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Why regional mid-sized cement players may give better returns

Investors intending to take exposure to cement sector may co..

Investors intending to take exposure to cement sector may consider investing in regional midsized companies. There are two key reasons why mid-sized cement companies look attractive. One, the average valuation of mid-sized companies, such as J K Lakshmi Cement, J K Cement, India Cement, Orient Cement, The Ramco Cements and Dalmia Bharat, is quite attractive in comparison with large-sized companies. For FY19 estimated earnings, the average EV/EBIDTA of aforementioned mid-sized companies is 6.5. As opposed to this, large-sized cement players are trading at EV/EBIDTA of 9.6 for FY20's estimated earnings. This makes mid-sized companies almost 48 per cent less expensive than large-sized companies.

Besides, analysts and dealers point out that that revival in demand for cement is expected to take place in select regions rather than pan-India. This is reflected in the trend of cement prices across regions. Despite high pet coke prices and lack of availability of sand, cement prices have increased in the western and the southern regions, while in central, north and eastern regions, prices have been flat or have declined. In regions where prices have been rangebound or increased, low-cost housing and government-sponsored infrastructure projects are fuelling cement demand. To a certain extent, these factors make business situation better for regional mid-sized cement companies.

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