A H Ghani
MUMBAI: The latest info from the bourses is that cement stocks with high price-earning multiples (P/Es) are seen as better investment stories by informed investors.
Agreed, average P/E multiples for the cement sector are somewhere between 17 and 22. It is 22 for north Indian cement stocks and 17 for south Indian ones. Then, why do you find cement stocks with eyebrow-raising P/Es of 40 and 50? Shree Cement, Mysore Cement and Saurashtra Cement are cases in point.
Generally, stocks of cement companies that have just emerged out of the red have low earnings per share (EPS) and thus high P/Es. Since these stocks are traded on a forward earnings basis, investment interest in them is high. So, pros are not deterred by such high P/Es. Says J Radhakrishnan, cement sector analyst with India Infoline: “The converse too is true. A low P/E does not mean they are good buys.” For, their future earnings must have been fully discounted.
So, next time when you come across a cement stock with a high P/E, see whether the company has just emerged out of the red. If that is not the case, the company must be enjoying a normal P/E. Now you know why ACC and Gujarat Ambuja Cement are quoted around a modest 22. Clearly, they have a normal stream of earnings, which are fully discounted.
The moral of the story: look at what a company is going to earn in the coming days, high or low P/Es should not matter. The past is not material, the future is. Consider the case of Mangalam Cement, whose P/E was high a couple of years ago. Now, its earnings have normalised and thus its P/E is a modest 9.1.
An acquisition story is an exception to this theory. For instance, if Mysore Cement is being traded at a super high P/E of 52.4, it is because the market is expecting the German cement major Heidelberg to pay other shareholders what it shelled out for acquiring SK Birla’s stake.
