Why UltraTech Cement commands valuation of an FMCG company
UltraTech, the biggest in cement business, is the face of this industry makeover.
UltraTech, the biggest in business, is the face of this industry makeover.
Like consumer staples that harness numerous power brands to justify valuations covering earnings five decades into the future, UltraTech is beginning to command premiums analysts typically assign to FMCG companies. In the past two years, the valuation gap between UltraTech and companies constituting the Nifty Consumption Index has halved.
At present, UltraTech’s is the fifth most expensive stock in the Nifty after consumer companies Titan, Britannia, Asian Paints and Hindustan Unilever. Typically, the Street ascribes superior PE multiples to consumer companies because of their high Return on Equity (RoE) and volume visibility.
Overseas, cement is treated as a part of the building material space and trades at PEs similar to those in commodities industries. The current PE multiple ascribed to Ultra-Tech seems to suggest the Indian market perceives cement as a branded product.
UltraTech is trading at 50 times trailing and 38 times one-year forward earnings. That translates into a premium of 111 per cent to the Nifty’s valuation. By comparison, Zurich-based LafargeHolcim, which owns ACC and Ambuja Cements, is trading at 14.1 times, while the Swiss benchmark index is quoting at 16.8 times.
UltraTech leads its global rivals in growth estimates, underscoring its pricing power in a cement market that is the world’s second-biggest after China. Ultra-Tech’s projected earnings growth for FY20 is 31.9 per cent, compared with a range of 5-27 per cent for its overseas peers. The PEG ratio — a measure of price-earnings per unit of growth — at UltraTech is 1.27, while for top global companies it is 1.8.
This optimism reflects the return of pricing power in India’s cement sector after a gap of at least three years. There is consensus among sector experts and analysts that in the coming months, manufacturers would be able to sustain price increases unlike in the past few years. Sustained investments in infrastructure and lowcost housing projects should help maintain stable demand.
Analysts expect the industry’s operating profit to rise 17 per cent in the March 2019 quarter, the fastest pace of growth in about three years. In the December 2018 quarter, the industry’s operating profit margin was at a 16-year low. Double-digit volume growth in FY19 and higher pricing power prompted CLSA to upgrade UltraTech, with a price target of Rs 5,025.