Investors in cement stocks are desperately looking for an answer to this question.

After a prolonged lull in demand, volume growth is picking up pace, buoyed by government spending on infrastructure projects; but prices are far from their historic levels. In fact, cement prices took a hard knock in the seasonally strong March quarter of fiscal year 2018 (FY18).

Prices have improved in April, but considering inflated input costs, the quantum of increase is not enough to abate the Street’s worry on the profitability of cement producers.

Prices across India rose by Rs5 per 50kg bag on a month-on-month basis in April to Rs326/bag, according to the latest dealers’ channel check survey by Kotak Institutional Equities.

Usually, cement prices see a sharp rise in the first quarter of the fiscal year since it is a busy construction season. According to the domestic brokerage firm, in April 2017, prices had surged by as much as Rs26/bag month-on-month (see chart).

One reason cement prices have failed to sustain at higher levels is that real estate activity, especially in the housing segment—which is the largest contributor to overall cement demand—is still in the doldrums.

At the same time, the ongoing consolidation has changed the industry’s supply dynamics. Competitive intensity remains high as some regional firms are venturing into newer markets and some of them have been on a capacity addition spree. So cement makers are chasing demand growth at the expense of prices.

And this trend of depressed prices may not reverse anytime soon.

Surplus capacity in certain regions of the country would keep the sector’s capacity utilization at around 70-75% at least for another two years and unless that improves, prices won’t see a meaningful revival, say analysts.

According to brokerage house PhillipCapital India (Pvt.) Ltd, the biggest challenge for the sector is a revival of prices.

“Our recent ground checks revealed that with a clear message from the central government, the industry should revert to its traditional pricing ways, and should increase cement prices by only Rs5-10 per bag (in each attempt) with an expectation of 50% absorption. FY19 being a pre-election period, sharp price increases will result in sensational news flow; hence, we believe the industry will be more cautious," it said in a report dated 10 April.

Hence, PhillipCapital India expects the increase in cement prices to be reasonable and not aggressive.

In short, the pricing discipline among cement producers won’t return in a hurry and that will have a bearing on their profitability in FY19.

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