Construction Materials : 1QFY26E preview: Price-led recovery in margins by Kotak Institutional Equities
We expect cement industry demand growth of 4-5% yoy in 1QFY26E and build in 7.5% yoy growth for our coverage universe, factoring in some market share gains and inorganic growth. As per our dealer checks, price hikes during the quarter resulted in a price increase of 4% qoq in 1QFY26 on pan-India basis, mainly led by South. We expect price hikes to improve margins sequentially in 1QFY26E, partially offset by higher costs on account of operating deleverage and higher energy costs. We expect cement EBITDA/ton for our coverage universe to increase by ~Rs80/ton qoq as a result of these factors.
Prices firm up during 1QFY26
All-India average prices increased for the third successive quarter in 1QFY26. As per our checks, all-India prices improved by 4% qoq, with all regions (ex-Central) witnessing qoq increases in average prices. Price hikes in April-May 2025 were partially reversed in June 2025 due to the early onset of monsoons. Prices in South increased ~10% qoq in 1QFY26, while other regions saw 0-2% qoq improvement. North/West/East/South saw 1.9%/1.3%/1.7%/10.5% qoq increase in prices, whereas the Central region saw 0.1% qoq decrease in 1QFY26.
Demand—low base aids growth in 1QFY26
Our channel checks suggest that cement demand witnessed strong growth until mid-May 2025; however, the early onset of monsoons restricted growth from end-May 2025. We expect cement industry demand growth of 4-5% yoy in 1QFY26E on a low base due to elections in 2024. We estimate 7.5% yoy volume growth for our coverage universe, factoring in a market share gain and contribution from inorganic growth by ACEM (Orient Cement) and UTCEM (Kesoram and India Cements). We estimate ~8% yoy growth in demand in FY2026E, with capacity utilization at 69%, similar to FY2025 levels.
1QFY26: Higher prices drive margin expansion
We estimate costs to increase by 2% qoq (-2.5% yoy), led by (1) operating deleverage with 8.4% qoq volume decline (+7.5% yoy) for our coverage universe and (2) lagged energy cost impact. Substantial price hikes, partially offset by increasing costs, should improve margins sequentially in 1QFY26. We expect cement EBITDA/ton for our coverage universe to increase by ~Rs80/ton sequentially in 1QFY26E.
Seasonal headwinds and expensive valuations to limit upside
We anticipate the weakness in June 2025 prices to continue in the coming months. Valuations of most companies in our coverage universe provide little comfort, given the lack of any meaningful short-term triggers. We expect industry consolidation to continue, with multiple smaller capacities (~10% of industry capacity) potentially being acquired. Strong supply addition in 2HFY26E should keep margins under pressure and we see downside risks to consensus earnings. UTCEM and DALBHARA are better-placed than peers. TRCL and SRCM remain top SELLs.
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