Spotlight back on cement firms' valuations

With Holcim acquiring a 14.8% stake in Gujarat Ambuja last Monday, the spotlight is back on the valuations of cement companies. Holcim has paid an enterprise value of about $185 per tonne (excluding the Rs 15 per share non-compete value to promoters), which is much higher than the $107 per tonne it paid a year ago for acquiring a stake in ACC via Ambuja Cement India.

There are two reasons for such a large difference in the valuations of the two companies. First, Gujarat Ambuja is a far more efficient player and hence merits a higher valuation than ACC. Second, the cement industry is performing better than in the past year.

The high price, however, did not enthuse the market as the Gujarat Ambuja stock fell 8% over the previous week as against the Sensex dropping 1.3%. The fall could be attributed to the fact that the higher valuation was already factored in its stock price and the absence of a premium in the open offer to the market price.

The market has been bullish on cement stocks in the recent past as the industry is expected to do very well for the next two-three years. After Holcim's stake buy, some other cement companies, too, have attracted buying interest with large volumes.

The big gainers in the past week: Dalmia Cements (up 7%), India Cement (15.8%) ACC (2.7%), JK Lakshmi (10.7%) and Prism (10.4%).

Market players are obviously building up expectations that Holcim, or some of its international competitors, will be eyeing other cement companies with reasonably large capacities.