New Delhi [India], December 31 (ANI): Cement manufacturers are facing a challenging fiscal year as operating margins are expected to shrink by 170-220 basis points, settling at 15-16 per cent for FY2025, according to a CRISIL report.
The decline is attributed to weaker pricing power and subdued demand, even though input costs are expected to remain under control.
Demand for cement, which had recorded a robust compound annual growth rate (CAGR) of 11 per cent between FY2022 and FY2024, is projected to slow to 4.5-5.5 per cent this fiscal.
This deceleration is due to multiple factors, including a base effect, extended heatwaves, labour shortages during the general elections, and a reduction in construction activity in the first half of the year.
However, the latter half is expected to witness some recovery, driven by improved rural demand and higher government spending on infrastructure.
Cement prices, which hit an all-time high of Rs391 per 50 kg bag in FY2023, declined by 2 per cent to Rs384 last fiscal. This year, prices are anticipated to fall further by 5-6 per cent due to moderating demand growth and increasing competition. The resulting decline in realisations is expected to impact profitability significantly.
The pricing trends will not be uniform across regions. The eastern region is likely to experience the steepest price drop of 11-12 per cent, owing to sluggish demand and substantial capacity additions.
In the southern region, prices are projected to decline by 5-6 per cent following a 4 per cent dip last fiscal, primarily due to subdued demand and increased capacity growth.
Northern prices may fall 4-5 per cent as effective capacity rises despite no new additions. The western region is forecast to see a 3.5-4.5 per cent decline, while the central region is expected to experience a more modest drop of 2-3 per cent, given limited capacity additions.
The cement industry has witnessed significant capacity expansions over the past two years, with 101 million tonnes (MT) added. Another 210-220 MT is expected to come online by FY2029, reflecting a 5.5-6.5 per cent CAGR. This aggressive expansion across geographies is intensifying competition and further pressuring prices.
While input costs such as power, fuel, raw materials, and freight surged during FY2022 and FY2023 due to geopolitical tensions, a correction in energy prices brought some relief in FY2024. Input costs declined by 500-600 basis points last fiscal, and further reductions are anticipated this year, providing a cushion against lower realisations.
Despite the cost relief, the combination of weaker pricing power and subdued demand growth is expected to dent profitability. Operating margins are projected to drop to 15-16 per cent this fiscal, highlighting the need for manufacturers to navigate these challenging conditions carefully.
The second half of FY2025 will be critical for recovery, as government spending on infrastructure is expected to pick up, and rural construction demand shows signs of revival. The cement industry will rely on these factors to offset the challenging market conditions in the first half of the year. (ANI)
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