Gains for building material majors capped by outlook, price rally

Muted revenue growth, price competition and destocking drag Q4FY25 earnings of tile, pipe and wood panel makers, with brokerages signalling further near-term weakness

Muted revenue growth and margin pressures continue to dog listed building material majors. Companies in the pipes, tiles and wood panel segments are facing demand issues, destocking and weak operating leverage that have dented their financials in the fourth quarter of 2024-25 (Q4FY25). Given the weak sentiments, brokerages believe that a rebound in the near term is unlikely. Further, given that there was an average return of 27 per cent in these stocks over the past three months, some of the stocks could face downgrades.

 

BOB Capital Markets says that revenue for its building materials universe grew at a muted pace of 2.5 per cent year-on-year (Y-o-Y) in Q4FY25. This was the ninth consecutive quarter of sluggish growth due to tepid demand. Margins, too, fell by 218 basis points (bps) Y-o-Y to 12.8 per cent.

 

Utkarsh Nopany of the brokerage says the margin fall was on account of high discounts offered to dealers in view of the rise in competitive intensity in a soft demand environment. Tiles was the worst-performing sector on the operational front across the three segments.

 

Most brokerages also point out the impact of lower government spending, liquidity issues, destocking and lower leverage for the operational underperformance of the sector.

 

Udit Gajiwala of YES Securities says: “Q4FY25 was a difficult quarter for all building material companies. Demand across segments remained soft due to slump in construction activities and no major pickup in government works. Credit crunch in some regions and elevated competition further accelerated the pain for companies.” 

 

Nuvama Research, too, views the performance of home decor players in the quarter as lacklustre. While operating profit and net profit of plastic pipe players contracted by 10 per cent and 7 per cent, respectively, due to destocking and lower government spending, tile players were hurt by weak demand and posted a top line growth of just 2 per cent. In the wood panel space, while revenue grew 7 per cent Y-o-Y, operating and net profit fell by 9 per cent and 41 per cent, respectively, due to high competitive intensity and timber prices.

 

The near-term outlook for the three segments is not too encouraging. YES Securities points out that there have been earnings downgrades for all the companies in their coverage. Further, given the bleak demand environment and no major green shoots in sight, the brokerage has revised its target multiples for a majority of the companies. APL Apollo and Greenply Industries are its top picks.

 

Nuvama Research believes that demand pickup in tiles and pipes will be a challenge even as anti-dumping duty and Bureau of Indian Standards (BIS) implementation in pipes and cost-cutting in tiles bodes well for the two segments. Though falling timber prices are positive for wood panel players, continued oversupply hurts growth, say analysts led by Sneha Talreja of the brokerage. APL Apollo, Venus Pipes and Greenply Industries are its top picks in the sector.

 

While the near-term outlook is cloudy, ICICI Securities believes that the medium term is positive for the tiles and bathware segment. “We expect a healthy housing market to drive growth for tiles and bathware companies in the medium term as many real estate projects launched in calendar year (CY) 2021 onward should start seeing completion from CY25. Operating profit margin too will likely improve, driven by operating leverage and benign raw material prices.”

 

The brokerage has a “Buy” rating on Cera Sanitaryware but it has downgraded Kajaria Ceramics to “Hold” and Somany Ceramics to “Add”.