Weak cement prices steal Dalmia Bharat's thunder

Cement prices are expected to see an uptick in April. (Image: Pixabay)
Cement prices are expected to see an uptick in April. (Image: Pixabay)

Summary

  • Realisations are likely to remain a pain point for Dalmia Bharat, with peers Ambuja Cements, ACC and UltraTech Cement being better placed

Dalmia Bharat Ltd is in a tight spot, thanks to the steep correction in cement prices lately in the eastern and southern regions. While prices have dropped across markets, the excess capacity in these two regions has meant a sharper drop vis-à-vis all-India average.

Given Dalmia’s significant exposure in these regions, muted price trends have raised concerns about its realisation and profitability outlook. This has resulted in earnings downgrades.

Motilal Oswal Financial Services has trimmed the company's Ebitda estimates for FY24, FY25 and FY26 by 4%, 8% and 8%, respectively due to weak pricing.

 

Interestingly, the subdued price trajectory has overshadowed a slew of positives that may aid Dalmia’s long-term growth. For instance, its organic expansion plans are on track. It will add clinker and cement capacities of 4.9 million tonne per annum (mtpa) each through a mix of greenfield and brownfield expansions by FY25. The company plans to raise cement capacity to around 49.5 mt in FY26 from 44.6 mt now. Its long-term capacity target is reaching 75 mtpa and 110-130 mtpa by FY27 and FY31, respectively.

To reduce the concentration risk, Dalmia is diversifying into newer regions. Currently, it has a vast presence in east and south India and intends to expand to west, central, and north. Timely capacity additions are critical amid ongoing stiff competition and focus of listed cement makers on market share gains.

Despite its robust expansion drive, leverage has remained low. The management has indicated that its growth plans will be in line with demand trends across its operating regions. The calibrated approach will help in maintaining a balance between capacity additions and keeping debt in control.

“Our estimates indicate net debt will hover at around 3,000 crore over the next three years (FY24E-FY26E) and debt/Ebitda to stay at ~1x despite capacity additions indicating no major balance sheet stress for the company," said a BoB Capital Markets report dated 28 March. Net debt stood at 431 crore, and net debt-to-Ebitda ratio was at 0.16x as of December 2023.

Furthermore, Dalmia remains committed to cost-saving initiatives by investing in alternative energy sources, renewable energy, and waste heat recovery systems. These measures are expected to translate into better margins gradually. Also, the company has divested its non-core assets so that it can focus entirely on the cement-making business.

While all these steps are in the right direction, the stock's performance depends on volume growth and realizations. The good part is that Dalmia is poised to gain from its earlier capacity additions. Motilal Oswal estimates Dalmia to report 12% year-on-year volume growth in Q4FY24 aided by market share gains. But realizations are likely to remain a pain point. In comparison, pan-India-focused peers such as Ambuja Cements Ltd, ACC Ltd and UltraTech Cement Ltd are better placed.

Further, the delay in the acquisition of Jaiprakash Associates’ cement assets, announced in December 2022, can be a near-term overhang on the stock. The approval process seems to be taking longer than anticipated, deferring the potential benefits from the deal.

Meanwhile, cement prices are expected to see an uptick in April. It would be a breather for investors if this materializes. Due to upcoming elections, cement demand in Q1FY25 is expected to remain muted. So, sustaining price hikes, if any, remains to be seen.

Dalmia’s shares have fallen 14% so far in 2024. The stock trades at an FY25 EV/Ebitda of about 11 times, which is a discount to larger peers UltraTech and Ambuja, which trade at multiples of over 18 times. EV is enterprise value. As things stand, there is little to suggest the valuation gap should narrow.

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