Top cement cos' valuations rise above replacement costs
The valuations in the domestic cement industry are on the rise, thanks to the good demand scenario and better-than-expected realisations.
The enterprise value per tonne (EV/tonne) of the top cement makers are back on track as they are trading above the replacement costs. The industry had witnessed substantially low valuations of as low as $50 per tonne on the back of expectations of glut situation due to fresh capacities going on stream and thereby apprehensions of low realisations.
The replacement cost is the cost to set up plants on a per tonne basis. For greenfield projects, it stands between $100 and $120 per tonne depending on the size of the cement making facility. And for the brownfield expansion, replacement costs is around $80 per tonne.
However, setting aside the industry experts' expectation, demand picked up and the last one-and-a-half month saw rising prices of the building material in quite a few regional pockets across the country.
ACC's current valuation is at $120 per tonne which in the mid of last calendar year stood below $100 per tonne. Whereas its sister company Ambuja is trading at above $130 per tonne.
The mid-cap companies too have seen firmer valuations, which on an average, have increased to $70-75 per tonne from $45-60 per tonne a quarter ago.
However, industry experts cautioned that such higher valuations may not be sustainable in the long run as more and more capacities come on stream. "May be for a quarter or maximum two quarters, valuations will remain firm," said analysts.
| Valuations (EV/tonne) of cement companies | ||
| Company | EV/tonne ($/tonne) | |
| July, 2009 | January, 2010 | |
| ACC | 97 | 120 |
| Ambuja | 120 | 140 |
| Shree | 82 | 137* |
| UltraTech | 82 | 126 |
| IndiaCements | 65 | 82 |
| * Includes power segment Source : Cement analysts | ||
According to sector analysts, price hikes in the months of November and December coupled up with rise in demand has pushed the valuations up. Moreover, improvement in margins due to steep fall in coal prices on a year-on-year basis has continued to help cement makers to come up with good quarterly shows. Currently, the average national cement price per 50 kg bag is Rs 220. Though in regional pockets, especially in the central, east and north markets, prices are as high as Rs 260 per bag.
Since, cement is a regional building commodity, valuations of the southern cement makers are still below the replacement costs. The south, in terms of demand and realisation, is comparatively weaker than the other regions of the country.
| Stock prices (Rs/share) | |||
| Company | 1 July | 12 January | Change (%) |
| ACC | 763.90 | 898.95 | 17.68 |
| Ambuja | 89.70 | 103.40 | 15.27 |
| Shree | 1196.85 | 2192.00 | 83.15 |
| UltraTech | 681.45 | 982.15 | 44.13 |
| India Cements | 130.65 | 124.20 | -4.94 |
| Source : Bombay Stock Exchange | |||
The mergers and acquisitions activities in the cement space during the last few years have happened above $115 per tonne and in some cases the deal reached as high as $235 per tonne. Last year remained mum on consolidation front except an internal restructuring of Grasim's cement business in October.
Having tasted deals at extremely higher valuations, none of the cement makers, however small, was willing to sell below $140 per tonne. However, no takers were ther to this stand. Now with rising valuations, there could be some actions in the cement space on consolidation front, said analysts.