June quarter earnings didn’t see any fireworks from the cement sector. Although cement sales volume growth has picked up, it was largely led by government spending on infrastructure. Demand from the real estate sector, especially the housing segment, which is the largest driver of cement demand, remains muted.
Realization growth was subdued and is unlikely to revive sharply in the current lean monsoon quarter. Unfortunately, there is no respite from cost headwinds. Rising petroleum coke and diesel prices have kept operating costs elevated, eroding margins of many cement makers.
For margins to improve, earnings have to catch up, but the ongoing spree of large capacity additions is likely to keep the sector’s capacity utilization low, delaying much-needed earnings growth.
In this backdrop, the valuations at which Indian cement stocks are currently trading are not cheap by any means.
As the table alongside shows, the average one-year forward price-to-earnings (P-E) multiple of large-cap cement stocks is 24.5 times. Average one-year-forward P-E of listed Indian cement stocks is around 21 times. This is much higher than average one-year forward P-E of global peers. Globally as well, the industry is facing a situation of overcapacity, hence the lower valuations, say analysts.
Not just P-E, even if one considers their EV/Ebitda—another valuation parameter—Indian cement companies are trading at higher levels than global cement producers. EV stands for enterprise value and Ebitda is short for earnings before interest, tax, depreciation and amortization.
It should be noted that despite fundamental challenges, many large-cap and mid-cap cement stocks rallied following the rise in benchmark indices. So, even if demand conditions improve, the scope for further upside in cement stocks is limited.