InvestorQ : Is it true that investors are taking a better view on cement valuations now? Is cement still not a commodity, then why is it getting such high valuations?
Arusha Ray made post

Is it true that investors are taking a better view on cement valuations now? Is cement still not a commodity, then why is it getting such high valuations?

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3 months ago
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There is a very interest aspect of cement companies that has been noticed in the last 30 years that cement companies do really well when the pricing power turns in the hands of the producer. That way they are able to pass on the input spike. Now, you would have noted that the one thing that hit cement companies in last one year was the sharp spike in input costs. In fact, the input cost spike has been almost across the board, especially in fuels.

Fuel accounts for nearly 15% of the cost of cement manufacture and if you add the downstream impact, it is a lot more. In the last one year, cost of diesel is up by 35% in line with global crude prices. Petcoke, an important input for cement, has seen prices increases of 60-70% in one year. This has been true of coal too. Apart from these clear cost-push factors coming from input prices, there has also been a spike in freight costs.

Now, it must be remembered that the movement of cement is an expensive affair and higher fuel costs only add to the problem, as it spikes the transport cost of cement substantially and almost changes the economics of cement manufacture and supply. The ability to pass on input costs has been a major boost for cement stocks. However, it is not clear if this trend will continue and so the future price moves will depend on that.

But, let me come back to the more important aspect of bargaining power of the producer. You can possibly argue that if input costs are passed on, net benefit to the cement manufacturer is limited. But you miss out on an important aspect of the cement industry. Historically, cement companies have done well in valuation terms if and only if bargaining power of pricing has shifted from the consumer to the producer.

That has been the trend in the last 35 years and unlikely to change. That is the time, cement companies have given the best shareholder returns. After a very long gap, that bargaining and pricing power looks to be returning to cement. That is making cement an interesting proposition.

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