Generally not valued on a PE basis ‘coz in cyclical businesses earning swings can be very wide hence looking at EPS wouldn’t 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 don’t 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 firm’s 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 wouldn’t 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 can’t 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.

Today one of the private equity fund has recommended this stock. So this stock was zoomed to 20% circuit. This is my assumption.

Disc: not invested.

The plan now is to get the plant started in January 2016. It has been delayed due to the earthquake in Nepal.

Yes agree with you. I have read this somewhere. Can you help me with the logic why cement companies are not valued basis PE.

Wim Plast reported pretty decent numbers. Volumes were up slightly. Revenues were down because of steep fall in input prices.
Ebitda margins were up 400bps YoY.

Healthy set of numbers. Stable.

Disc- Holding.

Cheers everyone.

Neil