Although recent price increases and lower input costs may bolster the short-term operating profit of Indian cement manufacturers, analysts caution that profitability is expected to be limited in the medium term. This limitation stems from the challenges cement companies face in implementing significant price hikes amid ongoing capacity expansions.

India is poised to consume approximately 440 million tonnes of cement this year, with robust double-digit volume growth. Given expectations of continued strong demand in the coming years, most cement producers have announced substantial capacity expansion projects.

This surge in capacity expansion is projected to add around 40 million tonnes of cement capacity annually from FY24 to FY25. This contrasts with the 20 million tonnes added each year between FY18 and FY23.

Fitch Ratings noted, ""A focus on retaining market share amid capacity additions will test the industry’s pricing power despite the growing demand.""

Notably, Adani Cement aims to double its capacity within five years, while India's largest producer, UltraTech Cement, plans to increase its capacity from 132 million tonnes to 200 million tonnes. Other cement producers such as Dalmia Bharat, JK Cement, and Shree Cement have also announced capacity expansion plans.

The rapid pace of capacity expansion is expected to prevent margins from improving to the extent seen in FY21 when lower energy prices contributed to profitability, despite the adverse impact of COVID-19 on demand.

Cement prices have remained relatively soft for most of this year, even as demand has grown in the range of 15-20 per cent during the current fiscal year. Companies have prioritised volume growth to maintain market share.

However, in the current fiscal year, profitability for these companies is anticipated to recover from multi-year lows. This recovery is aided by sustained demand growth driven by increased government infrastructure spending and a decline in key input costs.

A significant surge in fuel and power costs had caused the operating profit of cement manufacturers to contract to its lowest level in eight years, approximately 770 rupees per tonne in 2022-23 (April-March).

With stable prices and the delayed impact of lower-priced fuel, profitability is expected to rebound by up to 26 per cent, or 200 rupees per tonne, in the current fiscal year, according to CRISIL Ratings.

Naveen Vaidyanathan, Director at CRISIL Ratings, noted, ""Power and fuel costs, which constitute 30-35 per cent of the total production cost, will follow the trend of falling pet coke and coal prices with a lag effect. For this fiscal, power and fuel costs are likely to be lower by Rs 200-250 per tonne year-on-year.""

Despite tepid cement prices in recent months, companies have managed to implement some price hikes recently, partly due to increased government infrastructure spending ahead of the upcoming general elections. Following a weak monsoon season in August, cement prices saw hikes in September, particularly in the eastern region, with further increases expected across India in October.