Tight grip on costs aids Dalmia Bharat; over to price trends now

Falling operating costs have brought immense respite for Dalmia Bharat Ltd. (Hindustan Times Delhi India)
Falling operating costs have brought immense respite for Dalmia Bharat Ltd. (Hindustan Times Delhi India)

Summary

On a per-tonne basis, Ebitda rose by 45% year-on-year, as operating expenses hit a multi-quarter low of 4,129 in Q2FY24.

Nobody expects the moon from earnings of cement manufacturers in the seasonally weak September quarter. But this time around, falling operating costs have brought immense respite for Dalmia Bharat Ltd. At a time when consolidated operating revenue increased by 6% year-on-year, Ebitda increased by as much as 55% to 589 crore, ahead of Street expectations. On a per-tonne basis, Ebitda rose by 45% year-on-year, as operating expenses hit a multi-quarter low of 4,129 in Q2FY24.

Freight costs were lower than expected. The management attributed the fall in freight cost per tonne to lower lead distance and removal of the busy rail season surcharge during August and September. Plus, an increase in the share of renewable energy in the overall energy consumption helped.

The strong operating profit performance went a long way in offsetting the weakness in volumes and realizations. Sales volume rose 6.6% year-on-year to 6.2 million tonnes (mt). An extended monsoon and steep price hikes in the company’s key markets of east and south weighed on cement demand, keeping realizations under pressure. Given this, pan-India focused competitors could outperform Dalmia Bharat in volume growth in Q2FY24.

Graphic: Mint
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Graphic: Mint

But investors have little to complain about, what with Dalmia Bharat’s shares hovering near 52-week highs of 2,424.75 seen last month (Shares closed at 2,322.10 on Monday). Investors seem to be betting on the brighter side of price hikes, meaning better outlook on realizations. But price hikes need to sustain.

Also, amid rising competition and the intense chase for market share gains, capacity additions are a positive. In the last three-and-a-half years, the company has added around 17.2 mt of cement capacity, taking the total cement capacity to 43.7 million tonnes per annum (mtpa) and clinker capacity to 22.2 mtpa.

Faster expansion growth has meant more leverage. In Q2FY24, net debt increased to 1,500 crore from 1,208 crore in the previous quarter. The management says debt could increase further, and peak at 3,000 crore in FY24.

Meanwhile, in this calendar year so far, the Dalmia Bharat stock has rallied by nearly 25%, outperforming larger peers such as UltraTech Cement Ltd and Shree Cement Ltd. Potential benefits of the recent price increases have driven the stock price surge. However, a reversal in operating costs and rising debt could play spoilsport. This, in turn, would cap the prospects of significant earnings upgrades.

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