Dalmia Bharat Ltd is in a tight spot, thanks to the steep correction in cement prices recently in eastern and southern regions. While prices fell across markets, the excess capacity in these two regions meant a sharper fall relative to the all-India average.
Given Dalmia’s significant exposure in these regions, muted price trends have raised concerns about its performance and profitability outlook. This resulted in earnings declines.
Motilal Oswal Financial Services cut the company’s Ebitda estimates for FY24, FY25 and FY26 by 4%, 8% and 8%, respectively due to weak pricing.
Interestingly, the lowered price trajectory overshadowed a host of positives that may aid Dalmia’s long-term growth. For example, its organic expansion plans are underway. It will add clinker and cement capacities of 4.9 million tonnes per annum (mtpa) each through a mix of greenfield and brownfield expansions by FY25. The company plans to increase cement capacity to about 49.5 mt in FY26 from 44.6 mt now. Its long-term capacity target reaches 75 mtpa and 110-130 mtpa by FY27 and FY31, respectively.
To reduce the concentration risk, Dalmia is diversifying into newer regions. Currently, it has a vast presence in eastern and southern India and intends to expand to west, center and north. Timely capacity additions are critical amid continued stiff competition and listed cement makers’ focus on market share.
Despite its robust expansion drive, leverage remained low. Management has indicated that its growth plans will match demand trends across its operating regions. The calibrated approach will help maintain a balance between capacity additions and keeping debt under control.
“Our estimates indicate that net debt will hover around ₹3,000 crore over the next three years (FY24E-FY26E) and debt/Ebitda to remain at ~1x despite capacity additions indicating no major balance sheet stress for the company,” said a BoB Capital Markets report dated March 28. Net debt was at ₹431 crore, and net debt-to-Ebitda ratio was at 0.16x as of December 2023.
In addition, Dalmia remains committed to cost-saving initiatives by investing in alternative energy sources, renewable energy, and waste heat recovery systems. These measures are expected to gradually translate into better margins. Also, the company has divested its non-core assets so that it can focus entirely on the cement making business.
While all these steps are in the right direction, the stock’s performance depends on volume growth and realizations. The good part is that Dalmia is poised to profit from its earlier capacity additions. Motilal Oswal estimates that Dalmia will report 12% YoY volume growth in Q4FY24 helped by marketing gains. But realizations will likely remain a pain point. In comparison, pan-India-focused peers such as Ambuja Cements Ltd, ACC Ltd and UltraTech Cement Ltd are better placed.
Further, the delay in the acquisition of the cement assets of Jaiprakash Associates, announced in December 2022, may soon be hanging over the stock. The approval process appears to be taking longer than anticipated, delaying the potential benefits of the deal.
Meanwhile, cement prices are expected to increase in April. It would be a breather for investors if this came true. Due to upcoming elections, cement demand in Q1FY25 is expected to remain muted. So, continuation of prices, if any, remains to be seen.
Dalmia shares have fallen 14% year-to-date in 2024. The stock trades at FY25 EV / Ebitda of around 11 times, which is a discount to larger peers UltraTech and Ambuja, which trade at multiples of more than 18 times. EV is enterprise value. As things stand, there is little to suggest that the rating gap should narrow.