More steam left in Dalmia Bharat

Analysts expect earnings to grow by 50% over FY18-20

One would tend to imagine that after having returned almost 42 per cent in the past one year, much higher than the -4 to 5 per cent returns seen in top cement stocks such as UltraTech Cement, Ambuja Cements and Shree Cement, investor comfort in Dalmia Bharat may not be very high.

However, if analysts are to be believed, the days ahead are equally good for Dalmia Bharat. The company continues to expand its capacities and footprint, and is currently among top cement manufacturers not only in terms of capacity but in profitability too. With a capacity of 25 million tonnes (mt), it reported per tonne operating profit of more than ~1,000 for the December quarter.

This is not only comparable with peers, but at the upper end of the ~500-1,100 per tonne profitability reported by Shree Cement, UltraTech, Ambuja Cements and ACC.

The momentum is seen continuing. Last month, CLSA initiated coverage with a ‘buy’ rating on Dalmia Bharat and a target price of ~3,500, which indicates 16 per cent upside potential from the current levels of ~3,007. Strong cost efficiency and products, coupled with fiscal incentives, have resulted in industry-leading unit margins, say analysts. Its growth focus continues with three more acquisitions at different stages, and if done, it would see Dalmia Bharat foray into the north and west. CLSA forecasts a 50 per cent compounded growth in its earnings during FY18-20.

The south and east Indiafocused player is trying to acquire Binani Cement’s 6.2 mt assets in Rajasthan to help it grow in north and west. The other acquisitions in process include Kalyanpur Cement and Murli Industries.

While growth plans are inspiring, investors need to keep an eye on debt gearing. So far, Dalmia Bharat has done well by reducing its net debt to Ebitda from 6x in FY16 to an estimated 2.3x in FY18, but the same can rise to about 3x if Binani Cement’s capacities are consolidated in its books at 50 per cent value, say analysts. The increase in leverage, however, may not be a major concern, if the cement cycle remains favourable.For now, analysts are bullish on Dalmia Bharat. Analysts at Anand Rathi expect it to post a 24 per cent growth in sales, operating margins growth of 21.5 per cent and 40 per cent rise in net profit for the March quarter, compared to the December quarter.

The per tonne profitability is estimated at ~1,088, despite the rise in fuel and logistics costs. For FY19, CLSA expects per tonne Ebitda to remain flat, but rising to ~1,300 in FY20. Given its growth prospects and highly efficient operations, Dalmia Bharat remains among the preferred picks of analysts.

Analysts at Antique Stock Broking say Dalmia Bharat will continue to reap the benefits of operating and financial leverage as the demand cycle turns.