The Indian building materials sector has been a consistent wealth creator for equity investors over the past 15 years. Multiple segments within the sector such as tiles, sanitary ware, pipes, paints, plywood, and MDF benefited from strong housing demand, rising formalization and expanding distribution networks. However, over the last two to three years, sector growth has slowed meaningfully despite strong reported real estate activity in the large builder’s category.
Investors today are wondering if the growth rate of the sector can mean revert over the next few quarters. If so, aren’t these stocks undervalued right now given that valuation multiples are trading well below the 5-year average?
This sector note examines possible reasons for why this divergence has emerged, how management commentary has evolved over the past few quarters, what it implies for valuations and how investors should think about opportunities within specific sub-segments of the building materials sector.
Building materials sector: A history of wealth creation for investors
For many long-term investors in India, the building materials sector has been a wealth creator since 2010. During the period from roughly 2011 to 2015, the sector enjoyed a combination of strong volume growth and steady realization improvement. Annual volume growth of 15% or higher was not uncommon, supported by rising housing starts, improving affordability and increasing penetration of branded products.
In 2010 many building material stocks (Cera Sanitaryware, Kajaria Ceramics, Greenply Industries, Supreme Industries, Astral Ltd) traded at valuation multiples of less than 15 times trailing earnings while delivering excellent profit growth of around 20%. This created an attractive risk-reward profile leading to sustained investor interest. Over time, strong execution and improving balance sheets resulted in a significant re-rating across the sector. By 2015, many of these stocks were trading at a trailing PE multiple of more than 30. These valuation multiples sustained over the next 5-year period, barring occasional periods of market turbulence in 2019 and the COVID crash of 2020.
What has changed in the past few years?
The experience of the last few years has been very different though. Growth rates have moderated and investor expectations have been reset. While real estate developers have reported strong sales and bookings, listed building material companies have struggled to deliver comparable growth. Managements that were giving a growth guidance of more than 15% p.a. are today struggling to deliver high single digit growth rates.
This has raised questions about whether the slowdown is cyclical and temporary, or whether the sector is facing a more prolonged phase of subdued demand. To answer this, it is important to examine a few structural and timing-related factors that have contributed to the current situation.
Impact of Post-COVID Demand Normalization
One of the most important drivers of high growth during FY22 and FY23 was pent-up demand following the COVID period. For nearly two years, construction activity, home purchases, and home improvement spending were significantly constrained. Once restrictions eased, this demand was released rapidly.
During this phase, growth rates of 15–20% became common across several building material categories. However, this surge probably represented pent up demand rather than a sustained increase in consumption levels. As activity normalized, growth naturally slowed, creating a high base effect for subsequent years. This normalization has been a key reason why recent growth numbers appear weak when compared to FY22 & FY23.
Disconnect Between Real Estate sales and Building Materials growth
A recurring theme in management commentary and analyst discussions has been the apparent disconnect between real estate activity and building materials demand. While housing sales data and developer commentary suggest strong momentum, this has not translated into proportional growth for building material companies.
One reason for this is the nature of the recovery in India. Growth has been concentrated in premium and luxury housing, while the middle and lower segments of the housing market haven’t kept pace. Most listed building material companies are distribution-heavy, retail-focused brands that cater primarily to the middle of the income pyramid. As a result, they are not the primary beneficiaries of demand from large, premium residential projects.
Limited Presence in the Projects Segment
Another important factor is the limited exposure of many building material companies to the project segment. Historically, companies have deliberately restricted their project business because it is less margin-accretive and more competitive than retail sales.
Retail and distribution-led sales typically offer better pricing power and healthier margins. However, this strategy also means that when large developers report strong activity, the benefits do not fully flow through to listed building material players. This dynamic may explain why buoyancy among top-tier developers has not resulted in commensurate demand growth for companies focused on retail channels.
Interpretation of Home Loan Growth
Home loan growth figures are often cited as an indicator of housing demand, but they can be misleading when used as a proxy for building materials consumption. A significant portion of home loan growth includes resale transactions.
In resale cases, buyers usually undertake limited renovation work. While repainting and minor interior upgrades may occur, it is not necessary that tiles, sanitary ware, or piping systems are replaced. As a result, home loan growth does not always translate into proportional demand for most building material categories.
Competitive structure of building materials sector: Evolution Since 2016–17
The period around 2016–17 marked a structural evolution for the building materials sector. Leading players began expanding beyond their core categories, leveraging brand strength and distribution reach. For example, tile companies entered sanitary ware and plywood, sanitary ware players expanded into faucets and tiles, and pipe companies entered adjacent categories.
Reproducing a post of ours from the valuepickr forum from Jan 2021 –
“The most though provoking questions are more often than not qualitative; there is limited utility in slicing and dicing numbers beyond a point. The overall trend I see is that category expansion is happening across the board in stories that operate in the building materials sector. Other examples being –
Cera Sanitary venturing into faucets, tiles in addition to growing the core business
Kajaria ceramics venturing into sanitaryware, bathware and now plywood
HSIL venturing into PVC Pipes
Each of the sub categories within building materials has a large unorganized market, smaller regional players who lack the scale and the brand recall will cede market share to larger players over the next 5-10 years. COVID-19 has accelerated this shift by starving the smaller players of access to capital and by improving the cash flows of the organized players.
