Ambuja, UltraTech and Dalmia Bharat are UBS' top cement picks; here's why

UBS identified Ambuja Cements, UltraTech Cement, and Dalmia Bharat Ltd as its top investment picks from the cement sector. The brokerage highlighted its continued optimism for the sector despite a less-than-expected demand growth in the first quarter of FY26.

Cement volumes grew by 3% year-on-year in Q1, falling short of the anticipated 10% growth. The demand shortfall was attributed to an early monsoon, which impacted consumer discretionary segments. Nonetheless, companies in the sector have maintained a positive outlook, with Ambuja Cements even raising its volume guidance for FY26 by 100 basis points, reflecting confidence in future demand.

Regional demand varied significantly, with central India showing the strongest growth, followed by the eastern, southern, and western regions. The northern region lagged, partly due to geopolitical tensions between India and Pakistan. Notably, mid-sized cement companies outperformed larger players, achieving a 7-8% volume growth compared to just 1% for the top four market leaders.

"Our top picks, in order: Ambuja, UltraTech and Dalmia. We retain our FY26E volume growth of 7-8%," UBS said.

The brokerage suggested a target price of Rs 14,700 on UltraTech cement. It gave a price target of Rs 710 on Ambuja cements. On Dalmia Bharat, it suggested a target of Rs 2,700. Meanwhile, UBS has a target of Rs 2,350 on ACC.

Pricing trends revealed a surprising resilience, UBS said. Despite the volume shortfall, blended net sales realisation (NSR) rose by approximately 4% quarter-on-quarter. While prices remained flat in the north and west, they experienced strong hikes in the east and south, regions which had seen price reductions in previous quarters. This ability to maintain or even increase prices despite lower volumes underscores the sector's robust pricing power.

Cost dynamics during the quarter presented a mixed picture. Costs increased by Rs 170 per tonne due to negative operating leverage and higher power and fuel costs. However, year-on-year, costs fell by 1%, contributing to a 41% increase in EBITDA and a 36% rise in EBITDA per tonne, aided by a favourable base effect. This cost management indicates a strategic focus on efficiency and operational improvements.

UBS remains positive about the sector's prospects and anticipates strong Q2 Ebitda growth. While upcoming capacity additions of approximately 50 million tonnes for FY26 might challenge pricing dynamics, the brokerage expects marginal price improvements for the remainder of the fiscal year.

Cost reductions are expected to persist, providing margin levers for Ambuja and UltraTech, potentially widening their EBITDA per tonne gap over peers. Regionally, UBS is more confident in demand stability in the north and west, whereas the south, central, and east carry higher risks.

The sector is likely to benefit from GST rationalisation, which could enhance near-term demand. UBS's analysis suggests that despite anti-profiteering provisions, these reforms could act as a profitability tailwind, making price hikes more feasible. This potential for increased profitability highlights the sector's resilience and adaptability in a challenging economic environment.