Andhra Cements Limited (NSEI:ANDHRACEMT), a INR₹3.57B small-cap, operates in the basic materials industry, which can be affected by shifts in the housing market, as many produced raw materials are components of construction projects. Basic material analysts are forecasting for the entire industry, a strong double-digit growth of 29.51% in the upcoming year , and an enormous growth of 80.35% over the next couple of years. This rate is larger than the growth rate of the Indian stock market as a whole. In this article, I’ll take you through the sector growth expectations, as well as evaluate whether Andhra Cements is lagging or leading in the industry. Check out our latest analysis for Andhra Cements
What’s the catalyst for Andhra Cements’s sector growth?
Altogether the basic materials sector seems like it has reached maturity in its life cycle. Companies appear to be vastly competitive and consolidation seems to be a inevitable. However, the industry is still facing many emerging trends including the reduction of waste, raw material inflation, and innovation in global supply chain management. In the previous year, the industry saw growth in the teens, beating the Indian market growth of 12.80%. Andhra Cements lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Andhra Cements may be trading cheaper than its peers.
Is Andhra Cements and the sector relatively cheap?
Construction materials companies are typically trading at a PE of 31x, in-line with the Indian stock market PE of 27x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 10.00% on equities compared to the market’s 9.83%. Since Andhra Cements’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Andhra Cements’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Andhra Cements recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Andhra Cements as part of your portfolio. However, if you’re relatively concentrated in construction material, you may want to value Andhra Cements based on its cash flows to determine if it is overpriced based on its current growth outlook.