Analysts say the situation is quite extraordinary as cement companies have lagged IT services companies on all the major financial parameters over the past decade. “And we do not see any reason for this to change, given the nature of the two businesses,” said Kotak Institutional Equities’ Sanjeev Prasad.
On a 1-year forward P/E basis,
, , and Cements are commanding multiples of 28x, 41x, 34x and 24x, respectively. On the other hand, the figures of , , , and turned out to be lower at 18x, 24x, 26x, 16x and 17x.
Cement stocks have their inferior business models in terms of their financial returns, cash generation and cash return to shareholders. “On growth, the volumes of cement companies will probably grow in line with real GDP growth (5-7%) and prices will largely follow raw material changes, while the revenues of IT companies will likely grow at high-single or low-double digit growth rates,” he said.
The top 4 cement companies have had an average RoACE of 11% and an FCF-to-EBITDA ratio of 38%, while the top-5 IT services companies have had an average RoACE of 41% and an FCF-to-EBITDA ratio of 57% over FY2013-22.
Reflecting an anchoring bias problem on D-Street, Prasad said in a report that relying on historical multiples may be looking at things wrongly because the past multiples have little relevance in the valuation of a company/stock on first-principles basis.
“Cement companies’ multiples are lower on an ex ante basis compared to forward multiples on reported EBITDA/EPS, as earnings of cement companies eventually turn out to be lower than consensus estimates,” the report said.
What should investors do?
Amid a capex boom in India and rising hopes of a higher consolidation in the cement industry following the entry of Gautam Adani with the acquisition of ACC and Ambuja Cement, stocks in the sector have been rallying in the last few months.
On the other hand, IT stocks have been under pressure amid worries related to margins, new deal wins and growth outlook amid slowing down of the global economy.
Analysts say that while the near-term outlook of IT stocks is gloomy, the long term story is intact.
Despite being cautious on the pocket, market veteran Prashant Jain said one should never lose sight of the IT sector. “Over time, it creates a lot of wealth. I do not see any reason why it will not do well in the longer term, but the near term multiples appear a bit higher,” he said.
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