Cement companies are taking the place of fast-moving consumer goods (FMCG) stocks on Dalal Street. Historically, FMCG companies have been the most expensive stocks in terms of price-to-earnings (P-E) multiples because of their sturdy financials across business cycles. Now, that is changing.

Consider this: UltraTech, India’s largest cement maker, is trading at 35 times its net profit in 2013-14 and is more expensive than ITC and Hindustan Unilever, two of the country’s top consumer goods firms. At its current stock price, ITC is trading at 31 times its earnings in the past 12 months, while HUL is available at 34.5 times its trailing earnings.

Other top cement makers are not cheap, either. Holcim-owned ACC and Ambuja are trading at 27 times their trailing earnings and Shree Cement at 32 times. Stocks of all these cement makers have hit new life-time highs in the recent rally and risen 30-60 per cent in the past three months. FMCG companies, on other hand, haven’t participated in the current rally and both ITC and HUL scrips are trading below their previous highs.

Experts said these were unusually high valuations for commodity companies with cyclical earnings. “Cement is a cyclical industry with a high degree of demand and earnings volatility. These stocks usually trade in low double-digit earnings multiples. FMCG companies, by comparison, show stable earnings across business cycles and command a premium valuation for their earnings stability and certainty,” says G Chokkalingam, founder of Equinomics Research & Advisory.

For more visit: Business Standard

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