Ind-Ra Maintains Neutral Outlook on Cement Sector for FY26
India Ratings and Research (Ind-Ra) has maintained a Neutral Outlook on the overall cement sector for FY26 while assigning a deteriorating Outlook to small (tier 2) players. The overall Neutral Outlook reflects the likely growth in demand, range-bound input costs and comfortable balance sheets that would keep the sector in good stead, despite a weak pricing environment due to increased competition amid a large capex pipeline. As a result, Ind-Ra has also maintained a Stable rating Outlook on its rated cement portfolio for FY26. However, for the first time, Ind-Ra has assigned different outlooks to large (tier 1) and tier 2 players, due to the growing divergence in their performances. Players with a capacity of over 15 million tonnes (mnt) and a diversified geographical presence have been categorised as tier 1 players while others have been classified as tier 2.
“While the tier 1 players are likely to witness growth in FY25, the tier 2 players could witness a decline in volumes with their profitability being around 40% lower than long-term average (compared to 20%-25% fall for the tier 1 players), leading to the weakening of the credit profiles as they head into FY26. After widening in FY25, the gap between tier 1 and tier 2 players is likely to keep growing over the near- to medium term given the weak pricing environment amid high competition. With subdued volumes and a steeper fall in profitability, the credit profiles and liquidity buffers of the tier 2 players are likely to weaken, resulting in a deteriorating outlook while the tier 1 players continue to have a comfortable financial profile and adequate rating headroom, reflected in the Neutral Outlook,” says Khushbu Lakhotia, Director, Corporate Ratings, Ind-Ra.
Mid-single-digit Demand Growth likely in FY26: Ind-Ra expects the cement demand to register mid-single-digit growth in FY26, led by: a) a recovery in demand from the infrastructure segment after a weak FY25, following the general elections, b) an improvement in rural demand fundamentals with an improving real wage growth for the lower income strata, and c) continued growth in urban housing even though the pace could moderate, due to the base effect. With real GDP growth likely remaining 20bp higher at 6.5% in FY26, Ind-Ra expects the cement demand to GDP growth multiplier to recover to around 0.8x (FY25P: 0.6x; FY24: 1.1x), although it remains slightly lower than the long-term average of around 0.9x. The agency expects the demand growth to fall to 4% in FY25 (FY24: 9%), the lowest since FY21, given the weak infrastructure demand after the general elections in 1QFY25.
Risks to housing demand could emanate from inflationary pressures as well as lower/uneven monsoon which could affect rural spending. Furthermore, the sustenance of the capex momentum and the execution of the budgeted capex is a key monitorable, given reducing utilisation rates of the budgeted capex (FY25RE: 92%; FY24: 95%; FY23: 99%).
FY26 Set to Witness Decadal-high-Capacity Addition, Utilisations to Remain Below 70%: Expansions of around 160 mnt has been planned over FY25-FY27 on a capacity base of around 615mnt in FY24. Ind-Ra believes only 75%-80% of the planned expansion is likely to come online over FY25-FY27, given the possibility of delays in obtaining clearances, equipment ordering/delivery and adequacy of cash flows/leverage thresholds (particularly for mid-sized players) being the key constraints. However, the pipeline for FY26 is heavy with supply addition likely surpassing the previous decadal high of 40mnt witnessed in FY18 due to which the implied three-year supply CAGR over FY24-FY26 likely to slightly exceed demand growth. The capacity utilisation is likely to remain range-bound at 67%-68% over FY25-FY26, marginally lower than 69%-70% witnessed in FY24. However, a silver lining is that announced clinker additions are close to the half of the planned cement additions, resulting in clinker utilisations likely remaining higher than the cement utilisations, indicating a higher effective utilisation rate.
North to Keep Highest Utilisation; East and South Weak: The North is likely to remain the most balanced region, with capacity utilisations remaining the highest in the country, despite a likely moderation in FY26. Utilisations in the western region are likely to improve due to growth in demand and limited capacity additions. However, competition would be high, given the influx of surplus cement from the south market. The reverse is true for central India where a large pipeline is likely to weigh on otherwise strong utilisations over the near term. Around one-fourth of the planned capex is concentrated in the high-potential eastern region, largely in the form of grinding units. Consequently, the region is likely to witness subdued capacity utilisations in the near term, before demand growth catches up, resulting in a subdued profitability in the region. With a weak demand, the capacity utilisation in the south market is likely to have fallen sharply in FY25 and is likely to remain at around 60% given the large supply pipeline.
