The Ramco Cements Q2 FY26: Margin Pressure Persists Despite Volume Recovery

The Tamil Nadu-based cement manufacturer, operating 10 state-of-the-art production facilities with a combined capacity of 19.40 million MTPA, demonstrated resilience in its core operations despite an increasingly competitive industry environment. The company's ability to post triple-digit year-on-year profit growth, albeit from a low base, signals a gradual recovery from the sector-wide challenges that plagued the cement industry throughout FY25. However, the sequential decline in profitability and persistent margin pressures underscore the ongoing headwinds facing the sector.

The quarter's performance reveals a company navigating the delicate balance between volume growth and margin preservation in an oversupplied market. Whilst revenue expansion of 9.52% year-on-year suggests improving demand conditions, the compression in net profit margin to just 3.39% highlights the intensifying cost pressures and competitive dynamics that continue to weigh on the cement sector's profitability.

Financial Performance: Volume Recovery Masks Margin Deterioration

The Ramco Cements reported net sales of ₹2,238.74 crores for Q2 FY26, representing a sequential increase of 7.94% from Q1 FY26's ₹2,074.02 crores and a year-on-year improvement of 9.52% from ₹2,044.13 crores in Q2 FY25. This revenue growth, driven primarily by volume expansion in key southern markets, demonstrates the company's ability to capitalise on improving construction activity and infrastructure spending. However, the sequential revenue improvement failed to translate into proportionate profit growth, revealing underlying margin pressures.

Operating profit before depreciation, interest, tax, and other income (PBDIT excluding OI) stood at ₹388.01 crores in Q2 FY26, yielding an operating margin of 17.33%. Whilst this represents a year-on-year improvement of 197 basis points from 15.36% in Q2 FY25, it marks a sequential contraction of 184 basis points from Q1 FY26's robust 19.17%. The margin compression reflects the dual impact of moderating cement realisations and elevated input costs, particularly power and fuel expenses, which continue to pressure the industry's profitability.

The company's net profit margin of 3.39% in Q2 FY26, whilst improved from the dismal 1.24% recorded in Q2 FY25, remains significantly below the 4.07% achieved in the preceding quarter. This erosion in bottom-line profitability stems from the cumulative burden of interest costs totalling ₹111.38 crores and depreciation charges of ₹183.34 crores, which together consumed a substantial portion of the operating profit. The elevated debt servicing costs, reflecting the company's capital-intensive expansion programme, continue to constrain earnings despite operational improvements.

Employee costs rose to ₹151.25 crores in Q2 FY26 from ₹147.07 crores in Q1 FY26, representing 6.75% of net sales. The sequential increase aligns with industry-wide wage inflation and the company's efforts to retain skilled personnel in a competitive labour market. On a year-on-year basis, employee costs increased by 5.85% from ₹142.89 crores, slightly below the revenue growth rate, indicating reasonable cost management in this area.

Operational Challenges: Weak Returns Signal Capital Efficiency Concerns

The Ramco Cements' return on equity (ROE) of 7.54% and return on capital employed (ROCE) of 8.27% underscore persistent challenges in generating adequate returns on invested capital. These metrics, substantially below industry benchmarks and the company's own historical performance, reflect the dual burden of aggressive capacity expansion and subdued profitability. The low ROE indicates that the company generates less than eight rupees of profit for every hundred rupees of shareholder equity, a concerning metric for a capital-intensive business requiring continuous investment.

The company's capital structure reveals the strain of its expansion strategy. Long-term debt stood at ₹3,379.05 crores as of March 2025, representing a net debt-to-equity ratio of 0.60. Whilst this leverage level remains within manageable bounds, the debt-to-EBITDA ratio of 3.19 times signals that the company requires more than three years of operating profits to service its debt obligations. This elevated leverage, combined with weak returns on capital, creates a challenging equation for value creation.

The company's fixed assets surged to ₹12,140.15 crores in FY25 from ₹11,925.55 crores in FY24, reflecting ongoing capital expenditure on capacity expansion and modernisation. However, the sales-to-capital-employed ratio of just 0.66 times indicates that the company generates less than one rupee of revenue for every rupee of capital employed, a concerning metric suggesting underutilisation of assets or pricing challenges in converting capacity into profitable sales.

Industry Context: Oversupply and Pricing Pressure Weigh on Sector

The Indian cement industry continues to grapple with structural oversupply, with capacity additions significantly outpacing demand growth. Industry capacity utilisation hovers around 65-70%, creating intense pricing competition that limits companies' ability to pass through cost increases. The Ramco Cements' margin trajectory mirrors this industry-wide challenge, with realisation pressures offsetting the benefits of improving volumes.

The company's southern India focus, whilst providing proximity to key consumption centres, also exposes it to regional competitive dynamics. Tamil Nadu and surrounding states have witnessed aggressive capacity additions from both established players and new entrants, intensifying the battle for market share. The company's premium positioning in the blended cement segment offers some differentiation, but pricing power remains constrained by the abundance of available capacity.

Government infrastructure spending, particularly on road construction and affordable housing, provides a supportive demand backdrop. However, the pace of execution on announced projects and the monsoon's impact on construction activity create quarterly volatility in cement consumption patterns. The company's Q2 FY26 volume recovery suggests improving construction activity post-monsoon, but sustainability of this momentum remains contingent on continued government spending and private sector investment.

The Ramco Cements' peer comparison reveals a stark valuation disconnect. Trading at a price-to-earnings ratio of 181.39 times trailing twelve-month earnings, the stock commands a premium nearly five times the industry average of approximately 38 times. This elevated multiple appears unjustified given the company's ROE of 7.54%, which lags the peer average of approximately 9%, and its modest dividend yield of 0.19%. The price-to-book ratio of 3.26 times also stands significantly above most peers, with only J K Cements commanding a higher multiple, justified by its superior ROE of 14.50%.

