Valuations of top cement makers in reverse gear

Poor demand and pressure on margins correct stocks. 

The valuations in the cement industry are under pressure again. Thanks to consistent poor growth in the demand scenario and erosion in margins which are pushing the cement stocks down. 

In the first half of the current calendar year, top cement makers have seen their valuations take a hit by as high as 16 per cent. During this period, cement stocks corrected 10 per cent while benchmark market indices saw a drop of 8 per cent. 

Since January last year, the enterprise value per tonne (EV/tonne) of top cement firms remained more than the replacement cost. The replacement cost is the cost to set up plants on a per tonne basis. For greenfield projects, it stands between $100 and $120 a tonne depending on the size of the cement making facility. And for the brownfield expansion, replacement cost is around $80 a tonne. 

The valuations of the cement companies were consistently on a rise during the previous financial year on the hope that industry would see better scenario after the monsoon season last year. However, FY11 registered the lowest growth in the past decade and valuations came under stress. 

For instance, at the end of the June quarter the EV/tonne of country’s largest cement maker UltraTech stood at $123 a tonne, drop of over 16 per cent as against $147 at the end of December quarter. Similarly, that of Swiss major Holcim-owned ACC declined by more than 13 per cent to $118 a tonne as against $136 a tonne during the same period. 

Valuation of ACC’s sister concern Ambuja Cements also dropped to $165 a tonne in June from $185 a tonne in December. 

Domestic cement industry has witnessed several expensive deals especially when foreign players entered the sector. The most recent deal between Andhra-based Bharathi Cement and French major Vicat was pegged around $200 a tonne. Similarly, Holcim paid $200 a tonne to Ambuja Cement while Portuguese firm Cimpor bought Shree Digvijay Cement at $162 a tonne. 

After registering a poor growth of 4.8 per cent against the expectation of 10 per cent in FY11, the first few months of the current financial year has further worsened. According to the available statistics, the industry’s growth was flat at 0.3 per cent. 

According to industry analysts, reaching a growth of 8 per cent in FY12 seems unlikely as demand has not yet taken off. And with monsoon spread across the country the demand may not see any surge, they said. 

Since the Indian cement industry entered its longest ever high growth phase in mid-2005, the valuations of the cement makers were on a rise till the end of 2007 before declining to below the replacement costs. Ambuja Cements had touched its highest valuation in October 2007 at $297 a tonne while during the same time ACC and UltraTech had seen their value peaking at $255 a tonne and $199 a tonne, respectively.