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Indias cement sector may face near-term pressure on profits due to high input costs, while expectations of higher cement prices and lower costs in the second half of FY27 could leave limited room for earnings to outperform market expectations, according to Kotak Institutional Equities.
The brokerage said the market capitalisation of Indias cement sector has risen 31 per cent, or around Rs 1.6 trillion, over the past five years. The sector has also seen new listings during this period, while investor sentiment towards cement has remained strong and valuations continue to be high. Kotak said investor optimism has been driven by several factors, including limited or no decline in cement prices following the GST rate cut in September 2025, faster consolidation in the industry, expectations of capacity shortages due to limited domestic limestone reserves, strong cement brands and potential cost savings from lower fuel consumption through green initiatives. The brokerage said investors may be expecting a sharp recovery in profitability once high input costs, including crude-linked costs, start to ease. Optimists may point to the near-term headwinds to the sector from high input prices in order to justify the weak performance of the sector and hope for a sharp recovery as and when crude prices were to normalize, Kotak said. However, the brokerage noted that current market estimates already factor in sufficient cement price increases and lower input costs in the second half of FY27. We would note that Street estimates do not factor in the headwinds with the assumptions baking in sufficient price increases and/or lower input prices in 2HFY27, it said. Kotak added that its estimates already factor in reasonable profitability and financial returns for major cement companies, leaving limited scope for positive earnings surprises. Our estimates factor in decent profitability and financial returns for the major players which should preclude positive surprises, the brokerage said. The brokerage also cautioned that cement is a capital-intensive, commodity-driven and highly competitive industry. It said earnings estimates and stock valuations should take these characteristics into account. We hope that the Street realizes the capex-intensive, commodity and competitive nature of the cement sector and (1) makes appropriate profitability estimates linked to its competitive nature and supply-demand dynamics to make estimates and (2) uses appropriate multiples linked to its commodity nature to value the stocks, Kotak said. Kotak further added that it does not expect any meaningful improvement in the cement sectors supply-demand situation over the next few years.We do not see any meaningful improvement in supply-demand situation for the next few years, it said. (ANI)
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