Analysts worried at high valuations in cement deal talks

While a few foreign companies are showing interest in some of India’s smaller cement companies, industry analysts are concerned over what they feel are the high valuations being mentioned.

The talk is of deals at $200 a tonne. Since the current average valuation is slightly above the replacement cost of $120 a tonne, experts say the price should not go beyond $135-150 a tonne.

Murli Industries, which has been on the block for some time, on Monday said large foreign companies had expressed interest in its cement assets in Maharashtra and it was in negotiations. There were reports that Cemex, the Mexican cement giant, was eyeing Murli’s units. on Monday, the shares of Murli Industries jumped 18.45 per cent to Rs 92.75. It has a three-million-tonne unit in Maharashtra and plans to build two more of the same capacity, one each in Rajasthan and Karnataka.

“The industry is facing supply pressure. If the deal is close to $200 per tonne, it will take valuations higher, with no reason, as smaller firms’ expectation will move north,” said a Mumbai-based analyst with a brokerage firm.

Barring French major Vicat’s purchase of a 51 per cent stake in Andhra-based Bharathi Cement this year, the past two years saw no deals in the sector, primarily because Indian promoters did not want to sell at low valuations.

High valuations hinder consolidation. The top companies control close to half of the industry’s capacity, but there are over 50 players in the sector. “Unless there is consolidation and not only acquisitions, the industry will continue to face the problem of demand-supply mismatch,” said the head of research in a broking house.

Currently, only Ambuja Cements is trading at close to $200 a tonne, way above the industry’s average enterprise value per tonne. ACC is around $130 and UltraTech around the replacement cost. Others are below $120 a tonne.

In a recent report, CLSA said cement majors were trading at a premium to the replacement cost. It added the stocks appeared to be expensive, given a weak outlook.

Foreign majors Holcim, Lafarge, Italcementi, Vicat, Heidelberg and Cimpor have a firm foothold in the domestic market, which currently has a capacity of 275 million tonnes per annum.