Yes agree with you. I have read this somewhere. Can you help me with the logic why cement companies are not valued basis PE.
Generally not valued on a PE basis 'coz in cyclical businesses earning swings can be very wide hence looking at EPS wouldnât make much sense and EPS determines PE.
EV/tonne 'coz it is compared with what it would take to set up a new capacity on a per tonne basis or say the replacement cost/tonne. Normally it is said that around 130$/tonne is the cost of setting up a new cement plant. EV can be assumed to be similar to a takeover price and its like, if you have a company whose takeover price is much more attractive to the cost of setting up a new plant then that makes the company attractive, right. Hence a comparison on an EV/tonne basis. Other way to look at it is that if your earnings from setting up a new plant are not enough to break-even or not enough to give you a decent return on your capital then again its like a company that trades much below the cost of setting up a new plant is attractive. It is like if you consider yourself as another cement company then what would you be willing to pay to buy this company, it is then that EV comes into picture and hence EV is important be it in EV/tonne or EV/EBITDA.
I spoke about discounting for small capacity companies 'coz big companies would always trade at a premium given their brand name,size, economics of scale 'coz of size etc.,. Hence reverse of this for small companies would be discounting for small companies 'coz they donât have above features of brand name, size , etc.,.
During good times companies start trading at close to EV/tonne to set up a new plant whereas during downturns they start trading much lower and hence become attractive (this again depends upon whether company is small or large as I said above).
EV/EBITDA can also be considered in conjunction with EV/tonne 'coz as I said PE is driven by EPS and also 'coz PE values a firmâs equity as that is what investors are willing to pay for every ruppee a company earns. PE also may not be the best method in this case 'coz you are kind of valuing the business here and a company may have high debt on its books and might still be attractive but PE wouldnât paint the right picture in terms of its attractiveness 'coz PE would be elevated as a result of suppressed earnings due to higher finance costs. OR say you also canât value a loss making company on the basis of PE as there are no earnings. Hence EV/Ebitda is a better metric if you want to value a business as it discards such variations in capital structure or any other variations due to accounting policies etc.,. as well.
EV/EBITDA is nothing but the number of years in which you will realise your cost of acquisition of the business. Hence it kind of values the entire Firm and not just the equity as in the case of PE.
Cement companies etc.,. normally carry more debt on their balance sheets or say the business is very capital intensive and hence metric like EV/EBITDA is used as it takes into account the entire capital structure and evens out disparities due to same.
Not sure if I have answered your question correctly as I also have a limited understanding.
Regards.
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Hey thanks a lotâŚIt was really helpfulâŚI got the logicâŚ
@hrfacebuk Nice explanation⌠Can you give us idea what should be reasonable EV/EBITDA value to invest in regional cement company like deccan??
(childish question to ask but trying to learn valuation matrix!!)
$ 80-90/tonne might be a good range.
But entirely depend on the context.
Hi Alekh,
At a high level, ultimately everybody is trying to come at a decision whether to buy a particular stock or not. But as I said in my post above that it is a mixture of all the factors and not just EV/Tonne or EV/EBITDA in isolation and hence wouldnât say what is a good EV/EBITDA or EV/Tonne.
For e.g. EV/Tonne of $25 or $30/tonne is very cheap but if there is huge oversupply due to massive existing capacities and there is no visibility of demand improving for another 2 odd years or more then buying this cheap also may not help as opportunity cost lost would be a lot, etc,. (I think you get the point 
)
That said, I personally feel that Deccan and NCL are still not expensive and decently priced (donât want to use enticing adjectives ), as at a high level, even if I take todayâs mkt cap of approx 500 Crs. for Deccan and their FY15 debt of 159 Crs and Cash balance of 26 Crs. then their EV works out to be (500+159-26) = 633 Crs.
Deccanâs capacity is 2.2 m tonnes. Therefore EV/Tonne will be (633 Crs/2.2m tonnes) = Rs 2877. Therefore in $ terms at exchange rate of Rs. 66 per $ this would work out to be $ 44.
Which ($ 44) I donât think is expensive for a company:
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Which has demand visibility in the region ( demand due to constructions due to Andhra/Telangana state formations, govt. spending on infra will start showing at ground level as well; Not much real estate demand but if that picks up then wud be more better).
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Doesnât have major capacity additions coming up in the region.
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Has seen cement prices being stable or going up in the region (http://www.deccanchronicle.com/151123/nation-current-affairs/article/cement-price-rs-70-bag). Note: I personally take such news paper articles with pinch of salt and better way is to verify the cement prices (or trends) on the ground as it is not much difficult to do so.
