Indian cement stocks most expensive among global peers despite low demand

Live Mint
Dated: July 07, 2020
Harsha Jethmalani
Shares of Indian cement manufacturers are trading at a premium to their global peers. As the alongside chart shows, one-year forward price-to-earnings (PE) multiples of Indian companies are much higher than their global counterparts. Even on an Ev/Ebitda basis, which is another parameter for valuations, Indian companies are expensive. EV stands for enterprise value. Ebitda is short for earnings before interest, tax, depreciation and amortisation.


These valuations are in spite of a bleak demand outlook, weak price recovery and consequently poor earnings growth. The March quarter earnings were marred by disruption caused by the coronavirus crisis, pushing many of them to delay their expansion plans. The Indian housing sector, which contributes to the majority of cement demand, of nearly 60%, remains in the doldrums.
Then, what warrants these steep valuations?
According to Jefferies India Pvt. Ltd, this sector remains a cleaner proxy to play the capex revival story with the aggregate leverage being near-zero. Jefferies finds the sector's long-term growth attractive. “Although select players are currently levered as a result of recent consolidation or investment on growth, focus is high on deleveraging and our coverage is almost net cash. This is reflected in the sector valuations and despite correction in the stock prices due to the ongoing crisis, valuations continue to be at a slight premium to historical average," Jefferies said in a report published in June.
But some others disagree. They feel that the sector’s struggle to achieve adequate demand growth, could continue for longer-than-expected. They say, global cement makers could be trading at cheap or fair valuations because of low capacity utilisation. Even though the problem of over-capacity exists in India, cement valuations don’t reflect it.
“This gap in valuations between Indian and global cement companies, has been there for a while now. The sector was expected to see a demand super-cycle in fiscal year 2021, but doesn’t look like it will happen. These valuations hardly justify the sector’s fundamentals. This is a classic example how the stock market remains disconnected with the economy," said an analyst with a domestic brokerage firm, who did not want to be named.
A demand super cycle occurs when there is a massive spurt in demand. It was expected that cement demand will improve substantially aided by the government's affordable housing push.
Meanwhile, recent cement dealers’ channel checks show that demand is showing recovery thanks to pent-up rural demand. As supply constraints eased, cement prices have started to recede. On an average, all-India prices were down ₹10/bag in June to ₹370/bag. One cement bag weighs 50 kg. A bountiful monsoon could help recover some demand loss, but that won't be enough to match the existing capacities.
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