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Valuations Stretched for Indian Cement Companies?
Sep 7, 2016

Commodity stocks like cement, are proxy for recovery in housing and infrastructure sectors. And good monsoons have boosted probability of recovery in earnings, with superior growth prospects of Indian cement companies. This has helped companies to command premium valuations, so much that they can buy out their Chinese counterparts for all stock deals. This is despite the fact that the Chinese companies are much bigger in size as compared to the Indian firms. The top 5 cement companies of India is less than third of Chinese Industry combined revenues.

And if one were to go by the numbers as reported by Business Standard, the valuations of the Indian cement companies are obscenely expensive.

Globally, cement makers are valued at 26x their latest annual earnings and 1.6x times their latest book value. The corresponding ratio for Chinese players is 23x and 0.95x respectively. On the other hand, Indian cement makers are valued at 48 times their net profit in the last financial year.

There is no denying the performance of the cement companies have shown improvement off late. However, the current valuations certainly warrant a caution. For readers who are looking forward to commit their money in cement stocks should factor in realistic growth expectations. One would do better to look into long term growth for every cement company. And then judge whether the valuations are reasonable enough. If not, then it is best to stay away from the sector.

Data Source: Business Standard, Bloomberg

This Chart Of The Day was published in The 5 Minute WrapUp - Buys High and Not Low- That's the Indian Investor for You

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