India: Cement cos’ valuations scale new heights

India: Cement cos’ valuations scale new heights
Published: 07 September 2005

With cement prices reaching new heights, valuations of cement companies have scaled new peaks on the bourses. While large profitable companies such as Associated Cement Companies (ACC), Gujarat Ambuja and Shree Cement are now quoting over US$100 (Rs 4400)/t of their installed capacity, valuations of loss-laden companies such as Prism Cement are about to touch the US$100/t mark. Just a year ago, paying more than US$100/t to acquire a small regional player was considered a sin.

For a majority of the cement companies, the market-cap has more than doubled in the past year. In contrast, beginning September last, the 50-scrip NSE Nifty index grew by just around 50 per cent. A higher-than-expected valuation has put a brake on mergers and acquisitions in the industry.

“Hardening of the cement prices and larger-than-expected rally in cement scrips have shot up the price expectations of single plant promoters. They are asking more than what is justified by economic considerations,” says Gaurav Dalmia, vice president, Dalmia Cement (Bharat), whose group is actively trying to acquire single location plants in the South and East India. Having failed in the acquisition game, the Dalmia group is now expanding its capacity through brown-field expansion.

It’s the same story for the Andhra Pradesh-based Zuari Cement, which is scouting for an acquisition in South India. “At current valuations, it’s cheaper to set up a green field facility than acquire an existing single location plant,” says a senior official in Zuari Industries. The company is now implementing a 1.5Mt brown-field expansion in Andhra Pradesh.

According to industry executives, it costs Rs 500-550 crore (US$57-US$62/t to put up a modern cement plant with a capacity to produce 2MTa of cement. As against this, a similar-sized company like Prism Cement’s market valuation is now hovering at around Rs 800 crore, or close to Rs 4000 (US$95-98) /t of its installed capacity.

The prices to earning ratios (P/E) of many of the smaller companies are now quoting higher than their larger competitors. For instance, Shree Cement is quoting at a P/E of over 54, Madras Cement’s P/E is 31.5 and Prism Cement’s P/E has crossed 30. In contrast, ACC’s P/E is only 21.45 and that of Gujarat Ambuja is only 18.6. “The current valuations seem absurd given the fact that most of the single location plants are sitting on huge debts,” said a senior executive of ACC.