Cement's growth surge: 50% CAGR projected by 2027 – Are these stocks ready?

Cement, the cornerstone of India's infrastructure and housing development, faces a paradox. Despite record-breaking home sales, robust infrastructure projects, and a thriving economy, the sector has struggled to keep pace, weighed down by pricing pressures, overcapacity, and sustainability challenges. Over the past three years, profitability has remained elusive, even as demand continues to surge.

The cement sector might be on the cusp of a revival, according to IKIGAI Asset Manager, led by Pankaj Tibrewal, the renowned former fund manager of Kotak Emerging Opportunities Fund. Today, we dig into IKIGAI’s detailed report and share the key takeaways from the report titled . Tracing growth To start with, cement is a highly affordable commodity, priced at 5-7 per kilogram in India, far lower than milk and tomatoes.



Historically, India's cement demand has closely followed GDP growth, with a notable boom starting in 2003, driven by a strong housing and capex cycle. Until 2012, the sector outpaced GDP growth, with an average 10-year growth rate of 1.4x.

However, according to IKIGAI, this growth rate has not been surpassed yet. Despite occasional volatility, cement demand remained in line with GDP growth. However, the sector performed much below the GDP growth rate in the next decade due to economic issues.

The downturn began when builders defaulted on their loans, triggering a severe slump in the real estate sector. The cement sector has faced a series of setbacks, from the taper tantrum and demonetisation to the pandemic-induced downturn, each leaving it struggling to keep pace with GDP growth. While reopening spurred a brief recovery with surging demand, the industry is once again faltering, hit by a GDP slowdown, prolonged monsoons, and election uncertainties.

Demand Vs profitability IKIGAI reports that India is the second-largest cement market globally, with a grinding capacity of 659 million tons (MT). However, it lags behind China but leads the US and Vietnam. Infrastructure remains a critical demand driver, bolstered by rising capex.

Moreover, housing demand correlates strongly with cement consumption and has also supported the industry’s growth trajectory. IKIGAI believes pricing power remains elusive. Over the past 14 years, the price of a 50 kg cement bag has increased by only 50% (3% CAGR), even lower than inflation trends.

Cement prices have grown by only 1% CAGR in the past decade. Over the past two decades, from 2002 to 2023, cement prices have grown at a meagre 1% CAGR, reflecting a long-term stagnation. This sluggish price growth has hindered the sector’s profitability, even in the face of robust demand.

IKIGAI notes that an oversupply in the market, consistently outpacing demand, has pushed the sector's profit pool share to its lowest point in a decade. Since FY10, the south has had the highest capacity addition, followed closely by the east, north, west, and central. This has limited pricing power, thereby impacting profitability.

However, demand has not kept up with supply, resulting in low capacity utilization, the lowest in over a decade. According to IKIGAI, this has hurt pricing power and ultimately impacted profitability due to high fixed costs. Capacity utilization is the lowest in over a decade but is slowly improving.

Market leaders The cement sector has undergone big consolidation over the past decade. IKIGAI writes that the top five companies hold over 50% of the market share. Consolidation accelerated after Adani Group entered the sector in 2022, buying Ambuja and ACC from Holcim.

The Adani Group's entry triggered a spree of acquisitions, with Ambuja Cement leading the race. According to IKIGAI, it added 31 MT of capacity to compete with the market leader, UltraTech Cement. Subsequently, UltraTech acquired three companies, bringing the total to 73 MT, the highest, to ensure it was not left behind in the race and to protect its turf.

Incidentally, most of these acquisitions took place in the southern market, which was the most fragmented market. However, this is changing. Following recent acquisitions, the top five players now hold over 60% of the market in the region.

Room for consolidation However, the industry remains fragmented even after the recent consolidation, with many players still having capacities below 10 MTPA. This could lead to further consolidation as larger players rush to buy smaller players to expand faster. As a result, the top four players are expected to account for more than 75% of incremental capacity additions over the next three years, with a total capacity share of 65% by FY27.

The consolidation, with top players holding the most market share, can give them pricing power, which is much needed for the sector. There is some good news on the cost front: The cost is stabilizing, which means there is little scope for cost increases. Hence, with low price increases, Ebitda per tonne has remained narrow over the past few years, with top players achieving around 1,009 per tonne in FY24.

IKIGAI noted that this makes profiting from capacity additions challenging, as post-tax return on capital employed (ROCE) often falls below 5% at current margins. At current margins, investing in fixed deposits yields better returns than capital expenditures in the cement industry. This makes price increases crucial to justify future investments.

To reverse this, Ebitda per tonne must double to justify incremental investment, which can only happen with price increases. Moreover, most companies operate at sub-optimal ROCE, with the top 5 companies leading the pack with 11-13% ROCE. At current margins, the market capitalization of listed cement companies implies that they must perpetually sell over 150 billion tons of cement at a discounted rate.

This underscores the sector's reliance on demand growth and pricing improvements to justify its valuations. This highlights a big opportunity as more consolidation can bring pricing power. The residential, infrastructure, and commercial sectors are expected to push this.

Moreover, the growth potential is significantly higher given India's per capita cement consumption of 280 kg per year, well below the global average of 500-550 kg. According to IKIGAI, this leaves much room for growth. Countries like China, Vietnam, and Korea consume much more cement per capita, highlighting the untapped potential in the Indian market.

Cost optimization remains an industry focus area. Renewable energy and waste heat recovery offer significant savings. Green power costs 40-50% less than grid power, and waste heat recovery provides 70-80% cost reductions.

Hence, increasing the adoption of cheaper energy sources would help the sector optimize cost, which could help them get higher Ebitda per tonne. In that case, the financial position of the top 10 players, who had 330 MT of volumes in FY24, can improve drastically. In fact, every 1 increase in price per bag adds 67 billion to their Ebitda, which is 2% of Ebitda or 3% of PAT.

This, coupled with manageable debt levels, can improve earnings by FY27. Moreover, the net debt position of top players as of March 2024 remains manageable, with net debt-to-Ebitda ratios of 2.92 well within acceptable limits.

Therefore, if Ebitda improves due to price hikes and cost optimization, IKIGAI believes the top 6 players could grow their revenue by 50% CAGR by FY27. Earnings can grow at 50% CAGR by 2027 If Ebitda per ton improves. IKIGAI anticipates strong performance from major players like UltraTech, Ambuja, Shree Cement, Dalmia Bharat, Nuvoco, JK Cements, and Ramco.

However, key concerns include high valuations and the looming expiration of limestone mine leases by 2035, which could impact long-term growth. Despite poor returns and profitability, valuations of leading listed companies trade above replacement cost based on 1-year forward capacity. Dalmia, Ambuja, and JK Lakshmi's valuations have reduced, while UltraTech continues to lead.

UltraTech's higher valuation may be due to its dominant position, which could be justified. However, the availability of limestone, a key raw material for cement production, could emerge as a constraint, as more than 25% of limestone mines will expire by 2035. Over 25% of sector limestone mines will expire by 2035.

Of these, JK Lakshmi Cement is the most vulnerable, with 82% of its existing reserves expiring, while Shree Cement is the least susceptible, with 2%. The cement sector in India has faced challenges over the past three years, with low pricing power despite robust growth in housing and infrastructure. Despite this, the sector may be poised for a reversal as costs stabilise and prices rise, driven by India's expanding infrastructure and housing sectors, which should align demand with GDP growth.

Additionally, cement is one of the few sectors with low disruption risk, ensuring long-term demand regardless of economic fluctuations..