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Dalmia Bharat’s expansion plans need demand to be robust

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Shares of cement companies have been beaten down because of escalated costs pressures and inadequate price increases. The shares of Dalmia Bharat Ltd are not an exception with the stock falling 32% so far in CY22. The underperforming trend in the shares could persist because of looming near-term margin challenges.

“In the short run, elevated fuel cost would keep Ebitda per tonne muted to 1,037 for FY23E,” said a report by Yes Securities on 22 June. This was 1,093 per tonne in FY22, representing a drop of 18% year-on-year (y-o-y). Prices of key inputs for cement makers such as petroleum coke and coal have remained elevated. In FY23, investors will watch if costs decline significantly, leading to better earnings prospects.

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Meanwhile, there is some excitement on Dalmia Bharat’s capacity expansion plans. “As a step forward towards our vision of achieving 48.5 mtpa (million tonnes per annum) capacity by 2024 and 130 mtpa capacity by 2030, we have committed 1,988 crore towards capital expenditure during this year,” said the company in its latest annual report. In FY22, Dalmia Bharat expanded its capacity by 5.15 mtpa to 35.9 mtpa.

Over the next few years, the company will spend 9,000 crore on capacity expansion and sustainability initiatives. “Despite strong capex spending over next two years, we believe the leverage will continue to be in comfortable range (capped at <2x),” analysts from JM Financial Institutional Securities Ltd said in a report on 15 June. “Net debt stood at a negative of 1,400 crore as on March 2022 (net debt to Ebitda at -0.6x),” it said. However, Dalmia Bharat is not the only cement company that is adding capacities. “When top cement companies are also expanding capacity, investors hope that volume growth is faster than capacity growth for individual companies. However, this is difficult to achieve when many companies are on an expansion mode. Plus, if demand is softer than expected, firms may sacrifice on pricing, which would impact margins,” said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. How this would play out would also depend on how robust demand is in future.

There is a glimmer of hope, though. Dalmia has a vast presence in the east. “If the eastern region exhibits higher growth in FY23, helped by a favourable base, these eastern proxies should see higher than industry volume growth,” said Satyadeep Jain, analyst at Ambit Capital. However, the east is also seeing the highest capacity increase among all regions in India and, hence, poses a risk to earnings as competition rises, he said.

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