Indian cement makers race ahead of China's

India's top cement makers are valued at $52 bn compared with Chinese industry's market cap of $48 bn

Indian cement makers now top the valuations charts globally and they can now buy out their Chinese counterparts in all-stock deals despite being much smaller in size. India's top cement makers now have a combined market capitalisation of $52.5 billion, which is much ahead of the Chinese industry's combined market capitalisation of $48.3 bn. Chinese companies are, however, more than thrice as big as their Indian counter parts in terms of revenues.

Indian companies in the sample taken for comparison reported combined revenues of $17.1 bn during 2016-17, less than a third of the Chinese industry combined revenues of $56.2 bn.

Among individual companies, India's top cement maker UltraTech Cement jumped places to become the world's fifth most valuable cement maker ahead of global biggies such as Cemex, Anhui Conch and Italcementi, among others. At the other extreme, Shree Cement is now the world's most expensive cement stock with price-to-earnings multiple of 103 times and price-to-book value of nearly 10 times. The corresponding ratio for Chinese makers are 23x and 0.95x, respectively. (Click here for charts)

Collectively, Indian cement makers are now valued at 48 times their net profit in the last financial year on average, nearly double the corresponding valuation ratio of Chinese firms. Globally, cement makers are now valued at 26x their latest annual earnings (net profit) and 1.6x their latest book value or net worth.

The analysis is based on the world's top 100 cement makers in terms of market capitalisation. The Bloomberg sample has 12 companies from India and 21 Chinese companies. Indian firms together account for 14 per cent of the sample's combined market capitalisation. Together, the sample firms are currently valued at $380 bn and they reported revenues and net profits of $250 bn and $10.5 bn, respectively, in the last financial year.

However, Indian companies are yet to catch up with their western and Chinese counterparts in terms of revenues. With revenues of $3.8 bn in FY16, UltraTech is the world's 14th biggest cement maker (excluding its parent Grasim Industries). In comparison, CRH plc, the world's top cement maker, reported revenues of $26.2 bn in the last financial year followed by Lafarge Cemex at $24.5 bn. In comparison, China's top cement maker China National Building Material Co reported revenues of $16 bn in FY16. China is the world's largest cement producer followed by India and the United States. In 2014, China produced 2,500 million tonnes (mt) of cement against India's 280 mt and US' 83 mt. This mismatch between the size of operations and market capitalisation has raised the possibility of an irrational exuberance in valuation of cement companies in India.

"At the end of the day, cement is a commodity and globally commodity producers never get valuations higher than 20-25x. Besides, cement volumes are growing in low single digits in India and is projected to remain like that in the foreseeable future," says G Chokkalingam, chief executive officer, Equinomics Research & Advisory.

Bulls are, however, betting on a demand revival in the country on good monsoon and spending push by the government. "Some of the cement stocks have become expensive but overall, the industry is likely to report much better volume growth, revenues and profitability in current financial year than the past few years. We remain positive on the sector," says a cement analyst with a brokerage house on condition of anonymity.

Others have turned cautious. "Cement stocks have outperformed the BSE Sensex by a wide margin over the lows clocked in February this year, taking valuation bands to the upper quartile. At these valuations, clearly, there is a risk of short-term underperformance," wrote Manish Saxena of Edelweiss Securities in a recent report on the sector.