Cement stocks valuations as high as top tier IT, banking stocks; here’s what is fueling optimism

Cement stocks are trading at a premium, with valuations as high as frontline IT and banking shares, despite muted growth in sales volumes in the last few years. This high price of cement stocks — at par with IT and banking stocks — is on the back of optimism among market participants that the cement sector volumes will grow between FY 19 and FY 21, said a research report.

Cement stocks trade at a premium to IT stocks on FY 2021E P/E and EV/EBITDA basis, and to private banks on FY 2021E P/B basis, said Kotak Institutional Equities in the report. However, it also cautioned investors against the disruptions which may hit cement companies’ profitability with the new economic reforms going forward after the next government comes to power.

Last week, there was a rally in cement stocks when India’s largest cement maker UltraTech Cement Ltd posted robust quarterly results. Going by the financials of top cement companies between 2012-18, the EBITDA of ACC, UltraTech Cement, Ambuja Cements and Shree Cement has not grown in the same measure as IT and banking stocks. However, Kotak expects a strong acceleration in  the profitability of the tier-1 cement manufacturing companies between FY 19 and FY 21.

UltraTech Cement posted stellar financial results last week beating street expectations by posting Rs 1014 crore in net profit for Jan-Mar 2019, aided by strong volume growth. Its operating margins also improved significantly year-on-year to 21% by more than 100 basis points. Another cement maker ACC also reported 38% year-on-year growth in its consolidated earnings at Rs 346 crore.

The Kotak report said the market is confident about volume growth on the back of India’s favorable demographics, consumer leveraging and financialisation. However, it added that there is no surety whether the current high profitability would be maintained given the disruption in sectors due to changes in regulatory and policy framework and other technological factors.

The brokerage firm noted that while the negatives of disruption will reflect in the multiples of stocks over a period of next 2-3 years given their expensive valuations, the actual impact of disruption on earnings will likely happen between 3-15 years depending on the sector.

Ahead of the general election results, Kotak says though the market participants are expecting  meaningful economic reforms form the next government but the next set of reforms will only expedite the forces of disruption due to changes in regulatory and policy framework.