Dalmia Bharat’s ESG focus is good, but it’s not rubbing off on valuations
- Sales volumes were a shade better than analysts’ expectations
- Cement realisations were higher by about 1.5%, which cushioned the fall in volumes
In a bid to become carbon negative by 2040, Dalmia Bharat Ltd continues to focus on environmental, social and governance (ESG) practices. Considering that it is one of the top five cement companies by capacity, reducing its carbon footprint entails a lot of investment. But these efforts aren’t reflected in any way in its valuations.
“Dalmia Bharat is trading at 6.6x FY22E EV/EBITDA and EV/tonne of USD60, which is a discount of 40-50% vs its peers despite comparable profitability and ESG parameters,” said a Maybank report on 14 July.
EV/Ebitda is a valuation parameter where EV stands for enterprise value. Ebitda is short for earnings before interest, taxes, depreciation and amortization. The report added that Dalmia’s carbon dioxide emission of 546kg per tonne of cement is well below India’s average of 650kg and 600kg, globally. Also, its electricity consumption of 70 kilowatt-hour per tonne compares well with the industry average of 78kwh per tonne.
But as J.N. Gupta, managing director of proxy firm, Stakeholders Empowered Services, said: “ESG in India is a comparatively new concept. And, as in the case with any new concept or idea, it takes some time for the market to recognise it. For some companies investing in ESG may be a sunk cost today, but for those who have already taken an initiative here, they are likely to benefit eventually.” Gupta, who is also a former Sebi executive director, added that companies with high ESG focus are observed to be preferred by institutional investors.
“As far as PE or any other valuation parameter is concerned, it is a sum of many factors. The market may give such companies some premium for their ESG practices eventually,” he added.
“Many other big cement makers are also investing in this direction, it is just that they haven’t provided a fixed timeline on the same,” an analyst at a domestic brokerage house said, requesting anonymity. He added that the Dalmia stock has been trading at a lower multiple because of factors such as weak volume growth, stretched balance sheet and acquisition-related concerns.
In a post-earnings conference call, Dalmia’s management said that its western India market had been the worst-hit by the coronavirus crisis due to migrant labour issues. Demand in its eastern market was driven by the independent house-building segment, and resumption of highway projects.
However, the management remains cautious on the sustainability of this demand, and is evaluating the situation on an ongoing basis. At the end of fiscal year 2020, Dalmia’s net debt stood at ₹2,830 crore, implying a net debt-Ebitda of 1.34 times, the management added. Gross debt increased to ₹5,900 crore as the company held the excess liquidity in view of the uncertainty in operations.
It should be noted that analysts are keeping a close watch on this metric because Dalmia has guided for maintaining its net debt-Ebitda below 1.5 times.
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