Dalmia Bharat's profitability is under pressure due to increased competition and pricing pressures in its core markets, leading to a potential setback in its expansion plans.
The cement sector is currently grappling with subdued prices, and some companies, like Dalmia Bharat Ltd, are feeling the heat more intensely. Dalmia Bharat's primary markets in the east and south are expected to face escalating pricing pressures. The eastern region is witnessing a surge in capacity additions by various cement manufacturers, which will significantly increase the supply of cement. In the south, the competitive landscape is rapidly evolving due to industry consolidation.
The acquisition of Penna Cement Industries by Ambuja Cements Ltd and UltraTech Cement Ltd's stake in The India Cements Ltd are poised to intensify the battle for market share in the south. Furthermore, the insolvency proceedings of Jaiprakash Associates (JAL) raise concerns about Dalmia Bharat's medium-term capacity expansion goals. A recent report by BOB Capital Markets suggests that Dalmia Bharat's ambition to expand its market share through acquisitions may face obstacles due to limited options for JAL assets in central India. Dalmia Bharat aims to achieve a capacity of 75 million tonnes per annum (mtpa) by FY28, a significant increase from its current 46.6 mtpa.
These unfavorable market dynamics overshadow the company's efforts to control costs. Dalmia Bharat's focus on cost reduction through energy expense management has positioned it as one of the industry's lowest-cost producers. The company aims to increase its renewable energy usage from approximately 39% to 45% and 50% by the end of FY25 and FY26, respectively. Additionally, Dalmia Bharat is working towards achieving cost savings of ₹150-200 per tonne in the coming years through various initiatives.
However, the near-term earnings outlook remains bleak due to weak pricing. BoB Capital Markets has revised its Ebitda estimates for FY25 downward by about 1%, FY26 by 10%, and FY27 by 9%. The company's capacity expansions of 2.4 mt in the northeast and 0.5 mt in Bihar are expected to be commissioned in the second half of FY25. Increased activity in the northeast may provide some relief in terms of incremental capacity addition and prices, helping the company navigate challenges in its core markets.
Capital expenditure for FY25 is estimated at ₹3,000-3,300 crore, earmarked for capacity expansion, land acquisition, and renewable energy projects. The company's debt position will be closely monitored due to the increased emphasis on expansion, particularly given the sequential increase in net and gross debt in Q2FY25. The stock's performance has been disappointing, with a 17% decline in CY24, underperforming its larger, pan-India-focused competitors. The stock is currently trading at a multiple of 11x its FY26 EV/Ebitda, according to Bloomberg data, which is a discount compared to some of its peers. This valuation gap is likely to persist in the near term.
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