Dalmia Bharat: strong volume growth, restructuring support high valuations
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Shares of south India-based cement maker Dalmia Bharat Ltd have corrected 25% after the 8 November demonetisation of high-value banknotes by the government. This is more or less in line with the 26% fall in the share price of India Cements Ltd, but far higher than the 9% decline in Ramco Cements Ltd. Both India Cements and Ramco are also based in the south.
The cash crunch caused by demonetisation of Rs1,000 and Rs500 notes is expected to result in lower sales volumes, and delay a much-anticipated recovery in demand. Besides, Dalmia Bharat traded at high valuations, and the steep fall in its shares is understandable.
But note that despite the sharp fall, its one-year forward price-to-earnings multiple still stands at over 35 times, much higher than that of its peers. The premium that Dalmia Bharat enjoys could be attributed to two factors. First, the company reported strong growth in the September quarter, with volumes improving to 3.4 million tonnes as it gained market share in the southern and north-eastern markets. “Total sales volume improved 20% y-o-y for the quarter which is approximately five times the industry’s cement demand growth. We have maintained our growth higher than the market. Our exports have improved by three times,” Dalmia Bharat said in a statement.
The company ventured into the Uttar Pradesh and Madhya Pradesh markets in the June quarter of fiscal year 2017 and expects significant contribution from these new markets in the coming quarters. Consolidated net profit jumped by almost 150% year-on-year to Rs31.10 crore and revenue rose nearly 18% to Rs1,908 crore, aided by better-than-expected price realization. But the jump in profits was expected.
While power/fuel costs fell from a year ago, they increased sequentially, which was on expected lines. Other expenses rose sequentially, mainly due to the commissioning of new capacity at Belgaum (Karnataka) and Umrangso (Assam), and higher advertising expenses due to the launch of a new brand—Dalmia DSP—in the southern markets.
Another factor that is likely to keep the stock on market participants’ radar is its proposed merger with OCL India Ltd. This merger is part of a simplification of the group’s holding structure, an exercise Dalmia Bharat initiated in early 2016. Under the proposed merger, Dalmia Bharat shareholders will receive two shares of OCL India for every share held in the company. This move is expected to unlock synergies, result in better cash flows and reduce administrative costs.
“Management’s focus on one listed entity over past 12 months has given investors more comfort in the group structure. Concerns about high gearing (net debt/EBITDA of 4x) should abate with steady asset sweating and disciplined capital allocation. Due to moderating capex, we expect net debt/EBITDA to improve to less than 3x by FY18,” Motilal Oswal Securities Ltd said in a report. Ebitda is short for earnings before interest, taxes, depreciation and amortization.