More Consolidation Ahead; Inorganic Potential Remains High in South: The cement industry has witnessed a massive wave of consolidation in the past couple of years. FY25 saw acquisition announcements worth over 40mnt of cement capacity, in line with Ind-Ra’s expectation of an increasing consolidation in the sector. Over 85% of the completed/announced acquisitions over FY23-FY25 have been done by the top 2 players, indicating the intensifying race for market share. Ind-Ra believes the sector is likely to witness further consolidation in the near- to medium term, given that the aggressive medium-term capacity targets of large players are unlikely to be achieved organically with the available resources and a widening gap between leading and small players amid likely pricing pressure. The capacity share of top five players, which had increased only 100bp over FY11-FY20 to around 53%, rose over 100bp over FY20-FY24 and could jump a further 500bp in FY25, basis their planned acquisitions. Ind-Ra believes this could continue to increase in the near- to medium term as smaller entities exit the competitive landscape. The share of top 10 companies could increase to around 78% by FYE25 (FY24: 72%; FY20: 69%) and is likely to increase further in the next couple of years.
Unlike the previous years, a majority of the acquired assets in FY25 are in the southern region, paving the way for a much-needed consolidation in the fragmented market. Given the high fragmentation and a large number of small-to-mid sized players, the southern market still offers a high potential for inorganic expansion.
Pricing Environment to remain Weak as Companies Continue to Focus on Volumes: After witnessing the sharpest yoy price fall in almost two decades, Ind-Ra expects a continued weak pricing environment in FY26 as companies focus on increasing their volumes amid the influx of decadal-high capacities. However, the prices are likely to show more stability compared to the sharp fall in FY25. The realisations were down around 7% yoy in 11MFY25 due to continued capacity additions amid the weak demand. Notwithstanding a sequential improvement in the past couple of months, the prices were lower yoy in February 2025. However, the exit prices of March are likely to be slightly better than the FY25 average, given the sequential improvement in recent months. To put this in context, there were only three instances of a yoy decline in all-India prices until FY25, with the quantum restricted to 2%. The southern region witnessed the sharpest fall in the prices, followed by the East.
Efficiency Measures to Cushion Profitability but Improvement unlikely without Price Hikes: While benign input costs and continued cost reduction measures are likely to cushion the profitability, Ind-Ra believes that the profitability of the cement companies is unlikely to improve in FY26 without an increase in the prices. The absolute EBITDA could, however, be supported by the volume growth. Ind-Ra believes the EBITDA of the tier 1 players will continue to outperform the industry average, due to their strong brands, strong market position and cost efficiencies in addition to company-specific cost-saving measures. A recovery in the profitability for the tier 2 players would be a challenge given the pricing pressures. The south-focused tier 2 players are likely to be the worst affected, as the ramp-up of the newly acquired assets in addition to the existing oversupply would exacerbate pricing pressure.
After recovering to around INR950/mt in FY24 (FY23: INR865/mt), the EBITDA/mt of the rated cement portfolio fell around 20% yoy in 9MFY25, owing to the fall in prices even as costs moderated. Thermal coal prices cooled off to average around USD135/mt in 9MFY25 (9MFY24: USD170/mt ), due to the softening seaborne demand, easing production disruptions and declining international gas prices. However, after falling in 1HFY25, petcoke prices have witnessed an increase over November-February 2025. Fitch Ratings Ltd.’s price assumption for benchmark Newscastle thermal coal stands at USD100/mt for 2025 (2024: USD130/mt; 2023: USD171/mt), down over 20% yoy as global consumption of thermal coal is likely to decline in 2025, due to weaker demand from the power sector, only partially offset by higher industrial use. However, the impact of continued geo-political disruptions would remain a monitorable. The cement companies continue to focus on alternative energy sources (waste heat recovery systems/solar/wind) while taking measures to optimise logistics and raw material costs.
Tier 1 Players Comfortable, Reduced Buffers for Tier 2 Players: After a significant increase in FY25 due to a combination of lower EBITDA, ongoing capex/acquisition, Ind-Ra expects the leverage of its rated cement portfolio to increase marginally in FY26, owing to the continued capex despite the recovery in the absolute EBITDA. Notwithstanding a weakening across the board, Ind-Ra believes that credit metrics of the tier 1 companies remain comfortable, with a headroom to absorb another soft year. However, while the overall sector level credit metrics remain comfortable given that the tier 1 players account for over three-fourths of the total sector capacity, Ind-Ra believes that pockets of stress are likely to build in the tier 2 space over the near term given their lower EBITDA, the reduction in liquidity buffers and lesser financial flexibility than their larger peers. Around 15% of the listed entities witnessed an interest coverage of less than 2x in 9MFY25, as compared to FY23 when skyrocketing fuel costs after the Russia-Ukraine crisis send profitability tumbling to historical lows. However, Ind-Ra opines that a recovery in the current environment may be more long drawn out than in the earlier instance when the swift correction in fuel prices led to the recovery in the profits in FY24.
