Expansions will bump up Dalmia Bharat's volume growth, say analysts

The Dalmia Bharat stock, which had hit its 52-week low at the start of the month, has rebounded and was up nearly 8 per cent in the last couple of sessions. The company’s June quarter performance was good despite soft volume growth on demand woes. The positive was the robust per tonne profitability reported by the company. 

It reported a blended per tonne profitability of Rs 1,464, up 26.2 per cent year-on-year, helped by easing raw material prices, drop in freight cost and other expenditure, along with growth realisations. Volume growth stood at just 1 per cent, with the general election impacting overall cement demand which grew just 1.2 per cent year-on-year.

The analysts, however, remain positive on volume growth, led by expansions. In July, the NCLT had approved resolution plan for Nagpur-based Murli Industries, which has a 3-million tonne (MT) cement plant and 2-MT clinker unit. The company management expects Murli to revive by the first half of FY21. The Kalyanpur 1-MT plant is already ramping up gradually, having reached 45 per cent utilisation in Q1FY20. Meanwhile, the company expansions in east India (about 8 MT), too, are on track. A 3-MTPA clinker and 4-MTPA grinding capacity will get commissioned in FY20 and the rest by FY21. The company already has about 25 MT expandable capacities.

Cement demand in the country that remains soft during the first half is expected to pick up during the second half, led by the housing and the infrastructure segments. Analysts at Anand Rathi Research say that they expect 13 per cent and 9 per cent annual growth over FY19-21 in revenue and volumes, respectively, backed by the ramping-up of capacity, incentives and the improving performance of the refractory division.

Given higher cash flows, the company has reduced gross debt by about Rs 404 crore during the first quarter. Net debt/Ebitda remained stable at 1.6 times and analysts expect about Rs 1,000 crore debt during FY20. The expansions are to be funded through internal accruals. With Dalmia’s mutual fund fraud case under litigation and expected recovery of the entire amount in FY20, analysts at Kotak Institutional Equities say the stock has been over-penalised in the past six months due to these concerns. Given a strong growth pipeline and attractive valuations (7.5 times EV/Ebitda FY21 estimates), they remain positive on the stock.