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Cement manufacturer Dalmia Bharat aims to be net-debt free by FY23. (Bloomberg)
Cement manufacturer Dalmia Bharat aims to be net-debt free by FY23. (Bloomberg)

Dalmia Bharat’s stock excitement is yet to rub off on valuation multiples

Firm’s net debt to Ebitda fell to 0.87 times in Sep, from 1.34 times in Mar, in line with its goal to be net debt free by FY2023

The Dalmia Bharat Ltd stock hit a new 52-week high of 989.90 on NSE on Tuesday. The shares have been on an uptrend in the past few trading sessions. A key reason for the optimism is the cement maker’s stellar September quarter earnings.

Even as weak prices weighed on realization growth, the company remained focused on cost rationalization. The upshot: Q2 earnings before interest, taxes, depreciation and amortization (Ebitda) of 700 crore is the highest-ever on a quarterly basis, said the management.

Consistent curtailment of variable and fixed costs helped. But rising input costs make analysts sceptical of a repeat performance on this front. Also, some cost benefits are expected to reverse as business normalizes and volumes recover. The management has guided for a 10-15% rise in working capital from hereon.

One-quarter wonder
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One-quarter wonder

Further, akin to its peers, Dalmia Bharat posted a decent volume growth of 7.4% year-on-year (y-o-y) to 4.8 million tonnes. It was driven by rural segments, mainly in the east. Pickup in government’s infrastructure and low-cost housing projects also boosted sales. In a post-earnings conference call, the management said, east India has grown in double digits despite covid-19 while demand in south started picking up from September. However, due to heavy monsoon in the east, the company saw seasonal correction in prices, the management said.

Dalmia Bharat has particularly done well to reduce debt. As of March 2020, its gross and net debt stood at 5,900 crore and 2,800 crore, respectively. In the first half of FY21, the company repaid debt of 750 crore. With that, its net-debt-to-Ebitda has reduced to 0.87 times in September from 1.34 times in March. The company intends to be net debt free by fiscal year 2023.

Additionally, a relatively higher focus on environmental, social and governance practices augurs well. According to the management, as of now, renewable power forms around 7-8% of its total power consumption. It expects this figure to reach 35-40% in the next five years and 100% by fiscal year 2030.

The company is also setting up a 22 megawatt waste heat recovery system, which is scheduled to be commissioned by end-FY22. Given the high carbon footprint of the sector, analysts see the company’s renewable energy-based expansion as a positive.

Meanwhile, the sharp rally in the stock indicates that the market is excited about these initiatives. However, they are yet to rub off on valuation multiples.

The stock is trading at a one-year forward EV/Ebitda of around 7 times. EV is enterprise value. This is lower than some peers such as UltraTech Cement Ltd and ACC Ltd, which are trading at multiples of 14 times and 9 times, respectively.

“The company’s efforts to pare debt and go carbon negative would reflect in its valuations when these targets are nearing completion. For now, the market is more interested in whether this volume recovery will sustain for the sector," said an analyst with a domestic brokerage firm requesting anonymity.

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