India’s cement industry may be on the verge of turning a corner after a tough period of geopolitical uncertainty, high costs and seasonal weakness, Morgan Stanley says.
Morgan Stanley said cement companies have been under pressure from the West Asia conflict, higher input costs and seasonal factors, but recent developments have led to greater optimism.
Morgan Stanley’s portfolio of cement stocks has declined about 1% through the past 3 months and 8% through the past 6 months on a market-cap-weighted average.
However, the brokerage feels several positive developments in the sector might be beneficial for the sector - robust demand, improved pricing, and signs of cost inflation being at its peak.
Cement Demand Remains Resilient
One of the biggest positive aspects of the industry’s growth has been demand growth.
Even in the face of state elections, extreme summer conditions and geopolitical uncertainty, cement demand was healthy in the first quarter of FY27.
Morgan Stanley estimates that industry demand grew by around 8% year-on-year, compared with about 7% growth in the previous quarter.
The brokerage expects demand growth to remain relatively stable in the near term.
However, the post-monsoon period will be an important indicator for the sector.
Cement demand is usually supported by construction activities, infrastructure investment, and housing projects after the monsoon season. This would give cement companies more support if demand remained high during this period.
Cost Inflation May Be Near Its Peak
Cement manufacturers have been very much under cost pressure because of the cost of fuel and energy.
However, companies have managed to absorb much of the higher costs through some operational measures.
Morgan Stanley highlighted fuel-mix optimisation as one of the key strategies cement manufacturers have adopted. Companies have increasingly moved away from expensive petcoke and imported coal to domestic coal where possible.
Cement companies have also been looking to lower-cost power sources, procurement efficiencies, and reduced lead distances.
Such measures helped limit the impact of high input costs on profitability.
Higher Costs Could Persist in Q2FY27
Even the improved outlook does not mean that costs should be overcome in a single shot.
That would mean that the brokerage would see high costs remain through the second quarter of FY27 due to inventory-related lag effects.
But it believes the cost inflation caused by the geopolitical conflict could be close to its peak.
If there is no further escalation in geopolitical tensions, input-cost pressures could gradually normalise in the second half of FY27.
This may give cement companies some relief and may also help margins.
Cement Prices Provide a Positive Surprise
Pricing is also one of the sector’s positive factors.
Morgan Stanley added that cement prices were up about 4% sequentially in the quarter.
The increase was especially significant because cement manufacturers were able to pass on a considerable portion of their recent cost inflation to customers.
This may indicate that pricing power in the industry can be stronger than one would have anticipated.
The brokerage also noted that management commentary and channel checks show that cement prices have generally held up during the monsoon period.
Pricing Discipline Could Support Margins
Maintaining cement prices during a seasonally weaker period is an encouraging sign for manufacturers.
Typically, demand can soften during the monsoon because construction activity is affected by heavy rainfall in several parts of the country.
If cement companies keep pricing discipline as a response to seasonally weak demand, it could help to lay a good foundation for margin improvement when demand picks up after the monsoon.
Morgan Stanley will therefore closely track these pricing trends in the coming months.
The combination of resilient demand and firm prices may also push post-monsoon prices up in the sector to higher levels and more profitable levels.
UltraTech Cement Is Morgan Stanley's Preferred Pick
Morgan Stanley has a preference for UltraTech Cement, the flagship cement business of the Aditya Birla Group.
The company’s recent financial performance is what provides some support for the brokerage’s view.
UltraTech Cement reported a 16.9% year-on-year increase in net profit to ₹2,600 crore, as compared to ₹2,225 crore in the corresponding quarter of last year.
The revenue from operations increased 15.8% to ₹24,648 crore from ₹21,276 crore a year ago.
At the operating level, EBITDA rose 13.7% year-on-year, to ₹5,015 crore, from ₹4,411 crore in the previous year.
Margin Remains a Key Monitorable
UltraTech's EBITDA margin was slightly lower, even if profit, revenue, and EBITDA continued to grow.
The margin was 20.3% in the previous period, while 20.7% in the corresponding period last year.
This means that cost pressures have not completely disappeared.
Cement companies’ ability to protect or increase margins will be the key factor for investors for many quarters to come.
If fuel costs are lower and cement prices do not go down, operating margins could come under less pressure.
What Could Drive Cement Stocks Next?
Morgan Stanley's outlook suggests that three factors could determine the next phase for cement stocks: demand, pricing and costs.
If post-monsoon demand remains strong, companies could have more pricing power.
At the same time, easing conflict-related cost pressures might ease the burden on margins.
A combination of higher volumes, stable or increasing prices and lower input cost pressure should create a favourable operating environment for cement producers.
However, geopolitical developments remain a major concern. A renewed escalation of the West Asia conflict could push energy costs up and slow the expected normalisation.
The latest assessment from Morgan Stanley suggests that the worst may be behind India's cement industry, but a full recovery will depend on how the next few quarters develop.
Demand growth of around 8%, stronger-than-expected pricing and extensive cost-mitigation measures have provided positive signals.
The key test will come after the monsoon, when construction activity typically picks up.
For investors tracking cement stocks, UltraTech Cement is the name of choice for Morgan Stanley, and demand trends, fuel costs and cement prices will remain the main indicators to watch.
If costs gradually normalise and pricing discipline continues, the sector may be able to enter the second half of FY27 with a much better earnings profile.
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