Cement valuations are finally getting a reality check.
An analysis by Motilal Oswal Institutional Research showed that the current one-year forward EV/EBIDTA multiple of 13.5 times of the sector is considerably lower than the peak level of nearly 18.8 times EV/EBITDA about 18 months ago. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization. This, as per the domestic brokerage firm is due to lower-than-estimated improvement in earnings.
“Prices remained moderate for a major part of the year and started rising only in February-March’19. The industry also faced cost pressure in terms of rising fuel cost during the initial two-three quarters of fiscal year 2019. As a result, profitability for cement players declined in FY19. Valuations for the sector remained almost in line with long-period average till February’19," it said in a report earlier this month.
For now, cement price trends are mixed across India. Prices continue to remain elevated in the northern and central regions but have cooled-off in the south. In the ongoing seasonally weak monsoon quarter, prices are expected to soften further.
What’s more, recently cement manufacturers have been accused of cartelization by union minister Nitin Gadkari. And any negative developments on that front would further weigh on the sector’s realisation growth prospects and consequently valuations.