The cement industry: is it overpriced? What professionals in the market say

The cement industry: is it overpriced? What professionals in the market say

Although there were "pockets of opportunity," the majority of analysts and fund managers Moneycontrol talked with advised caution on the category.

Recent market trends show that demand for cement increased in March 2024, however price is still low because of volume-driven tactics, according to Nuvama experts.

Is the value of the cement industry stretched? Is there potential for investment in this industry, or will investors remain wary due to its high valuations and problems with raw material supply and pricing?

Analysts at Kotak Institutional Equities said in a research dated April 15 that they were "baffled" by the market's unwavering confidence in the profitability of the industry in spite of frequent downgrades in results.  The majority of analysts and fund managers Moneycontrol talked with had a cautious outlook overall with some selective optimism over certain industry categories, or "pockets of opportunity".

The Kotak Institutional Equities research brought up some issues about the valuation of the industry. The analysis pointed out that the market has given high price-to-earnings multiples despite low asset turnover rates. Rather than maintaining these levels, the proposal is to reevaluate cement stock multiples, which generally range from "very high" 2.5-5X FY2025E BV.

What the market indicates

The majority of mutual funds have reduced their exposure to cement equities over the last six months, especially those of bigger, pan-Indian companies; yet, local companies like Ramco, Shree Cement, and Nuvoco Vistas have seen increases. With an average exposure of around 6%, the majority of funds now have very little invested in the category; this includes both theme infrastructure funds and diversified funds. The exception to this rule are commodity-focused funds like as ICICI Prudential's Commodities Fund, which has over 29% of its total weight in cement companies (including brands like UltraTech Cement, JK Cement, and Grasim Industries), the second-highest percentage after manufacturers and steel products at 40%.

In line with the general cautious attitude, Ambit Capital's Satyadeep Jain remarks, "Historically, we've found every single cement company to be expensive." According to Jain, the market often bases decisions on anticipated future capital allocation efficiency. High values are the outcome, even in cases when return on capital employed (ROCE) is not met. As a result of this tendency, firms that generate insufficient ROCE are nonetheless selling at high multiples.

He said, "The mathematics is simple, a company which has higher EBITDA (earnings before interest, taxes, depreciation and amortisation) per tonne and higher ROCE will trade at a higher valuation." This is why they have historically supported UltraTech over other companies.

According to Sreeram Ramdas of Green Portfolio, the price-to-earnings ratios of the majority of cement businesses are between 39 and 40x, which suggests that they are overpriced considering the sector is expected to increase by 8 percent over the next three years. Notwithstanding this, he sees room for growth in smaller businesses like as Udaipur Cements and Shiva Cements, pointing to their potential for capacity and revenue increase.

Recent market trends show that demand for cement increased in March 2024, however price is still low because of volume-driven tactics, according to Nuvama experts. Different areas have adopted price hikes, but it is unclear how long they will last given the challenges of competition.

Performance of stocks

Sanjay Moorjani of Samco Securities pointed out that while the majority of cement sector companies have performed better and the market as a whole has hit new heights, they have persisted in underperforming when compared to the overall index in terms of relative returns. Big companies like ACC and Ambuja Cement have gained around 37 percent and 61 percent, respectively, during the last year. Certain firms with a focus on the area, such as Barak Valley Cement and Mangalam Cement, have seen gains of around 92 percent and 207 percent, respectively, in the last year. Conversely, the stocks of Gujarat Sidhee Cement and Bheema Cement have dropped by around 27 and 65 percent, respectively.

All things considered, the industry has seen robust volume growth, according to Moorjani. "Although margins for the current quarter are anticipated to show a healthy year-on-year increase, a sequential decline is expected," he said.

According to Moorjani of Samco Securities, the company is optimistic about Dalmia Bharat because, even after a 20% price correction, investors may still purchase the stock at a comfortable valuation.

It's still all optimism.

Though there are doubters, not everyone sees the industry as doomed to failure. Religare's Nirvi Ashar lists future capacity increases and lower raw material prices as advantages. She advises taking into account local firms like Ramco in addition to companies like UltraTech and Dalmia Bharat.

Even though he takes a cautious approach, Moorjani still thinks that the growth story is still strong because of the strong demand for homes and the rising infrastructure expenditure.

According to Axis Securities' Uttam Kumar Srimal, there are further reasons to be optimistic about the industry, including as government efforts, premiumization tendencies, and the shift to green energy. Because he believes that UltraTech and JK Cement will do well going forward, he favors both companies.

Additionally, analysts expect a drop in gasoline costs, which provides manufacturers with some respite. However, Bandhan Mutual Fund's Sumit Agarwal highlights how susceptible the industry is to fluctuations in the price of raw materials, giving preference to diversified companies over local ones in such situations. In terms of the industry, Agarwal, who oversees Bandhan's Large Cap Equity Fund, is underweight (2 percent relative to total NAV).

Does cement make sense as an investment?

Notwithstanding the difficulties, several experts pointed out that some businesses would have profited from cheaper raw material and fuel prices, but they also said that the durability of price increases is still an important consideration.