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New UserLarge cement companies at a high, should not deter investors
22 Sep 2016
Largesized cement companies are trading at decadehigh valuations but this
should not bother investors, said experts. Largesized cement companies such as UltraTech
Cement, ACC, Ambuja Cement and Shree Cement are trading in EVEBIDTA range of 1216
times for FY18 which is quite high when compared with past 10year average of 710. Given
the upcycle phase of the cement industry , the valuations of these companies are expected to
expand.
Typically, cement demand from lowest point to peak in a cycle lasts for seven or eight years.
Cement demand has been
growing 45% and allIndia
capacity utilisation has been
67%. In the past demand cycle
(FY0107), capacity utilisation was close to 80% at the end of the cycle. Since
the industry is in an upward cycle, demand and capacity utilisation are
expected to improve. In an upcycle, valuation multiples expand and large
companies trade significantly higher than their longterm valuation average.
Given this, from the point of view of the next four to five years, investors should continue to hold on to their investments in largesized
companies. In the next four to five years, cement demand is expected to grow in the range of 78% while capacity utilisation is expected to
improve to 80% by FY20. It is this cycle investors need to play to cash in on the earnings growth story of these largesized companies.
Shree Cement and UltraTech Cement are the ones which are expected to do better than their peers in the scenario of rising demand.On
the valuation front, considering FY18 earnings estimates, the stock of UltraTech Cement and Shree Cement are trading at EV EBITDA of
15.3 and 17, respectively. They are trading at a premium to their peers, but this premium is justified given their diversified geographical
presence, timely expansion and relatively lower cost of cement production.
Source:ET