In the same vein Asian Paints venturing into waterproofing is a logical move. They already have strong distribution network in hardware stores and this presents a catchment area that can be accessed by sweating existing relationships. Construction chemicals is a large market in India, waterproofing by cursory estimates appears to be a sub USD 1 Bn category as of date but it meets the criteria of Asian Paints – brand strength, distribution network and influencer relationships can lead to a dominant market share. The waterproofing segment also offers a replacement market with a 4-5 year refresh rate, this is right up Asian Paint’s template.
Over a period of time one can expect to see 4-5 strong players with presence across multiple categories in the building materials space. The market sent the valuation of Cera and Kajaria higher the moment the management displayed the willingness and the ability to scale across multiple categories while keeping risk under control. When manufacturing is relatively easy and business success depends more on brand and distribution, sweating existing market reach to tap into new categories is easy.
HSIL did 200 Cr revenue in PVC Pipes within 2 years of launching
JSW Paints crossed 200 Cr within 2 years of launch
Cera captured respectable market share in faucets where Jaquar was the leader
Kajaria now does 250 Cr per year in sanitaryware + faucets
The niches that we are used to seeing in this segment may disappear over time. As the market started getting more organized, Kajaria (best tiles player) has to now compete with Cera (most efficient sanitaryware player). Competing against Johnson Tiles was easier for Kajaria, similarly competing against HSIL was easier for Cera. Now they go head-to-head against one another.
The good players in each of these categories will get bigger and keep growing but as they challenge the leaders in other categories the moats may get challenged, testing a few theories that we have been taking for granted all these years. In the process, the pedestalization of some of the businesses by investors will get tested if not shaken. I would spend more time tracking emerging supply and industry structure than obsess over growth rates, ROCE and ROE which are the culmination of business dynamics, never the source of a competitive advantage.
Corporate India is getting hungry; it is not just investors who read case studies about how Amazon has disrupted so many categories in the US.
This phase of category expansion coincided with a strong demand environment and contributed meaningfully to revenue growth over the next five years. However, much of this expansion-led growth is now embedded in the base. Companies operating at a higher scale are finding it increasingly difficult to replicate the same growth rates. Once the low hanging fruits of the early movers were extinguished, businesses have realized that competing across categories is not easy. Today we have players announcing exits from non-core categories – Cera Sanitaryware has exited the packaging business while Kajaria Ceramics has decided to exit the Plywood category.
If growth continues to be slow for more time, other players could go back to the textbook “focus on core competency” framework of the 1980’s and 1990’s in the US as investors demand better cash flows and capital efficiency in the absence of healthy growth.
How has the management commentary changed over time in the building materials sector?
Management commentary provides valuable insight into underlying demand trends. During FY23 and early FY24, most companies guided for growth of around 20%, supported by strong real estate data and post-COVID recovery.
By FY25, growth rates moderated to high single digits or low double digits. Management explanations focused on the time lag between housing starts and demand for finishing materials, which are typically installed toward the end of the construction cycle.
In FY26, the narrative has shifted further. Management teams are now emphasizing cost optimization, distribution rationalization, and organizational restructuring. These actions suggest a recognition that demand growth may remain subdued in the near term.
Increasing Focus on the Project Business
An important development has been the increasing focus on the project segment by companies that historically avoided it. For instance, companies such as Kajaria and Cera have indicated a rising share of revenue from project sales. Kajaria Ceramics today has a dedicated team to focus on the projects business that is doing an outreach to architects, builders and Government projects. Cera Sanitaryware derived ~35% revenue from the projects segment in Q2 FY26 while historically this proportion has been well below 30%. Their guidance for FY26 for projects share of revenue is ~40%.
As they say – actions communicate louder than words in investing.
This shift indicates that companies are seeking incremental volumes even at lower margins, reflecting limited confidence in strong retail-led growth in the near term. It also suggests that pricing power in the retail channel remains elusive.
What are the implications for building materials stocks?
The slowdown in growth has direct implications for valuation multiples. Historically, most building material stocks traded below 25 times earnings until around 2015–16. The subsequent period of strong growth and category expansion led to a re-rating, with multiples rising to 35–40 times earnings.
In the current environment, sustaining such valuations requires a return to double-digit volume growth along with modest pricing improvements. Without this, further de-rating remains a possibility.
This also brings to the fore the pitfalls of taking management guidance at face value and building detailed financial models based solely on this. Management teams get their guidance and business trajectory wrong many a time, we have seen this across sectors. Investor thinking today needs to be calibrated enough to take into account all of these factors before taking decisions on the basis of 5-year average multiples alone.