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Has seen margins expanding.
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Has been consistently reducing debt.
But if one says that in the light of all positive factors $ 44 is cheap then what is it cheap in comparison to? Obviously it is cheap in comparison to replacement cost per tonne which maybe around $ 120 -130/ tonne. But personally for small cement players to be on the safe side I would compare it with say $ 80-90 per tonne.
At a personal level there are many things which one considers to decide when to sell etc, which is difficult to put here. Say for example I am saying and feel that it is not expensive and decently priced but as a DISCLOSURE - I sold 1/3rd of my holdings in NCL today at 160+, the reason was not that I feel it is expensive but sold it 'coz wanted to top slice my portfolio, as I had bought NCL at lower levels and it had reached 15% of my portfolio and I wouldnât be comfortable with a small cement company becoming 15% of my portfolio.
Also at the same time I would like to remain in Cement as a sector right now (if I continue to feel favourable and improving demand scenario), but at a certain point I will move from NCL to a bigger cement player (say India cements with 15+ m tonnes of capacity). Buying NCL (or a view on Deccan etc), was a decision I took 'coz I felt that undervaluation was a lot in these companies with certain factors improving (as stated above. Please note that I might have missed stating few other factors that I might have considered for e.g. technically also I felt stocks had bottomed out and most of the selling had been absorbed or EBITDA/tonne & EV/EBITDA or receivables cycle & working capital cycle, etc,. hence donât consider the factors I stated as the sole basis for my decision making as I might have missed more than few).
Hence, in short, one needs to take his own call depending upon individualâs thought process.
Also please note that I think there is a risk of some kind of government action trying to reign in cement prices. Please be cautious of this factor apart from associated risk factors as these are cement companies with very small capacities.
Disclaimer - I am a novice & an amateur investor, hence please discount/ignore my views. Above are just my views and not a buy/sell recommendation. The calculations/numbers etc, are back of the envelope calculations and hence can be way off the mark as compared to actuals; therefore please do your own due diligence.
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Thank you @hrfacebuk for replying so patiently. My thesis of investment in deccan is visibility of demand in regions of andhra and telangana, but being new in capital market was not sure about valuations front of cement manufacturer. Got better understanding now with your help. Thanx. 
Thanks to @thestocklady for starting this thread with wonderful debt repayment thesis called out and helping the world participate.
In terms of future potential: They have 100 cr+ debt repayment capacity + strengthening prices + debt free status likely this yearâŚSo Iâd say there is more to go
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2016 results are out. But I am unable to find out how many million MT in total were sold. This would give us idea about capacity utilization as well as EBITDA per ton.
Utilization was around 63 % for the March 2016 Quarter. And for Full year 2015-16, it was 59%.
MC interview with CFO suggest sales and EBITDA may remain same in FY17
Straight from the horseâs mouth. Had written to them and they replied.
Ground Report. Management is successful in snubbing the local unions !
Is there a way to find out any planned shutdown for maintenance or any upgradation or change of existing sub units !
Anyone tracking this company privy to reason for fall in revenue in q1fy17 to 132cr compared to 159cr same quarter last year?
Any outlook on the company?
Thanks in advance.
Dear All, if DECCAN, SAGAR and NCL has a low EV/Ton, does that mean, high OPM? However if OPM are concerned the big guys like ULTRATECH, SHREE and DALMIA have reasonably good OPM. What is advantage we have if EV/Ton is low? Is it that the project cost is low?
Do anyone has done market review after demonetization and impact of it on cement realization in the month of Nov and dec? what are current prices in these regoins?
Prashant
The results were good YoY, but slightly subdued QoQ. Overall consistent results.
One important thing I read in their announcement and wish to share is the Beginning of operations of the railway siding linking the cement plant with the existing Vishnupuram Janpahad railway line and the first take was dispatched on 8 th February 2017.
This would surely be good news and they would save reasonably on their transportation costs.
Thanks for updating. Do you have any idea how much they can save on logistics cost with this railway line?
Last year their logistics cost was :
Freight Charges ( in lacs)
By road 9,944.99
By rail 2,435.52
Road was almost 14% of their topline.
Prashant
Q2 results are not so good.
YoY comparison - revenue down from 16032 to 13616, profit down from 1138 to 950 trade receivables are up from 1069 to 5849. Looks like AP consumption story is far away while raw material prices are shooting up.
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Ev/ tonne is what a buyer of business would pay per tonne of output. Like UltraTech payed around 7900cr for 11 mtpa of Binani installed capacity.
Deccan is way cheap on this metric available at 550cr for 2.3 mtpa.