Cement firms' valuations crack as slump sets in

A slowdown in the cement sector has drastically impacted the industry's valuation. The enterprise value of most of the companies is currently at a discount of more than 30 per cent to their replacement cost.

The replacement cost is the amount of money that is spent on replacing an old plant.

A year ago, the domestic cement industry was in an upswing, with its valuation reaching an all-time high of over $200 a tonne. However, its current average valuation has dropped to as low as $50 a tonne against the replacement cost of $120 a tonne.

The current valuation of the largest cement-maker, ACC, is hovering around $75, while that of Ambuja is at $85, UltraTech $70, India Cements and Madras Cement at $60 each.

Industry analysts said valuations are very low level and it is a good time for consolidation. Many foreign players also see it as a good opportunity. However, they added that India has become a seller's market and, hence, no company will be willing to sell, especially when the industry has tasted valuation as high as $250 a tonne.

The chief financial officer of a leading cement firm told Business Standard, "Valuations are, of course, below the replacement cost. But why would anybody sell at these low levels when the industry foresees good growth in the coming years?"

Pawan Burde, a research analyst at Angel Broking, said, "There are no positive triggers for the sector, which has affected valuations of cement firms. Valuations will remain subdued for at least one to two years."

The managing director of a southern cement firm said, "Players are not willing to sell below $140 a tonne.

The industry slump will not last long. The longest profitable cycle made the industry sit on surplus profits, which may not encourage selling plants."

The sector is facing a global slowdown, though industry sources said the situation in India and China is better than the rest of the world. French major Lafarge recently announced it was going to divest some of its global cement plants.