Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
12,086.70114.9
Stock Analysis, IPO, Mutual Funds, Bonds & More

Do cement companies deserve such high valuations?

Despite weak demand resulting in low pricing power, cement stocks are expensive.

, ET Bureau|
Aug 10, 2018, 11.33 AM IST
0Comments
ThinkStock Photos
Cement-Think-stock-1
Analysts point out that even if cement demand were to improve materially, the current valuations of largesized companies already factor in the positives.
Commoditised businesses typically trade at less gravity-defying valuations, say, than a top-end carmaker. Besides the brand ‘aspect’ of commodities, the key reason for lower valuations is the theoretically low entry barrier, something that allows a new entrant to pose a stiff challenge to incumbents. India’s cement stocks, which have undergone multiple re-ratings in the past five years, are proving to be major exceptions.

Despite weak demand resulting in low pricing power, cement stocks are expensive, exceeding the typical valuation range within which analysts expect them to trade. The street ascribes EV/ EBIDTA multiple range of 10-15 to largesized cement manufacturers. But (based on FY18’s earnings), large cement companies are trading above this range. The average EV/EBIDTA multiple for largesized companies is 18.2.

Cement snip 1

Several analysts believe that peak valuations in a highly competitive industry such as cement are unjustifiable. They point out that most large-sized cement companies are operating at between 78% and 85% of their capacities. Since the headroom to enhance utilisation is minimal, the ability of companies to benefit from lower fixed cost per unitalso called operating leverage in technical parlance—will be lower. Hence, it will offer limited scope for any material surprise in projected earnings growth.

Analysts also point out that even if cement demand were to improve materially, the current valuations of largesized companies already factor in the positives.

Also Read

Mid & small-sized cement companies to gain more from tax cut than larger peers

Deutsche raises EPS estimates of cement companies by 3-14%

After volume focus, cement companies getting back pricing power

MS downgrades cement companies, says profitability uptick to be slower

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service