Valuation Analysis: Expensive Multiple Offers Limited Margin of Safety

At the current market price of ₹1,024.55, The Ramco Cements trades at an enterprise value-to-EBITDA multiple of 21.95 times, reflecting investor optimism about future earnings recovery. However, this valuation appears stretched when juxtaposed against the company's current profitability metrics and growth trajectory. The stock's classification as "Expensive" by multiple valuation frameworks suggests limited upside potential at current levels.

The company's market capitalisation of ₹24,209 crores translates to an EV-to-sales ratio of 3.38 times, significantly above the cement industry's typical range of 2.0-2.5 times. This premium valuation implies expectations of substantial margin expansion or volume growth that may prove challenging to deliver in the current oversupplied market environment. The book value per share of ₹314.92 suggests the stock trades at more than three times its net asset value, a multiple typically reserved for high-return businesses rather than capital-intensive cement manufacturers struggling with single-digit ROEs.

The stock's recent valuation history reveals persistent volatility, oscillating between "Fair" and "Expensive" classifications over the past two months. This instability reflects the market's uncertainty about the company's earnings trajectory and the sector's outlook. The 52-week trading range of ₹788.75 to ₹1,206.60 indicates significant price volatility, with the current price positioned 15.09% below the recent peak, suggesting some momentum loss despite the improved quarterly results.

Shareholding Dynamics: Promoter Stake Reduction Raises Governance Questions

The most striking development in The Ramco Cements' shareholding pattern is the dramatic collapse in promoter holdings from 22.05% in June 2025 to just 3.42% in September 2025, representing an unprecedented reduction of 18.63 percentage points in a single quarter. This massive divestment by the promoter group raises significant questions about management's confidence in the company's near-term prospects and could signal concerns about the business that aren't fully reflected in the financial statements.

Institutional investors have maintained relatively stable positions, with mutual fund holdings increasing marginally by 0.42 percentage points to 17.03% in Q2 FY26. Combined institutional ownership (FII, mutual funds, insurance, and other DIIs) stands at 40.02%, providing some stability to the shareholder base. However, the promoter stake reduction fundamentally alters the company's ownership structure and may impact corporate governance and strategic decision-making going forward.

The modest increase in non-institutional holdings from 17.77% to 17.43% suggests retail investors have not aggressively accumulated shares despite the promoter exit. This tepid response from retail participants, typically attracted to promoter selling as a buying opportunity, indicates broader scepticism about the stock's near-term prospects. The pledged shares standing at 3.42% of total equity adds another layer of concern about the financial health of certain promoter entities.

Stock Performance: Underperformance Accelerates in Recent Months

The Ramco Cements' stock has delivered a one-year return of 16.14%, outperforming the Sensex's 4.14% gain by 12.00 percentage points. However, this relative outperformance masks significant recent weakness, with the stock declining 10.72% over the past three months whilst the Sensex gained 3.93%, resulting in a negative alpha of 14.65 percentage points. This divergence suggests growing investor concerns about the company's earnings trajectory and sector outlook.

The stock's beta of 1.35 indicates higher volatility than the broader market, with a standard deviation of 26.89% compared to the Sensex's 12.45%. This elevated volatility, combined with the recent underperformance, creates a challenging risk-reward profile for investors. The stock's classification as "Medium Risk High Return" appears optimistic given the deteriorating fundamentals and stretched valuations.

Technical indicators paint a mixed picture, with the stock trading in "Mildly Bullish" territory but below multiple key moving averages. The price of ₹1,024.55 sits below the 5-day, 20-day, 50-day, 100-day, and 200-day moving averages, suggesting weakening momentum. The immediate support at the 52-week low of ₹788.75 lies 23% below current levels, whilst resistance at the 100-day moving average of ₹1,071.22 caps near-term upside potential.

Investment Thesis: Structural Headwinds Outweigh Cyclical Recovery

The Ramco Cements' investment case rests on the assumption of a sustained recovery in cement demand and margin expansion as capacity utilisation improves. However, several structural factors challenge this optimistic scenario. The company's five-year EBIT growth rate of -3.70% indicates that operating profits have actually contracted despite capacity additions, suggesting fundamental challenges in converting growth into profitability.

The company's Mojo score of 44 out of 100, placing it firmly in "SELL" territory, reflects the confluence of expensive valuations, below-average quality metrics, and deteriorating financial trends. The valuation grade of "Expensive," quality assessment of "Below Average," and "Positive" financial trend create a contradictory picture where improving quarterly results fail to offset longer-term concerns about capital efficiency and returns.

The cement sector's structural oversupply, combined with The Ramco Cements' elevated leverage and weak returns on capital, creates a challenging environment for value creation. The company requires significant margin expansion and volume growth to justify current valuations, outcomes that appear increasingly difficult to achieve in the face of intense competition and pricing pressure. The dramatic reduction in promoter holdings adds another layer of uncertainty, potentially signalling concerns about near-term business prospects.

Key Strengths & Risk Factors

Outlook: What to Watch in Coming Quarters

The coming quarters will prove critical in determining whether The Ramco Cements can translate volume recovery into sustainable margin expansion and improved returns on capital. Investors should closely monitor the company's pricing strategy, capacity utilisation trends, and any further developments regarding promoter holdings. The ability to reduce debt levels whilst maintaining growth investments will be crucial for improving return metrics and justifying the premium valuation.