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We believe the cement sector is at the cusp of an earnings recovery, with the downgrade cycle now largely behind, supported by a strengthening demand outlook and easing fuel cost pressures. Robust central and state government capex towards infrastructure and affordable housing should drive cement demand growth of ~7–8% YoY in FY27E. Further, the recent ~10–16% correction in petcoke/coal prices is expected to reduce cost pressure and improve margin visibility. Despite ~57mtpa of grinding capacity additions in FY27E, we expect industry capacity utilization to remain largely stable as capacity commissioning and ramp-up will be phased through the year, limiting effective supply growth. We believe the cement sector offers an improving risk-reward profile as easing fuel costs and sustained infrastructure-led demand support better earnings visibility. The sector is currently trading at 16.0x one-year forward EV/EBITDA, in line with its 10-year average, and at a ~13% discount to its five-year average. UTCEM and JKCE remain our preferred picks in this space.

Earnings downgrade cycle largely behind

* We believe the earnings downgrade cycle is largely behind in the cement sector, supported by a favorable demand trend and softening cost pressure. The FY27 outlook for cement demand continues to be aided by a robust government-led capex program at both the central and state levels (up ~12%/15% YoY). The continued emphasis on roads, railways, urban infrastructure, and affordable housing provides a strong structural demand tailwind for the cement sector.

* The North and Central regions continued to witness strong demand momentum in 1HCY26. The East and West regions also, after a muted Apr-May’26, have seen a demand pick-up in Jun’26. However, in the South, the demand momentum has been relatively sluggish so far. We estimate a healthy recovery in cement demand in 2HFY27. The broad-based increase in both central and state capex should aid cement demand growth of ~7-8% YoY in FY27, following a healthy base in FY26.

* Fuel prices (both petcoke/coal), after surging over Mar-May’26 due to the West Asia crisis, have softened in Jun’26 and corrected ~11-16% from their peak. Given this fuel price correction, we estimate the fuel cost increase in 1HFY27E to be up to INR250/t vs. earlier estimates of INR330/t. Based on the spot fuel prices, we estimate the exit-2QFY27 fuel consumption cost (in Kcal) should decline to levels similar to exit-4QFY26. As a result, we believe the scope for earnings downgrades driven by higher input costs is now limited

Valuation and view

* We believe that improving cement demand outlook and easing cost pressure are leading to a favourable risk-reward profile for the cement sector. Cement stocks have been under pressure since Mar’26 due to concerns over rising fuel/crude prices and the resultant margin pressure. However, the recent correction in fuel prices, coupled with sustained demand momentum driven by higher government infrastructure spending, is likely to enhance earnings visibility. We estimate an improvement in profitability YoY in 2HFY27, as lower fuel costs begin to flow through the P&L, while strong demand should drive positive operating leverage.

* The sector currently trades at a 1-year forward EV/EBITDA of 16.0x, at mean of its long-term average one-year forward EV/EBITDA (~13% discount to its 5-year average EV/EBITDA). We continue to prefer names with a track record of strong execution, volume growth, a favorable regional mix, improving cost matrix, and higher return ratios. We are selective in our top picks in the cement space and prefer UTCEM and JKCE.

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