How Cement Stocks Have Lofty Valuations Despite Frequent Earnings Cuts?

The cement sector may be heading into rough weather. Market participants expect fresh cost pressures to weigh on margins, even as demand remains tepid. While early monsoons have lifted spirits for the fast moving consumer goods and agriculture sectors, they could spell trouble for cement makers by dampening construction activity, amplifying delays in recovery in an already muted demand environment.

To make matters worse, companies are struggling to sustain price hikes. Any increase is quickly rolled back, making it difficult to pass on rising input and fuel costs to consumers. As a result, margin pressures persist.

The cement sector has seen large downgrades to consensus earnings before interest, tax, depreciation and amortisation, and earnings per share estimates every year for the past 10 years, Kotak Institutional Equities said in a report. “Such a dismal track-record should prompt introspection among the analyst community.”

The consensus EBITDA and EPS estimates for the financial year ended March 2025, were cut by 5-45% and 31-96%, respectively, for nine cement stocks, Kotak said. Estimates for EBITDA for the preceding three years were reduced in the range 4-54%.

Nuvoco Vistas and The Ramco Cements witnessed the steepest cut in EBITDA and EPS estimates for FY25, according to the report.

Despite persistent risk of downgrades, the multiples of cement players have stuck at elevated levels for an elongated period of time. The eight cement stocks—ACC, Ambuja Cements, Dalmia Bharat, JK Cement, Nuvoco Vistas Corp, Shree Cement, The Ramco Cements, and UltraTech Cement command lofty valuations of 20-77 times estimated EPS for FY26.

Despite a decade of earnings downgrades, these cement stocks continue to trade at rich valuations, sounding alarms over whether it’s time for a reality check.

Dark Clouds Ahead? What Analysts See Coming

Earnings of cement players are likely to take a blow due to the lagged impact of elevated petcoke prices and high limestone royalty. To that effect, Elara Capital anticipates cement spread to near its short-term peak.

Apart from this, early monsoon, extreme heat conditions and the ongoing marriage season are aggravating worries for cement-makers, mostly due to the negative impact they have on labour activity.

Consequently, cement offtake in May slipped below expectations, following softer demand in April.  While green shoots of modest demand recovery did come in sight across a few markets, the early onset of monsoon in select areas, such as Kerala, Karnataka, Maharashtra, and Delhi-NCR, further dampened sentiments, Elara Capital said.

The sector remains in the doldrums on the cost front as well. After a significant increase in April, cement prices have taken a breather in May, Elara Capital said. Further attempts of raising prices in early May remained unsuccessful and most hikes were rolled back, the brokerage firm said. Except for South India, most regions witnessed either stable prices or a modest increase, and hence all-India average retail cement price rose by a mere Rs 2 per 50kg bag month-on-month to a level, which also happens to be the highest level since December 2023, Elara Capital said.

Sky-High Valuations, Grounded Reality

While cement stocks are priced like high-growth stars, all that they offer is sluggish demand, rising costs and subpar returns. Not to forget, the decade long history of downgrades.

Now, with such flaming hot valuations and no visible pickup in private capex in sight, it seems like market participants are hopping on a narrative sentiment rather than fundamental proofs.

Reasonable valuation models, such as discounted cash flow, would suggest that an industry with low asset efficiency and only modest returns on equity should not command high premiums, Kotak explained in its report.

Asset turnover ratio, which is metric to measure financial efficiency and tells how well a company uses its assets to generate sales, remains very low for the cement companies. Their average fixed asset turnover ratio for the eight cement stocks for the last 10 years was 1, Kotak added.

Adding on, the firm remarked that it views the reliance on outdated historical valuation multiples with a problematic lens. There's also overdependence on management guidance, the brokerage firm said, adding that companies themselves have limited visibility due to the uncertain environment.

Philip Capital, meanwhile, has a cautiously optimistic stance. It sees potential in India’s cement sector, citing macroeconomic momentum, sector-specific trends, and structural tailwinds. The brokerage assigned an ‘accumulate’ rating based on technical indicators, but advised investors to focus on fundamentally strong companies.