Home / Companies / News / Near-term gains unlikely for cement stocks due to high valuations
Near-term gains unlikely for cement stocks due to high valuations
The muted cement demand has continued even in June on the back of fewer government projects and labour and water shortage in a few states/regions, said analysts
A recovery in prices in the past couple of months has provided strong support to cement stocks. The share prices of select cement companies have gained 12-34 per cent in 2019 so far, outpacing an 8 per cent rise in the Sensex.
However, concerns over realisations and high valuations could limit gains in the near term. Channel checks by some research firms indicate that the pan-Indian average cement prices have fallen 1-2 per cent month-on-month in June. According to a CLSA report, higher price discounts and rebates were observed in mid-May amid weaker demand. This could partly offset realisation benefits in the June quarter, after a sharp recovery in cement prices during April-May.
The Department of Industrial Policy and Promotion data shows cement volumes inched up by 1 per cent year-on-year in April.
The muted cement demand has continued even in June on the back of fewer government projects and labour and water shortage in a few states/regions, said analysts.
Besides, September being a seasonally weak quarter for construction activities due to the monsoon, it could further accumulate realisation pressure as cement prices tend to remain soft.
Also, the government’s recent intervention to lower cement prices is another overhang.
Flat diesel and international petroleum coke prices, a stable rupee, and higher axel load norms leading to lower freight cost should support the operating margin. Key cement players are estimated to witness a 10-33 per cent rise in their Ebitda (earnings before interest, tax, depreciation and amortisation) per tonne in FY20. But, this has already been factored into the stock prices, said analysts.
Another factor limiting stock performance is rich valuation. Many large players such as UltraTech Cement, ACC, and Shree Cement are currently trading at 12-15 times FY21 estimated enterprise value to Ebitda — an around 20 per cent premium to their historical five-year average valuation.
However, an expected sharp revival in infrastructure and construction activities after the monsoon, along with a stable government, improves the medium- to long-term outlook for cement companies. Thus, any sharp fall in stock prices would be an opportunity for long-term investors.
To read the full story, Subscribe Now at just Rs 249 a month