Following the announcement of plans for GST revision, which is targeted to be implemented before Diwali, the top five cement stocks (UltraTech, Ambuja, Shree Cements, JK Cements and Dalmia Bharat) have gained an average of 3.1 per cent in the week. Cement is currently taxed at 28 per cent slab. The widely-held expectation is that with a simplified structure, cement will be taxed at a lower 18 per cent rate. Assuming Rs.350 for a 50 kg bag (the current price at the retail level), this could imply a lower cost of Rs.315 or savings of around Rs.35 per bag. Owing to a commoditised nature and intense competition, the industry could pass on a large part of the savings. In return, higher volumes and the operational leverage should benefit cement stocks.
GST revision is one more favourable factor for the cement industry. While the stocks have gained 3.1 per cent on GST news, the stocks on average have gained 5 per cent since Q1 FY26 results announcement, including the GST revision news. The sector stocks have gained an average 16 per cent in the last one year, as several tailwinds have accumulated for the sector.
IMPROVED METRICS
Operational metrics have improved for the industry despite weak pricing as illustrated by metrics of UltraTech Cements.
Cement realisations, after reaching a high of Rs.275 per bag (price realised at the company level) in December 2023, had declined 11 per cent to Rs.245 per bag by H1FY25. The recovery from there has been gradual – gaining 5 per cent to Rs.258 per bag by Q1FY26.
But even as cement prices are recovering, profitability has regained earlier highs in the current quarter. For UltraTech, EBITDA reached Rs.62 per bag in Q1FY26 after declining to Rs.38 by Q2FY25. The company and the industry have focused on operational effeciency, played on operational leverage and improved power/fuel mix to drive margin gains despite weak prices.
Both Ambuja and UltraTech are engaged in an acquisition/expansion phase. The direct impact of a larger size is evident in logistics costs, which have steadily declined from 63 per bag in March 2023 to 58 per bag in the current quarter. With a wider presence, the companies have been able to cut down on lead distances and the cost of transportation. With expansion still ongoing, this cost lever should have further leeway to improve.
The largest gains were made on power/fuel mix. The combined cost of power and fuel for UltraTech have declined from 85 per bag in March 2023 to 61 per bag. Close to half can be ascribed to lower coal costs, which have been declining from $600 per tonne during Covid peaks (late 2021) to $150 now. The companies have invested in renewable power to drive the other half of power eciency. In the last one year, UltraTech’s green power mix has improved from 28 per cent to 40 per cent.
The GST reform, when enacted, will complement the efficiency gains of the industry. Along with GST reforms, the cement industry will gain from the interest rate cut of 100 bps and Income Tax cuts implemented in this year’s Budget. This should give a boost to residential and affordable housing demand through lower interest burden and higher post-tax savings.
The lower cost of cement and pent-up infrastructure activity from election year should drive cement demand higher, allowing higher volumes.
Source: businessline
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