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The Indian housing sector, which contributes to the majority of cement demand, of nearly 60%, remains in the doldrums.
The Indian housing sector, which contributes to the majority of cement demand, of nearly 60%, remains in the doldrums.

Despite odds, Indian cement stocks are the most expensive globally

  • Despite correction in the stock prices due to the ongoing crisis, valuations continue to be at a slight premium to historical average, says Jefferies India
  • This is a classic example how the stock market remains disconnected with the economy, say analysts

Shares of Indian cement manufacturers are trading at a premium to their global peers’. As the chart alongside shows, the one-year forward price-to-earnings (PE) multiple of Indian companies is much higher than that of 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, taxes, depreciation and amortization.

These valuations are in spite of a bleak demand outlook, weak price recovery and, consequently, a poor outlook for earnings. March quarter earnings were marred by covid-19 disruptions, pushing many cement firms to delay their expansion plans. The Indian housing industry, which contributes to the majority of cement demand, of nearly 60%, remains in the doldrums.

So what warrants these steep valuations? According to Jefferies India Pvt. Ltd, the cement sector is a good proxy to play the long-term capex revival story, especially since the aggregate leverage across companies is near-zero.

“Although select players are currently leveraged 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," it said in a report published in June. But also note that the sector’s struggle to achieve adequate demand growth could continue for longer than expected.

“The sector was expected to see a demand super-cycle in fiscal year 2021, but this seems unlikely. 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. Expectations were that cement demand will improve substantially, aided by the government’s affordable housing push.

Analysts say global cement makers trade at relatively cheap valuations because of low capacity utilization. Even though the problem of overcapacity exists in India, cement valuations don’t reflect it.

Meanwhile, recent cement dealers’ channel checks show that demand is slowing 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 50kg.

A bountiful monsoon could help recover some demand loss, but that won’t be enough to match the existing capacities.

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