New Delhi [India], December 27 (ANI): The Indian cement industry must significantly improve its profitability, with EBITDA needing to exceed Rs1,000 per ton to justify the bare minimum return on capital employed (ROCE) for future investments, according to a report by IKIGAI Asset Manager.

Achieving this profitability threshold would require substantial pricing support, underscoring the sector's challenges despite robust demand and consolidation.

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Illustrating current margins, the report outlines an example where the industry achieves an EBITDA of Rs800 per ton. After adjusting for 80 per cent capacity utilisation and accounting for depreciation, the post-tax ROCE stands at a mere 3 per cent. For incremental investments, the report highlights that profitability needs to be doubled.

The combined market capitalization of listed cement companies, exceeding USD100 billion, implies the industry would need to sell over 150 billion tons of cement on a discounted basis perpetually. Such lofty expectations add pressure on companies to enhance efficiencies and improve pricing strategies.

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By FY27, the top four players are expected to account for over 75 per cent of capacity additions, with their combined capacity share rising to 65 per cent.

However, a significant challenge looms with the expiration of more than 25 per cent of limestone mines by 2035, making limestone availability a key factor for future acquisitions.

Renewable energy costs are proving to be a game-changer for the sector. Power from renewable sources is 40-50 per cent cheaper than grid power, while waste heat recovery systems are 70-80 per cent cheaper.

Increasing the share of green energy in cement production could help reduce operational costs and improve margins.India is the second-largest cement market globally, with an installed grinding capacity of 659 million tons, second only to China (1,640 million tons).

Despite its size, cement remains one of the cheapest commodities in India, priced at Rs5-7 per kg, much lower than other essentials like sugar, steel, or milk. Moreover, cement accounts for only 6 per cent of the cost of building a house, highlighting its affordability.

The report reveals that while cement demand has historically grown in line with GDP, pricing power remains weak. Over the last decade, the price of a 50-kg cement bag has increased by only 50 per cent (CAGR of 3 per cent), compared to a 400 per cent increase in the price of a cup of tea. The industry has seen a mere 1 per cent CAGR in cement prices over the past decade.

India's cement industry is unique in being largely promoter-driven, with major players like UltraTech Cement, Ambuja Cement, and Shree Cement leading consolidation. UltraTech and Ambuja have acquired grinding capacities of 73 MTPA and 31 MTPA, respectively, over the past decade.

The industry's next phase of growth hinges on balancing demand dynamics, pricing strategies, and cost optimization through renewable energy adoption.

As the report notes, each Rs1 increase in cement price per bag could add Rs67 billion to the EBITDA of the top 10 players, making pricing a critical lever for sustaining growth and ensuring long-term profitability. (ANI)

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