Dalmia Bharat: Debt repayment, rising market share support high valuations

The Dalmia Bharat stock’s valuation is lower than that of UltraTech Cement Ltd and Shree Cement Ltd, but higher than other listed cement firms


Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Cement maker Dalmia Bharat Ltd is trading at a one-year forward price-to-earnings multiple of around 32 times. The stock’s valuation is lower than that of UltraTech Cement Ltd and Shree Cement Ltd, but higher than other listed cement firms. Dalmia Bharat is the fifth largest cement company by market capitalization and fourth largest in terms of capacity. On a year-to-date basis, the stock has rallied 40% and currently trades at around Rs1,900. But in spite of this sharp run-up, some brokerage firms say there is more steam left in the stock.

Let’s find out why.

In the December quarter, Dalmia Bharat’s cement volumes grew 20% year-on-year to 3.56 million tonnes, largely driven by the ramp-up of new capacity at its Belgaum plant in the south that started commercial production in the fourth quarter of fiscal year 2016. Realizations fell year-on-year, hurt by weak cement prices in the east. The company has very strong presence in both these regions. At the operating level, its margin improved by 56 basis points to 24.2% year-on-year mainly because of cost efficiency measures such as using alternative fuels to offset the impact of higher coal and petroleum coke prices.

Going by the earnings of cement makers for the December quarter, the impact of demonetization on volumes has not been as severe as anticipated earlier. Also, the Street was already aware that south-based firms would be least hit. And other cement firms too took steps similar to Dalmia Bharat to mitigate the adverse effect of surging input costs on margins.

So what’s so special about Dalmia Bharat and why is it trading at a steep valuation? The stock enjoys a premium over others courtesy two factors; deleveraging of its balance sheet and rising market share.

In a post-earnings conference call, the management said it has repaid Rs600 crore debt in the first nine months of the current fiscal year and that its outstanding net debt is Rs5,700 crore. The company will continue to focus on deleveraging over the next few years. For the current quarter, maintenance capex is likely to be Rs45-50 crore and FY18 capex would be at Rs100 crore, the management added.

“Given moderating capex, we expect net debt/EBITDA to improve to less than 3x by FY18. Deployment of incremental free cash generation toward debt reduction would lead the next phase of re-rating,” Motilal Oswal Securities Ltd said in a report. Sharing a similar view, IIFL Institutional Equities expects the company to continue generating one of the highest Ebitda/tonne in the industry. Ebitda is short for earnings before interest, taxes, depreciation and amortization.

Meanwhile, Dalmia Bharat’s market share in the south jumped 120 basis points in the last one year to 7.7%, while that in the east remained flat at 15% and in the north-east, it jumped by 170 basis points year-on-year to 20.6%. The current growth rate will continue for the next few quarters, said an Edelweiss Securities Ltd report.

These broking firms see more than 10% upside in the company’s stock from current levels, with a 12-month target.

To conclude, while debt repayment and increasing market share would drive Dalmia Bharat’s earnings growth, a surge in energy costs remains a risk and could restrict further expansion in margins, thus limiting upside in the stock.

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