Undercurrents In Cement Industry; Stick To Fundamentals Says Nirmal Bang

Nirmal Bang Report

It is clear that the recent capex announcements by the major cement companies are a response to an enhanced diversified portfolio and an increasing adherence to ESG standards. We expect cement industry’s capacity growth, assuming some delays/deferments, at 5-6% during FY23 – FY25.

Historically, the cement industry has grown at a compound annual growth rate of ~5% over the past 10 years (i.e., from ~335 million tonne in FY12 to over ~555 mt in FY22).

Five major players (controlling ~49% capacity share) have announced aggressive capex plans, but the industry’s capacity utilisation is unlikely to improve despite better demand outlook.

This, in our view, will lead to fresh rounds of consolidation in the cement industry, especially among the mid-sized and small-sized companies with high-cost structures and bloated balance sheets.

The near-term cost headwinds have already put pressure on margins as companies are unable to pass on the rising costs due to moderation in demand.

Management reshuffle has led to the cement sector underperforming among the broader markets. Although the demand outlook is likely to remain healthy in the foreseeable future, we believe that the recent stock price corrections offer good entry points for accumulating quality cement companies that have healthy balance sheets and long-term growth prospects despite near-term challenge.

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