More steam left in Dalmia Bharat, analysts expect earnings to grow by 50%

Successful acquisitions could transform it into a pan-India cement player

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, one of India’s oldest cement companies. The company continues to expand its capacities and regional footprint, and is currently among top cement manufacturers not only in terms of capacity, but in profitability too. With capacity of about 25 million tonnes (mt), it reported per tonne operating profit of more than Rs 1,000 for the December quarter. This is not only comparable with peers, but at the upper end of the Rs 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 Rs 3,500, which indicates about 16 per cent upside potential from the current levels of Rs 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 India-focused 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 (1.1 mt plant in the east) and Murli Industries (3 mt capacities in the west).

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 (earnings before interest, tax, depreciation and amortisation) from about 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 Rs 1,088, despite the rise in fuel and logistics costs. For FY19, CLSA expects per tonne Ebitda to remain flat, but rising to Rs 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, too, say Dalmia Bharat will continue to reap the benefits of operating and financial leverage as the demand cycle turns. With increase in capacity utilisation across, the benefits of fixed cost absorption should also kick in.