The cement sector has faced notable corrections in stock prices, with companies such as UltraTech Cement, ACC, JK Cement, Ambuja Cement, Shree Cement, and JK Lakshmi Cement experiencing declines ranging from 2% to 13% over the last month. This downturn is driven by several key factors that are influencing the sector's performance.

Weak Cement Prices

One significant factor affecting cement stocks is the decline in cement prices. According to analysts, the average all-India cement prices during the June quarter fell by 1% sequentially and 4% year-on-year. This trend is expected to continue, with July and August prices being at least 3% lower than the June exit prices. Analysts from Jefferies India Pvt Ltd have noted that cement prices hit a multi-year low in Q2, with a further 3% drop quarter-to-date. Despite the fall in input costs, the benefits are not translating into improved profitability for cement companies, as operating cost declines driven by lower power and fuel costs are tapering off. Mangesh Bhadang, a research analyst at Centrum Broking, points out that the decline in cement prices has been persistent for nearly a year, impacting the sector's profitability.

Capacity Expansions

In addition to weak prices, the cement sector is dealing with significant capacity expansions. Crisil Research projects that Indian cement manufacturers will invest approximately Rs. 1,25,000 crore in capital expenditures between FY25 and FY27. This expansion, driven by a strong demand forecast and a desire for market dominance, is expected to start affecting the market from Q4FY25. The aggressive capacity increases might lead to oversupply, putting additional pressure on pricing and profitability. Bhadang suggests that while industry consolidation could bring pricing discipline in the long run, the near-term aggressive capex is likely to exceed demand and impact realizations negatively.

Conclusion

Overall, the cement sector is navigating a challenging environment characterized by declining prices, evolving market dynamics due to capacity expansions, and fluctuating profitability. Investors are closely watching these developments, anticipating potential impacts on stock performance and industry stability.

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