Do cement companies deserve such high valuations?
Despite weak demand resulting in low pricing power, cement stocks are expensive.
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.
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.