Building materials hit a wall in Q2, recovery to lay bricks in FY26

Demand and margins set for slow rebuild, helping valuations cement stronger base

The performance of listed major companies in the building materials sector during the July-September quarter (Q2) of 2024-25 (FY25) was weak. Volumes remained subdued due to ongoing demand challenges while operating profit margins were pressured by declining gross margins and rising input costs.

 

Among the various segments, ceramic companies showed mixed results, while polyvinyl chloride (PVC) pipe makers and wood panel manufacturers reported declines in both volume and margin.

 

Commenting on the lacklustre performance, BOB Capital Markets noted that revenue growth for its building materials universe remained sluggish at just 1.3 per cent year-on-year (Y-o-Y) for the seventh consecutive quarter, hindered by weak demand and prolonged monsoons. Overall operating profit for the sector dropped nearly 21 per cent Y-o-Y, driven by severe margin pressures resulting from heightened competition in a weak demand environment. 

   

Ceramic players performed relatively better, with Kajaria Ceramics and Somany Ceramics posting Y-o-Y volume growth of 5.3-8.4 per cent. Kajaria’s Q2 volume growth of 8.4 per cent was lower than its guided 11-12 per cent, and the company is now targeting 9-10 per cent growth for FY25. Despite this lower-than-guided growth, Kajaria outperformed the sector and gained market share during the quarter. Although gas prices remained stable, higher discounting led to a contraction in gross margins both Y-o-Y and sequentially. Exports, according to IIFL Research, remained weak, falling 31 per cent Y-o-Y due to high freight rates.

 

The bathware segment also underwhelmed, with revenue declining by 0.8 per cent for the sixth consecutive quarter. Operating profit margins for key players dropped sharply by 386 basis points Y-o-Y to 12.5 per cent in Q2FY25, primarily due to higher raw material costs and increased dealer discounts amid weak demand.

 

Looking ahead, brokerages expect domestic tile market realisations to remain under pressure due to weak export performance. Given a 24 per cent Y-o-Y decline in India’s net exports in this segment, there is an expectation of heightened competition in the domestic market from export-focused players in Morbi, Gujarat.

 

Roughly 250 units in Morbi have shut down due to muted demand. Another concern for the export market is the potential imposition of anti-dumping duties on Indian tiles by the US, which accounts for 8 per cent of total exports to that market.

 

Antique Stock Broking observed that tile volumes across the top 10 export destinations declined by 13 per cent Y-o-Y, driven by a 7 per cent Y-o-Y drop in exports to the US and a 6-35 per cent decline in exports to West Asia. The decline in US exports, according to analysts at the brokerage led by Manish Mahawar, was triggered by preliminary anti-dumping duties imposed by the United States International Trade Commission in May 2024, along with high ocean freight rates and container availability issues.

 

PVC companies also had a weak Q2, facing challenges from volatile polymer prices, reduced government capital expenditure, and extended monsoons. Both major players in the sector, Supreme Industries and Astral Pipes, reported a volume decline of 1-3 per cent compared to the previous year. While overall sector volume growth remained in the low single digits due to channel destocking, operating profit fell by 30 per cent due to lower realisations per unit, heightened competition, and inventory losses.

 

The wood panel sector also posted a muted quarter, impacted by excess capacity additions and input cost pressures. Operating profit margins for wood panel manufacturers declined for the ninth consecutive quarter, with lower demand and margin stress across segments. This was due to supply-side pressures and elevated timber prices. Players in the segment have now begun implementing modest price hikes to offset input cost inflation.

 

BOB Capital Markets remains positive on building material stocks, expecting a gradual recovery in demand and improved margins, with valuations becoming more reasonable. Its top picks include Supreme Industries in plastic pipes, Cera Sanitaryware in bathware, Somany Ceramics in tiles, and Greenply Industries in wood panels. While demand recovery is expected to be delayed until 2025-26, IIFL Research believes CenturyPly and Cera Sanitaryware are well-positioned within the sector.