Asset sale alone won’t re-rate Dalmia Bharat
2 min read 28 Mar 2023, 09:37 PM ISTThe wholly-owned unit Dalmia Cement (Bharat) Ltd has entered into a binding agreement to sell its entire 42.36% stake in the refractory business to promoter group company, Sarvapriya Healthcare Solutions Pvt. Ltd.
PremiumDalmia Bharat Ltd has inched a step closer to its objective of becoming a pure play cement producer. Its wholly-owned unit Dalmia Cement (Bharat) Ltd has entered into a binding agreement to sell its entire 42.36% stake in the refractory business to promoter group company, Sarvapriya Healthcare Solutions Pvt. Ltd. The deal is expected to be concluded within 30 days. In a conference call on Monday, Dalmia Bharat’s management said it doesn’t see a risk of delay.
With this, the stake in Indian Energy Exchange (IEX) is the only non-core investment left with the company. In FY22, Dalmia Bharat had sold a 5.2% stake in IEX and divested its stake in Hippo Stores on a slump sale basis. Currently, Dalmia Bharat’s stake in IEX stands at about 15% and the management has told analysts that it is exploring options for further stake dilution.
To that extent, reducing exposure to non-core assets is encouraging as this is among the pain points for investors in the Dalmia Bharat stock.
That said, this doesn’t change Dalmia Bharat’s earnings outlook or re-rating prospects. “The continued focus on non-core assets divestment is directionally positive for the company. But based on this transaction, which is worth ₹800 crore, we have not revised our earnings estimate," said Rajesh Ravi, institutional analyst, cement, HDFC Securities Ltd. In the larger scheme of things, this figure doesn’t move the needle on the company’s earnings outlook, he added.
For a meaningful earnings revival, the pace of cement capacity additions and regional diversification remain paramount. In a bid to gain market share, cement producers have been on a capacity expansion spree.
Dalmia Bharat aims to reach 54 million tonne (mt) capacity in FY24, up from 49mt guided earlier. This would be aided by completion of acquisition of some cement assets of Jaiprakash Associates Ltd, the management said.
The company has reiterated the target of achieving 75mt capacity by FY27, and 110-130mt by FY31.
Cement demand is expected to remain firm in 2023 driven by government spending on infrastructure and related activities. So far this year, the Dalmia Bharat stock is down nearly 1% whereas large cement companies such as UltraTech Cement Ltd and Shree Cement Ltd have given positive returns.
To be sure, demand is expected to be decent, but dealer channel checks by various brokerages show that so far in the March quarter, cement prices across India have failed to sustain at higher levels. Particularly disappointing has been price movements in south India, which is among the key markets for Dalmia Bharat.
That apart, debt remains a monitorable. In the conference call, the company management said it aims to keep key metric net debt-to-Ebitda below 2x, unless it comes across an inorganic growth opportunity. Ebitda is earnings before interest, taxes, depreciation and amortization.
“A significant re-rating of the stock has already happened since the company announced its capital expenditure plans during July 2021. The same has led to significant expansion of valuation multiple over the trailing two years," said Ronald Siyoni, deputy vice president, research, Sharekhan by BNP Paribas. “Further re-rating would be driven by execution of their vision of being a pan-India player, healthy demand/pricing environment in core regions and continued divestment of non-core assets like monetization of balance 15% stake in IEX," he added.
Shares of Dalmia Bharat trade at FY24 EV/Ebitda of 10.85 times, showed Bloomberg data. EV is enterprise value. While the divestment focus bodes well for the stock’s valuation, bridging the valuation gap with larger peers will be a tall task with competition intensifying.
