The tug of war between UltraTech Cement Ltd and Dalmia Bharat Ltd over the acquisition of Binani Cement Ltd has finally ended. Effective 20 November, Binani Cement is a wholly-owned subsidiary of UltraTech Cement, following a favourable Supreme Court ruling. For Dalmia Bharat, which has a significant presence in the southern and eastern markets, the acquisition would have given access to new markets in the north, especially in south Rajasthan.
Investors are also relieved that Dalmia Bharat didn’t stretch itself and pursue the deal far too aggressively. Its net debt-to-Ebitda stands at 1.97 times, using FY19 earnings estimates of JM Financial Institutional Securities Ltd.
Ebitda stands for earnings before interest, tax, depreciation and amortization.
In fact, analysts tracking the cement producer haven’t changed their stance or recommendation on the stock after the apex court’s decision. The Street had factored in a decision in UltraTech’s favour, said an analyst with a domestic brokerage firm.
But what next for Dalmia Bharat? Even before the Binani bid, it was already on an acquisition and capacity expansion spree. So, the market’s attention has now shifted back to developments on those fronts.
In the March quarter of FY18, the company had announced a capex of ₹ 5,000 crore for the next three years. This included its capacity expansion in the east and acquisitions of debt-laden Kalyanpur Cements Ltd and Murli Industries Ltd.
In a recent conference call with analysts, Dalmia said it had spent ₹ 350 crore in the first half of FY19 on an expansion project and the revival of Kalyanpur Cements. Besides, the company’s board has approved the amalgamation of OCL India Ltd, which it had acquired in 2016, with itself. However, the acquisition of Murli Industries is slightly delayed, as National Company Law Appellate Tribunal proceedings are still pending.
Further, its management said that Dalmia’s gross debt as of 30 September 2018 stood at about ₹ 7,100 crore and net debt at about ₹ 3,800 crore. As per analysts, apart from the progress on consolidation of acquired assets, deleveraging is a key upside trigger for the stock.
The company’s performance in the September quarter was subdued. Although cement sales volumes growth was decent, profitability was impacted by increased input cost pressures. As the chart shows, high cost of petroleum coke and diesel resulted in margins slipping by 60 basis points on a year-on-year basis. A basis point is 0.01%.
While the demand outlook is improving for Dalmia’s key markets in east and south India, many brokers have cut operating margin estimates, after factoring in the high cost inflation and weak prices.