Dalmia Bharat rises over 4%; MOFSL sets target price of Rs 2,800, citing these three reasons

Share market today, Dalmia Bharat share price: In the past six months, the stock gained nearly 7 per cent whereas the benchmark index, the S&P BSE Sensex, rallied nearly 11 per cent during the window.

Representative image. Source: Unsplash

Share market today, Dalmia Bharat share price: Shares of Dalmia Bharat, the cement manufacturing company, rallied as much as 4.2 per cent to Rs 2,369.90 apiece on the BSE intra-day on Monday, January 1. The stock has underperformed BSE Sensex and most cement players in the past six months; however, its long-term outlook looks healthy.

In the past six months, the stock gained nearly 7 per cent whereas the benchmark index, the S&P BSE Sensex, rallied nearly 11 per cent during the window.

The stock's underperformance during the said period is attributable to a delay in the acquisition of JPA’s cement assets (announced in December 2022) and a slowdown in cement demand in the eastern region, analysts at Motilal Oswal Financial Services (MOFSL) note in their report dated December 29, 2023.

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However, they are optimistic about the company’s long-term outlook due to three reasons:

a) The company's plan to increase capacity to 110–130 mtpa at a 14–17 per cent compound annual growth rate (CAGR) by 2031;

b) focus on sustainable growth through various initiatives such as higher blended cement and green energy mix; and

c) strong balance sheet with the target of maintaining a net debt-to-EBITDA ratio of less than 2x.

The net debt-to-EBITDA ratio measures a company’s ability to pay off its liabilities. It shows how much time the company needs to operate at the current debt and EBITDA levels to pay all of its debt. MTPA stands for million tonnes per annum.

Citing the above three reasons, the brokerage has reiterated its 'BUY' rating on the stock with a target price of Rs 2,800 (based on Sep’25E EV/EBITDA).

Let's take a look at these triggers in a little detail:

Aims to become a pan-India cement player: Currently, the company has a major presence in the east and south regions of India. It intends to establish its presence in the western, central, and northern regions. Dalmia Bharat has proposed to acquire the cement assets of Jaiprakash Associates (JPA) located in central India, with a significant capacity share (nearly 10 per cent) in the region.

Focus on cost reduction and sustainability: Key initiatives are: 1) increase in green power share to 29% vs. 17% in FY22; 2) increase in TSR (thermal substitution rate) to 17% vs. 13% in FY22, 3) reduction in clinker factor to 58.5% and increase in blended cement to 88% in product mix, and 4) freight cost savings through a digital bidding platform for transporters and the use of heavy-duty electric trucks for transportation of raw materials.

Strong operating cash flows should support growth plans: MOFSL notes that the company’s clinker/cement capacity stood at 22.2mtpa/44.6mtpa. It plans to expand clinker/cement capacity to 27.1mtpa/49.5mtpa by FY26 through organic routes. Moreover, it has announced the acquisition of a clinker/cement/CPP capacity of 6.7mtpa/9.4mtpa/280MW at an enterprise value of Rs 58.4 b (USD75/t) from JPA. Captive power plants (CPPs) are coal-based power plants.

"We estimate the company to generate a cumulative OCF, or operating cash flow, of Rs 112 billion over FY24–26, which will support its future growth plans. Net debt is expected to increase with the conclusion of the JPA deal, and we expect net debt to increase to around Rs 30–40 billion. The management targets keeping the net debt-to-EBITDA ratio below 2x unless big inorganic opportunities arise," MOFSL notes.

Clinker is an important component in cement production. It is a grey material that is a mix of limestone and minerals and is produced by heating both materials at very high temperatures.