Dalmia Bharat: Charting higher growth via expansions, acquisition

Murli Industries' acquisition will drive market share gains in west India, while multiple expansions continue in east and south

Dalmia Bharat’s successful acquisition of Murli Industries on September 10, which was a much-awaited announcement, gave investors a reason to cheer. The stock has jumped 8 per cent in over four sessions, with further gains likely. 

Dalmia Bharat had submitted a resolution plan for the 3 million tonnes per annum (MTPA) capacities of Murli Industries with the NCLT, in 2017 and 2019, which has fructified only now. 

The acquisition gives Dalmia deeper penetration and an opportunity to gain market share in western India. It may also cater to Telangana, Karnataka, and Chhattisgarh, which are in the vicinity of these capacities located at Chandrapur (Maharashtra). 

In addition, it is undergoing massive expansion, targeting a pan-India presence. While a 3-MTPA clinker line in eastern India may be commissioned next month, grinding units in Jharkhand and West Bengal of 3 MTPA will be commissioned by December. These will be followed by a 2.25-MTPA grinding unit in Odisha (March 2021) and a 2.25-MTPA unit in Bihar (second half of FY22). 

Analysts say completion of the expansion in the 7.8 MTPA capacities, along with Murli Industries’ capacities, will place Dalmia among the top cement producers. Those at Kotak Institutional Equities say: “It is progressing according to plan — to reach 37 MTPA capacity and become the third-largest by FY22.”

Gains at the earnings level will be larger, as the company continues doing well and had reported industry-leading per-tonne profit of about Rs 1,675, during the June quarter. 

Valuations, with per-tonne replacement cost of $59 and $55 on FY21 and FY22 estimated capacities, respectively, are also attractive. Larger peers like Shree Cement, UltraTech, ACC, and Ambuja Cements are trading at a per-tonne replacement cost of $86-185 on FY21 and $71-173 on FY22 estimated capacities.

Though uncertainty regarding cement demand and prices are here to stay (due to rising infections), analysts at Anand Rathi believe Dalmia will continue to outperform the industry.

It also remains on track to reduce debt. Though Dalmia is estimated to spend Rs 2,500 crore during FY22 towards expansion, Kotak Institutional Equities says robust operating cash flows will drive strong free cash flows, and help reduce net debt from Rs 2,900 crore in FY20, to Rs 1,700 crore in FY22.

They expect the company to become net-debt-free by FY23.

Besides improving fundamentals acting as a re-rating trigger, favourable resolution of the mutual fund scam case will also give a fillip. 

Binod Modi of Reliance Securities believes that return ratios should improve once expansion is complete, reducing the valuation gap with peers. Target prices of Anand Rathi, Antique Stock Broking, and Kotak Institutional Equities range from Rs 990-1,072, for the stock trading at Rs 756 at present.