Highlights:
- Q4 volumes were higher by eight percent YoY
- Operating margin shows no signs of an improvement
- Clinker availability to limit volume growth in FY20
- Capacity expansion remains on track
- Valuations look attractive after the recent stock correction
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Dalmia Bharat, India’s fourth-largest cement maker, ended 2018-19 on a healthy note. Steady topline growth and stable margin aided operational performance in Q4 FY19. While volume growth moderated (vis-à-vis earlier quarters), improvements were visible on the cost front, which could pave the way for a margin recovery in the next one-to-two quarters.
Key result highlights- Quarterly revenue rose eight percent year-on-year (YoY) to Rs 2,842 crore. Strong demand in its key operating markets -- east and south -- drove volume growth of around eight percent in Q4. Cement volumes came in at 5.6 million tonne (MT) and were, however, constrained by lack of available clinker capacity.
- Price hikes in southern markets drove blended realisations higher by five percent quarter-on-quarter (QoQ). Realisations, however, were stable on a yearly basis
- Earnings before interest, taxes, depreciation and amortisation (EBITDA) margin improved 70 bps YoY despite the increase in raw material costs, mainly slag. Increase in EBITDA per tonne to Rs 1,165 was aided by a combination of marginal uptick in realisations and downtick in costs.
- Decline in freight expenses (down eight percent YoY) along with control on discretionary spends lent some support to the cost structure. Raw material as well as power and fuel costs have started trending downwards, but continued to put pressure on margin in the quarter gone by.
- Operational performance continues to be ahead of its peers -UltraTech Cement, ACC and Ambuja Cements. Volume growth was stronger than ACC (five percent) and Ambuja Cements (two percent), but weaker than market leader UltraTech (16 percent).
- Kalyanpur Cements (1.1 million tonne capacity), renamed as DDSPL, has started commercial production from Q1 FY20 and is expected to achieve 60-65 percent capacity utilisation in the next 12 months. The company is still awaiting final decision from National Company Law Tribunal (NCLT) on acquisition of Murli Industries.
- Its capital expenditure for FY20 is pegged at Rs 1,700-2,000 crore, which will primarily be used for setting up 8 MT capacity in eastern India. Besides, there could be some additional capex for revival and ramp-up of Murli Industries.
- During FY19, the company repaid Rs 1,368 crore of debt. The payments were majorly back-ended with Rs 824 crore being repaid in January-March. Consequently, leverage improved marginally to 1.6 times (versus 1.7 times in Q4 FY18) at the end of the fiscal. Given its capital expenditure plans, the same is expected to remain at similar levels in FY20.
Outlook and recommendation- Driven by large-scale infrastructure projects, demand for cement has been fairly strong. Industry leaders expect the demand trend to continue going forward as well.- While volume momentum continues to be strong, there exist risk in the demand environment because of macro and micro issues. Concerns regarding liquidity squeeze – the NBFC crisis – in domestic circles as well as a slowdown on the international front pose a near-term risk to the growth of the cement industry.
- Despite a competitive business environment, Dalmia continues to outperform the industry both on the volume as well as margin front. It is operating at a capacity utilisation of 72 percent and availability of clinker is likely to constrain its business volumes till the new capacity goes on stream in FY21.
- The company is looking to strengthen Kalyanpur Cements in coming months and sees a decline in input costs as well as cost synergies from the acquisition to aid margin profile over the next 12 months.
- In spite of the subdued near-term growth prospects and high leverage, Dalmia remains our preferred pick among large-sized cement companies as we expect it to outperform its peers in the largecap cement space over the medium to long run. Long-term investors should keep on accumulating this stock on dips as we expect FY20 earnings to be largely driven by margin improvement and anticipate a volume-led earnings growth from FY21 onwards.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
