mere Rs1 price increase per cement bag could inject Rs67 billion into the top players' EBITDA, underlining pricing's importance as a lever for growth and sustainability.

(With inputs from agencies.)