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Covid-led disruptions in construction activity during the first wave in March 2020 had taken a massive toll on the volume growth of Indian cement manufacturers. At that time, a low-cost inventory and cost rationalization were the only upsides available for investors.

In the recently concluded June quarter, mobility restrictions in various states led to a decline of 20% on a sequential basis for top cement manufacturers. But this time, the benefit of cheap inventory has waned; in fact, cement makers are now battling cost inflation.

Prices of key input commodities such as petroleum coke, imported coal and diesel, which together account for more than 50% of production costs, continue to remain elevated.

An expensive bet
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An expensive bet

As for cement prices, they remain volatile, and going by recent channel checks, may not see a sharp uptick in a seasonally weak monsoon quarter.

Yet, Indian cement stocks are trading at a premium to their global peers.

True, the gap has narrowed. An analysis by JM Financial Institutional Securities Ltd shows that on a one-year forward EV/Ebitda basis, Indian cement makers are trading at a valuation multiple of 9.8. EV stands for enterprise value. Ebitda is short for earnings before interest, taxes, depreciation and amortization.

On the same parameter, average valuation for global cement companies works out to 7.1 times.

The trend is similar even if one looks at cement shares on a price-to-earnings multiple basis too.

Analysts say that global companies are trading at a discount perhaps due to issues of over-capacity and under-utilization. On the other hand, Indian cement companies could have been rewarded for their increased focus on reduction in carbon footprint and deleveraging efforts.

According to rating agency ICRA Ltd, major cement companies are expected to set up around 175 megawatts of waste heat recovery system capacities in the current financial year. This will help in saving power costs and lower their carbon footprint.

While valuations seem to have moderated, they still remain expensive since they do not justify the sector’s weak fundamentals.

Granted, there are some signs of revival in Indian housing sales, which contributes around 60% to overall cement demand. But a meaningful improvement in prices is yet to happen, analysts add.

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