Given that the building materials sector is made up of many sub sectors, we will now present our views on a few sub sectors post Q2 FY26 quarterly earnings season. While there are some other sub sectors, these are the sub sectors we are keenly tracking right now.
Current outlook for the building materials sector
Summarizing the current outlook for various sub sectors within the building materials sector.
PVC Pipes
PVC pipes remain one of the few segments with attractive unit economics. Even at capacity utilization levels of around 60%, companies can generate reasonable returns on capital. Many players have invested in regional manufacturing to reduce logistics costs, resulting in industry-wide utilization levels of ~60%. This however leads to higher competition in micro markets in the race to sweat assets to maintain profitability & capital efficiency.
However, volatility in raw material prices and slower progress in government initiatives such as the Jal Jeevan Mission have constrained near-term growth. While operating leverage exists, a sustained upcycle will likely require greater pricing stability and demand visibility.
Paints
The paints segment has begun to show early signs of stabilization. Competitive intensity appears to be moderating as newer entrants have captured initial market share gains. Established players have reported some improvement in volumes, albeit on a weak base.
Management commentary in recent quarters has turned more constructive, suggesting that the worst of the disruption may be behind the sector. If this trend continues, paints could see a gradual improvement in growth. Asian Paints delivered its best volume growth of > 10% after many quarters in Q2 FY26. Birla Opus led disruption is finally starting to settle down a bit since low hanging fruits have already been picked by them in the core markets of Asian Paints.
Wood Panels: MDF and Plywood
The MDF segment has benefited from import substitution, supported by policy measures that make dumping by importers more difficult. Unlike previous cycles, capacity additions by larger players have not led to a sharp collapse in pricing. Capacity additions are expected to stabilize over the next couple of years. Once utilization moves beyond break-even levels, operating leverage can meaningfully improve profitability, provided realizations remain stable. With the BIS implementation set to further improve the pricing visibility, operating leverage here be a game changer for incumbents if demand comes back on track.
The plywood segment remains competitive and has traditionally been a lower-growth category. However, recent improvements in margins and industry discipline suggest gradual improvement.
In recent periods, investors have preferred to position themselves earlier in the construction value chain. Cement stocks attracted significant interest during FY25, reflecting this preference. However, elevated valuation multiples have led to some de-rating following FY26 results.
Paints and select building material sub-segments may offer better risk-reward if growth stabilizes. Valuations remain an important consideration since valuation multiples aren’t yet cheap in an absolute sense, though valuation multiples are well below their 5-year average in most sub sectors within the building materials sector.
How should investors approach the building materials sector now?
The building materials sector remains well understood and structurally relevant for long-term investors. However, the current phase requires patience. Growth visibility is limited, valuations are not uniformly cheap, and management commentary suggests caution. There are no sitters in the market now, in spite of a healthy 25-30% fall in valuation multiples.
Our suggestion to investors would be to do a lot of top-down work, understand the sub sectors in which you want to fish based on your investing preferences (Operating leverage, growth at reasonable price etc). Investors need to be very clear and use the current market to shortlist a set of companies that they would definitely want to play where they can be early entrants if demand actually gets better. If demand does not get better for the segment, we suspect that the derating may actually continue for a few more times before it actually gets better.
Slow and steady until the fundamental data changes would be our motto for the time being.
Our list of good stocks to track within the Building Materials sector
These stocks are part of our coverage universe at Congruence Advisers right now.
- Indigo Paints
- Shankara Building Products
- Greenply Industries
- Greenpanel Industries
- Mold-Tek Packaging
- Cera Sanitaryware
- Kajaria Ceramics
- Somany Ceramics
- Apollo Pipes
- Pokarna
Other stocks we have printed detailed business research reports on are
Please note none of these are recommendations. This is the list of stocks we are actively tracking within the building materials sector right now. Please do your own due diligence before you decide to invest in any of them.
We have been investors in Cera Sanitaryware, Kajaria Ceramics, Greenply Industries (currently invested too), Apollo Pipes and Somany Ceramics in the past. We have been tracking these businesses from 2011
Final Thoughts on the Building Materials Sector
It remains to be seen if the much-awaited pick up in revenue growth across categories will materialize in the next few quarters. The reduction in Income tax rate for individual tax payers and the reduction in interest rates is expected to spur healthy demand for housing in the economy segment.
The building materials sector offers reasonable valuation multiples right now given that growth rate has been muted compared to the historical trend. Investors have muted expectations right now since the past few quarters has disappointed on financials.
The most important determinant of future returns from this sector is likely to be future growth rate. Any positive surprise can lead to better earnings trajectory and valuation multiple mean reversion at the same time. Investors should get their tracking list ready and await better numbers & management commentary in H2 FY26 to take medium term positions here.
Disclaimer
The note contains some forward-looking statements and insights drawn from the historical results, annual reports and investor presentations; they are to be viewed only within this context and not as a prediction of future performance of the business or the stock named.
While due care has been taken to ensure that the information here is as accurate as possible, Congruence Advisers disclaims any liability in case of any unintentional inaccuracies.
The content does not constitute investment advice.
