Indian cement companies are on an expansion spree. We estimate they will spend about US$14.3 billion on additional capacity over the next four years, enough to make an extra 160-170 million tons of cement annually.

S&P Global Ratings believes this expansion will be well supported by demand--the Indian government plans to spend US$1.7 trillion on infrastructure projects through to 2030, according to Crisil. This will vastly raise cement consumption in the country. Large firms can fund expansion with minimal credit impact, in our view.

We estimate that domestic demand for cement will grow at a compounded annual growth rate (CAGR) of 7% over the next four years. A slower ramp-up in domestic consumption than what we now expect could soften cement prices and weaken the profitability of the cement producers. However, industry leverage will remain below the 10-year median, even if EBITDA were to remain 20% lower than the S&P Capital IQ consensus estimate.

Indian Cement Producers Have Ambitious Growth Plans

India will increase its cement capacity by more than 25% by 2028, or at a CAGR of 6%, we estimate. This is the fastest pace of capacity addition in the past decade. The bulk of the new capacity will come from the top-three cement producers, leading to further consolidation in the industry (see table 1 and chart 1).

Table 1

Chart 1

Chart 2

The 25% increase in capacity will require an investment of about Indian rupee (INR) 1.2 trillion (about US$14.3 billion) over the next four years. This equates to annual capex of close to INR300 billion, which is more than double the average annual capex incurred by these companies in the past decade.

Healthy Balance Sheets To Support Expansion

These firms, which account for 70% of India's total cement output, are in a much better position to expand. Rising cement prices have strengthened the balance sheets of cement companies, which are using increased earnings to cut debt (see chart 3). As a result, the consolidated gross debt of the largest cement companies is now one-quarter lower than the pre-2020 level. At the same time, EBITDA is 30% higher.

Chart 3

The industry ratio of net debt to EBITDA is at a decade-low of 0.1x, despite consistent capacity additions. Strong cash flows and inorganic expansion by larger players at strong valuations have kept leverage down. Despite the industry's large capex over the next few years, we expect the ratio to stay at a similar level thanks to a significant increase in operating profits.

Chart 4

Larger Players Can Fund Expansion With A Minimal Reliance On Debt

The cement companies are likely to generate strong operating cash flows supported by healthy demand from the housing and infrastructure sectors. We believe the operating cash flows of the top-three cement companies by volume--Ultratech Cement Ltd., Ambuja Cement Ltd. and Shree Cement Ltd.--will adequately cover their capex needs through to end-fiscal 2027. The three firms will account for more than 70% of the country's total cement capacity increase over the next four years.

Chart 5

The top-three companies had solid cash and liquid investments of more than INR250 billion as of March 31, 2024. This gives them capacity to pursue acquisitions. For example, Ambuja Cement in June 2024 bought Penna Cement Industries Ltd. for a total consideration of INR104 billion. Ambuja Cement funded the deal entirely through its internal accruals.

Ambuja Cement and Shree Cement will likely maintain their net cash position despite the large capex. UltraTech will turn net cash by the end of fiscal year 2026 (ending March 31, 2026), as it ramps up recently added capacity.

Based on consensus estimates found on S&P Capital IQ, we assume the other companies in our sample set will rely on debt to part-fund their expansion. While the aggregate net debt of these companies will remain at the current level, the ratio of net debt to EBITDA will be well below their historical peaks.

A lower cost of production could provide margin support

Logistics, power, and fuel account for more than 60% of cement firms' cost of production. We expect changes in fuel mix, greater use of captive coal, and logistics finetuning will lower the industry-wide cost of production by 8%-10% over the next four years. Changes to fuel mix will include an increased use of alternative fuels, such as agricultural and municipal solid waste.

UltraTech Cement and Ambuja Cement will drive most of the cost efficiencies in the industry. Their current cost of production is INR4,100-INR4,200 per ton, and they are targeting to bring down this cost by INR500 per ton by 2028.

Indian cement companies enjoy a strong raw material security, primarily due to the country's abundant limestone reserves. This ensures a consistent supply of the key ingredient for cement, mitigating potential supply chain disruptions and cost fluctuations.

The larger players may announce price cuts over the next few years to maintain market share as new capacity comes on stream. Nonetheless, the cost optimization initiatives will more than offset the cement price corrections. We assume the industry will collectively achieve a 1.5-2 percentage point improvement in EBITDA margin.

Chart 6

Housing And Infrastructure Will Be Key To Absorbing Supply

Higher government spending on housing and infrastructure will continue to support cement demand in India. At the same time, demand from the industrial sector should improve, given a revival in private-sector capex driven by strong corporate balance sheets and the government's Performance Linked Incentive scheme. The scheme rewards firms for increasing domestic sales and reducing import dependence.

The government launched the National Infrastructure Pipeline (NIP) in 2019 to create a US$5 trillion economy by 2025. At present, India's nominal annual GDP is US$3.7 trillion. The NIP encompasses capital outlay of INR100 trillion (US$1.2 trillion) in infrastructure over 2020-2025, a doubling of the sum spent in 2014-2019. Projects will span roads, housing, urban infrastructure, railways, power, and irrigation. Such works account for most of the cement consumption in India.

We expect India's cement demand to grow at a 7% CAGR over the next four years, higher than the likely pace of capacity additions during the period. As such, capacity utilization levels will remain above 70%, in our view.

Chart 7

India is the second-largest cement maker in the world after China, with total installed capacity of 635 million tons in fiscal year 2024. However, at 280 kilograms (kg) per person, the country's per capita consumption is well below the world average of 500 kg-550 kg. This presents a significant growth opportunity for the cement companies as India continues to urbanize and invest in infrastructure.

Circular-Economy Initiatives Will Be Crucial For Decarbonization

The cement sector accounts for about 8% of carbon-dioxide emissions in India. The 25% increase in capacity over the next four years could significantly increase the sector's carbon footprint.

The transition to a so-called circular economy is an essential plank to managing climate risks. Initiatives include maximizing resource efficiency, reducing waste, and promoting recycling within production. Such a transition would require investment to increase the use of alternate fuels (e.g. biomass), decreasing clinker content, and accelerating process innovation.

Ultratech and Ambuja Cement used more than 50 million tons of industrial waste and byproducts last year, as alternate raw materials in cement production. This was done to reduce carbon emissions. They are also developing blended cement with lower clinker content by maximizing the use of supplementary cementitious materials such as fly ash, slag, and waste gypsum. Most cement companies in India aim to reduce carbon intensity by about 25% by 2030.

India's cement boom is perhaps the rawest indicator of the country's high-growth economy. Our economists project the country's GDP will expand 6.8%-7% per annum through to 2027; as the economy grows, people will build, typically with cement.

Our assumption that India's cement makers will largely fund their expansion with cash flows and reserves, with very little debt, speaks to the robust fiscal health of entities. This is in keeping with the strong profits being generated across corporate India. As India's cement sector goes, so goes the country.

Editor: Jasper Moiseiwitsch

Digital Designer: Evy Cheung