Ind-Ra Sees Moderate Demand Growth but Profitability Headwinds for Cement Sector in FY27

India Ratings and Research (Ind-Ra) has maintained a Neutral Outlook on the overall cement sector for FY27 and a deteriorating Outlook for small (tier 2) players. The overall Neutral Outlook reflects the likely growth in demand and comfortable balance sheets that would keep the sector in good stead, despite a possible hit on profitability due to the rising input costs. As a result, Ind-Ra has also maintained a Stable rating Outlook on its rated cement portfolio for FY27. The agency has maintained different outlooks for large (tier 1) and tier 2 players, due to the likely divergence in their performances and credit headroom.

“Cement demand growth is likely to moderate to mid-single digits in FY27 (FY26: around 8%), amid inflationary pressures and a likely El Nino. This, coupled with a likely 100mnt capacity addition (almost equally split) over FY26-FY27 would keep sector capacity utilisation at 68%-69%. While the sector will witness a significant input cost inflation given the increase in fuel costs, the moderate demand environment, coupled with continued capacity additions, can restrict the increase in cement realisations to low-to-mid single digits. With only a partial pass-through of input cost increase, the EBITDA/mt could decline by around 15% yoy, after a similar recovery in FY26. Tier 1 players have adequate balance sheet headroom and financial flexibility to absorb the impact without impacting the credit profile, but tier 2 players could witness stress, given their concentrated geographical presence and limited financial headroom. While this could create potential inorganic expansion opportunities, the pace of sector consolidation could taper as players concentrate on ramping up acquired assets and executing announced capex. Sector competitive intensity is likely to remain elevated in the near term but early signs of capex rationalisation from some leading industry players are viewed positively”, says Khushbu Lakhotia, Director, Corporate Ratings, Ind-Ra.

Mid-single-digit Demand Growth likely in FY27: After a healthy 8% yoy growth in FY26, Ind-Ra expects demand growth to moderate to mid-single digit in FY27 owing to the likely impact of an increase in inflation and a looming El-Nino on demand. With a likely gross domestic product (GDP) growth of 6.7% in FY27, the cement demand growth to GDP growth multiplier is likely to fall to around 0.8x, (FY26: >1x, FY25: 0.9x; FY24: 1.1x). Cement demand from the infrastructure segment would be supported by a higher growth in central capex and a continued growth in state capex, though execution of the budgeted capex in the current environment will be a critical factor. On the housing side, rural demand is likely to be supported by factors like real wage growth, Goods and Service Tax (GST) cut and the welfare schemes of state governments. However, risks could emanate from a lower/uneven monsoon due to El-Nino conditions as Indian agriculture remains exposed to monsoons despite a reduced vulnerability due to the improved irrigation intensity over the years. While reduced affordability and a high base could weigh on near-term growth, urban housing demand fundamentals remain strong driven by favourable demographics, sustained consumer preference for home ownership and accelerating urbanisation.

FY27 Set to Witness Large Capacity Addition but Early Signs of Rationalisation Emerging: FY27 is likely to witness a capacity addition of around 50mnt, similar to FY26. However, Ind-Ra believes that early signs of a more rationalised approach towards expansions have emerged with two of the top three players reducing capex guidance for FY27, focusing on completion of ongoing projects. While supply additions during FY26-FY27 are expected to significantly exceed incremental demand, the implied three-year supply CAGR of around 7% would be only marginally higher than the demand CAGR of 6%.

With around half of the planned capacity likely in East and South, the capacity utilisation in both the regions is likely to remain subdued. The utilisations in the Western region are likely to improve with growth in demand and limited capacity additions. However, competition would be high, given the influx of surplus cement from the southern market. Utilisations are likely to remain robust in North and Central India, although the former has seen material capacity addition in FY26.

Input Costs to Rise in FY27 as Sector remains Structurally Vulnerable to Geopolitical Disruptions: Historically, all major geopolitical shocks have been transmitted into cement EBITDA through fuel costs, given the centrality of energy in the cost structure. Power and fuel together account for around 30% of total cement costs, making profitability highly sensitive to movements in petcoke and coal prices. Global petcoke prices surged to around USD140/mt by May 2026 (from USD115/mt in February 2026) while international thermal coal prices have also increased around 20% over the period, materially steepening the industry cost curve. Freight is another key cost driver, accounting for 25%-27% of costs and closely linked to diesel prices. The government announced an increase of close to INR7.5/litre in diesel prices in May 2026, marking a high single-digit increase. Packing material costs have risen even more sharply due to jump in polymer prices. However, packing material forms only 2%-4% of the total cost of cement companies, limiting the impact.

The ongoing input price uncertainty follows two years of a relatively benign cost environment which led to 1%-2% yoy decline in average power and fuel cost in FY26 (FY25: 14%). Overall, unless there is a sharp correction in global fuel prices or easing of geopolitical tensions, input cost pressures are likely to persist through the near term, with a visible impact on profitability. From a medium-term standpoint, the event reiterates the sector’s structural vulnerability to geopolitical disruptions, likely accelerating focus on captive coal integration among large players and higher adoption of alternative fuels and green power as longer-term cost mitigation strategies.

Large Supply Additions to Restrict Price Increase to Low-to-Mid Single Digit: After witnessing a multi-decadal high fall in FY25, cement realisations improved by around 2% yoy in FY26, supported by a pickup in demand and price hikes taken in the initial part of the year. Ind-Ra believes that with a mid-single growth in demand and continued supply additions, the pricing environment is likely to remain benign in FY27. However, the sharp increase in input costs could result in players implementing a few price hikes to cushion the impact of cost inflation on profitability. Historical trends over the past 15-18 years indicate that while cement players have historically implemented price hikes following sharp increases in input costs, the pass-through has typically been partial and with a lag. For instance, in FY23, when fuel costs surged to USD250-300/tonne, the industry effected price increases of 6%-7%, which covered only a portion of the cost inflation, resulting in a contraction in profitability.

EBITDA/mt to Decline in Absence of Full Pass-through of Input Cost Inflation: After recovering to around INR950/mt in FY26 (FY25: INR820/mt, FY24: INR950/mt, FY23: INR 865/mt), supported by firmer realisations, favourable power and fuel prices, Ind-Ra expects the cost headwinds to weigh on the profitability in FY27. Ind-Ra expects the impact of the sharp increase in costs on the overall EBITDA/tonne to begin reflecting from 1QFY27, as cement companies typically maintain fuel inventory of one-to-three months (though packing material inventory is modest). A full pass-through (on a prolonged cost impact) will require an average price increase of 5%-7% yoy, which may be unlikely given the current demand-supply balance. As a result, EBITDA/mt could see a low double-digit decline, with downside risks from an elongation of the current situation.

Tier 2 Players to be Hit Harder, Tier 1 Comfortable: Tier 2 cement players are likely to be disproportionately impacted in the current cost upcycle. Structurally, these players operate with higher regional concentration and relatively weaker brand positioning, due to which they face sharper margin compression during periods of input cost inflation. This has led to a widening divergence in profitability across the sector. While FY26 EBITDA/mt for tier 1 players has remained broadly aligned with historical cycle averages – supported by scale efficiencies, diversified markets, and stronger brands – tier 2 players continue to operate at meaningfully lower levels. At the same time, tighter balance sheet headroom and reduced liquidity buffers further constrain their ability to absorb sustained cost pressures or undertake strategic adjustments.