Dalmia Bharat Q4 review – Strong Volume growth; Margins surprise positively

Dalmia Bharat, India’s fourth largest cement maker, reported strong numbers for the March quarter. Strong demand and higher cement prices boosted quarterly revenues. Profit margins were better compared to the December quarter as the company was able to reduce costs.

Dalmia continues to surprise positively with the best volume growth in the sector. The company has been consistently outperforming its peers and gradually expanding its presence by setting up own capacity as well as by acquiring plants.

Strong volume growth along with improvement in margins

Dalmia Bharat’s quarterly revenues rose 21 percent year-on-year to Rs 2,638 crore. It sold 5.2 million tonnes of cement during the quarter, up 14 percent YoY. Strong demand in the Eastern market drove the volume growth in this quarter.

Earnings before interest, taxes, depreciation and amortisation (EBITDA) margins declined 320 bps YoY as cement companies in general are facing higher input costs. The prices of raw materials (fly ash and slag), power & fuel as well as freight expenses have risen steeply over the last 12 months.

Quarter-on-quarter, margins improved because of operating efficiencies and cost rationalisation measures (change in fuel mix, reduction in lead distance etc.). Dalmia plants in the southern region have switched to lignite, which further reduced costs.

Ramping up capacity organic and inorganic means

Dalmia has been on a merger & acquisition spree in the past couple of years.

In 2016, Dalmia merged Orissa Cement into it under a share swap agreement, which helped increase its capacity by 5.4 million tonnes.

The company is in the final stages of acquiring 2 companies under NCLT- Kalyanpur Cement and Murli Industries. These 2 acquisitions will add 4.1 million tonnes of capacity and expand its reach to regions around Bihar and Maharashtra. Also, UltraTech and Dalmia have been actively contesting the acquisition of insolvent Binani Cement, which has 11.2 million tonnes capacity.

Organically, Dalmia is planning to double its capacity in the eastern region by adding approximately 8 million tonnes for Rs 3700 crore. The project will be executed in phases and these new capacities will be spread across Orissa, West Bengal and Bihar.

Valuation and Recommendation

With pick-up in infrastructure, the overall demand outlook for the cement looks robust. With majority of the industry players nearing 80% capacity utilization, prices are expected to rise post-monsoon.

The company is gradually expanding presence across other key markets and expects to ramp up volumes from the revival of Kalyanpur Cement and Murli Industries. Strong demand in eastern markets should help the company clock double digit volume growth over the course of the current financial year.

While the industry has been facing input cost pressures, Dalmia has been able to improve margins through operating efficiencies. Strong cash flows and acquisition synergies should help pare debt and improve return ratios.

Dalmia (CMP – 2704; Market cap. – 24,110 crore) remains our preferred pick in the sector and we expect it to outperform its peers. Also, Dalmia with its consistent performance presents a strong case for multiple re-rating in the long run. It currently trades at a discount to UltraTech, the largest cement company in India.