Acquisition of JP's cement capacity a good long-term move by Dalmia

Consolidation in the cement industry continues with Dalmia Bharat buying the cement, clinker and power plants of Jaiprakash Associates (JP) with a cement capacity of 9.4 million tonnes (MT), along with clinker capacity of 6.7 MT and thermal power plants with generation capacity of 280 MW. The plants are situated in Madhya Pradesh, Uttar Pradesh and Chhattisgarh. The transaction is for an enterprise value of Rs 5,666 crore and it was done through the group subsidiary, Dalmia Cement.

While JP views this as a deleveraging exercise, it is part of Dalmia's group strategy of creating a pan-India footprint, with an eventual capacity of 131 MT (by the 2030-31 financial year or FY31) and a FY27 target of 75 MT. This gives Dalmia 10 per cent market share (and roughly 20 per cent capacity share) in central India. Regulatory clearances are awaited and this means no fixed timeline to complete the acquisition. The funding details of the deal is also not known. 

Central India has roughly a demand of 54 MT per annum (MTPA) with low per capita consumption of 170 kg versus a national average of 250 kg. The regional market is quite concentrated with top five players holding over 75 per cent share. Central India could see an effective supply addition of 9 per cent compounded annual growth rate or CAGR over FY22-25, while the demand CAGR is expected to be 7-8 per cent.

Dalmia’s capacity will rise to 49 MTPA from its current (pre-deal) capacity of 37 MTPA by 2023-24, when its own capacity expansion plans are completed. This would make it the third largest player in the country, based on the known expansion plans of other players.

After acquisition, Dalmia’s capacity mix will include 52 per cent in the east, 26 per cent in the south, 16 per cent in the central region and 6 per cent in the west.

Dalmia group’s net debt was assessed at Rs 2,540 crore (excluding the marked-to-market value of its 3.7 per cent stake in IEX) at end of the second quarter (Q2) of FY23 and the net debt equity was 0.3x with the Net Debt to Ebitda (earnings before interest, tax, depreciation and amorisation) at 1.2x. While the company targets keeping the debt ratios low, given the size of this strategic acquisition, the debt to Ebitda ratio could rise above 2x. 

According to industry estimates, the transaction is coming at around 30-40 per cent below replacement cost, owing to fully-depreciated assets, lack of interest from other potential buyers and the likely need for additional infusion to run operations. The cost works out to around $75 per tonne whereas new capacity would cost above $100 per tonne to set up.

Concrete judgment will be difficult until there’s more details on funding, plant-wise break-up of assets, availability of limestone reserves, possibility of capacity expansions and any additional funds required to run operations.

While more clarity is required, the deal appears to be good in the long term for the group. Some analysts have ‘buy’ rating on the stock, while others are recommending ‘hold’ after the announcement. The shares of Dalmia Bharat dropped 2.5 per cent to close at Rs 1,860. Valuation targets by analysts see an upside of Rs 2,000 or a downside of Rs 1,600.