Classroom | Key parameters to consider when investing in cement companies (Equity: Part 19)

Part 19 of the Moneycontrol Classroom deals with key parameters you should consider when investing in cement companies.

Region-wise demand-supply dynamics: While India is one market, transporting cement across long distances is not feasible. Which region a company is located in, the capacity situation in that region and whether the leading company in that region is rational about pricing makes a big difference to the profitability of companies in that region.

Energy and freight: These are two main costs incurred by cement companies because of the nature of the industry. The ability of companies to find cheap sources of energy, including captive power facilities, and being close to their consuming markets can be a differentiating factor.

Volumes - Quantity of production. This differs from sales revenue which depends upon on price fluctuations. While volume growth is important, also important is to see if it is accompanied by demand growth, otherwise it could lead to pressure on realizations.

Realizations - Average price received from sale, usually per tonne.

Operating Profits - Difference between realization and total manufacturing costs, usually measured on a per tonne basis. Comparing this across companies should reveal which are the better performing ones and examining their financials usually reveals what the contributing factors are.

Valuation – Enterprise Value (EV) per ton and EV/EBITDA – the former shows replacement cost based on cement capacity, while the latter measures market value based on operating profits.

End-use sector position: The main sectors using cement are construction, infrastructure and the real estate sector. The state of the real estate sector, especially new launches, gives an idea of how cement demand is shaping up in a region. The order book of construction companies and projects data should also give an idea of how investment demand is shaping up, and in turn how that could affect cement demand.

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