Alpha | Dalmia Bharat Ltd. – Equity Research Desk

Dalmia Bharat Ltd – Building a Sustainable Future

Incorporated in 1939, Dalmia Bharat Group is one of the pioneers in cement manufacturing in India with a wide range of products catering to customers across 22 states in the country. As of 31 March 2023, with an employee count of about 5600 and operations in 14 plants across 10 states, it has the fourth largest cement manufacturing capacity in the country. It is the largest producer of slag cement and speciality cement in India. As of 30 September 2023, the company had a cement capacity of 43.7 million tons per annum with a vision to emerge as a pan India company with a capacity of 75 MnT by FY27 and 110-130 MnT by FY31. Dalmia has one of the lowest net carbon footprint in Global cement industry – 456 CO₂ emission-Kg/ton in Q2FY24.

Products and Services

The company caters to both individual and institutional consumers, and also develop customised cement for specific engineering and construction needs. Consumer products comprises of Dalmia Cement, Dalmia DSP and Konark. Institutional products include Dalmia Infra Pro, Dalmia Insta Pro, Dalmia Infragreen and Dalmia Magic Range of Cement-based Surface Finish Solution Alternative to Putty.

Subsidiaries: As of FY23, the company had 30 direct and indirect subsidiaries, 7 direct and indirect associate companies and 2 joint ventures.

Key Rationale

• Leading-edge capacity addition – In the last three and a half years, Dalmia added about 17.2 million tons per annum of cement capacity, which is about 65% growth over the FY20 cement capacity. During Q2FY24, the company commercialized 2 million tons new grinding capacity and debottlenecked its clinker capacity by 0.5 million tons at its two plants in Tamil Nadu. The company is aiming for 2.4 million ton in northeast by FY26. The board has approved for adding 0.5 million ton of capacity in its plant in Bihar which will help the company improve volumes in high contributing state of Bihar. The company is tactically placing itself in a position to leverage the infrastructure and housing boom of the decade.

• Pan India penetration – The company is augmenting its cement business in existing as well as new geographies like Central and North. It is strategically making entry into regions where it is not currently present. Apart from having significant presence in the markets of South, East and Northeast with commissioning of 2.7 MTPA of cement capacity, the company is also ramping up volumes in newly entered Western region parallel to expanding capacities in South and East to improve presence in the markets. This geographical diversification is expected to aid company to cater to wider client base and increase its penetration in the industry.

• Q2FY24 – During the quarter the company delivered a volume of 6.2 million tons and a revenue of Rs.3149 crores which translates into a YoY growth of 6.6% and 6% respectively. The increase of renewable energy consumption to 29% from 18% in Q2FY23 has majorly contributed to the company’s cost efficiency. EBITDA per ton during the quarter improved 46% YoY to Rs. 955 a ton from a low figure of Rs.655 a ton in Q2FY23. Net profit of Rs.123 crores was reported during the quarter, an increase of 162% compared to the Rs.47 crores of Q2FY23. During the quarter, the company was successful in bringing down the lead distance from 308 kilometre to 277 kilometre YoY.

• Financial performance – Dalmia has generated a revenue and PAT CAGR of 10% and 39% over the period of 5 years (FY18-23). Average 3-year ROE & ROCE is around 7% and 9% for FY20-23 period. The company has strong balance sheet with a robust debt-to-equity ratio of 0.34.

Industry

India is the second largest producer of cement in the world. It accounts for more than 8% of the global installed capacity. India has a lot of potential for development in infrastructure & construction sector, consequently, cement sector is also expected to largely benefit from it. On the back of rising rural housing demand and expansion of industrial sector, the consumption of cement in India is expected to grow considerably in the long-term. Some of the recent initiatives, such as the development of 98 smart cities, are expected to significantly boost the sector. Further, initiatives like National Infrastructure Pipeline, PM GatiShakti among others are likely to drive the construction activities in the country, fuelling demand for cement. With high allocation under the Union Budget 2023-24 for infrastructure, affordable housing schemes and road projects to fuel the economy, the domestic cement industry is poised for a volume surge.

Growth Drivers

As per the Union Budget 2023-24, Government approved an outlay of US$ 32.57 billion (Rs. 2.7 lakh crore) for the Ministry of Road Transport and Highways which is likely to boost demand for cement. Under the housing for all segment, in 2023-24 the budget estimate for Pradhan Mantri Awas Yojana is US$ 9.63 billion (Rs. 79,590 crore), a 66% rise than the last year’s budget estimate of US$ 6.43 billion (Rs 48,000 crore) in 2022-23. 100% FDI is allowed through automatic route in construction-development projects and for urban infrastructure areas like urban transport, water supply, sewerage and sewage treatment.

Competitors: The Ramco Cement, India Cements etc.

Peer Analysis

In comparison with its listed peers, the company is generating better earnings proportionate to the revenue growth. It stands ahead of its competitors in terms of performance metrics indicating its ability to generate higher returns from the capital invested.

Outlook

The Government of India has been consistently investing in infrastructure to drive the country’s development agenda. Envisaging the scope of benefitting from infrastructure development projects in the nation in coming years, the company is ramping up its capacity and business lines. We believe that the company, with its futuristic vision and capacity expansions plans is rightly placed to increase its market share. It has a strong balance sheet with healthy cash-flows from operations and prudent financial policies governed by robust capital allocation framework. The company is undertaking a transformational journey called Dalmia 2.0 focusing on growth, financial performance, sustaining trust, and organization building.

Valuation

Given the strategic significance of the industry in which the company operates, coupled with a futuristic approach of capacity expansion and strong barriers to new entrants, we believe that Dalmia Bharat Ltd has potential to upscale its business in coming years. We recommend a BUY rating in the stock with the target price (TP) of Rs. 2604, 19x FY25E EPS.

Risks

• Geopolitical crisis – Geopolitical crises can directly affect resource availability, impacting the supply of essential raw materials such as petcoke and gypsum to cement industry.

• Surge in input costs – The margins as prone to take a dip due to surge in input costs such as raw materials or fuel costs.