Dalmia Bharat: Operating efficiency, deleveraging remains on agenda

Founded by Jaidayal Dalmia in 1939, Dalmia Cement is one of India’s pioneering cement companies. Headquartered in New Delhi, the company operates as Dalmia Cement (Bharat) Ltd., which is, in turn, a 100% subsidiary of Dalmia Bharat Ltd. It is a part of the Dalmia Bharat Group, one of India’s most respected business conglomerates-the other businesses of which include Sugar and Refractory products.

Dalmia Cement’s operations are spread across 22 states and union territories, mainly in East, North East, and Southern India, with selective presence in Uttar Pradesh and Maharashtra. They offer a vast range of cement variants through three marquee brands: Dalmia Cement, Dalmia DSP, and Konark Cement. These brands are available as Portland Pozzolona Cement, Portland Slag Cement, Composite Cement, and Ordinary Portland Cement in select markets.

The company is a category leader in super-specialty cement used for oil well, railway sleepers, and airstrips.

Its manufacturing capacity of 27 million tonnes per annum (MTPA) is spread across 13 cement plants, across 9 states. They invest heavily in research and development, operating 3 R&D centers equipped with cutting edge robotic labs called Dalmia Cement Future Labs at its regional hubs. From a current installed capacity at 27 MTPA, Dalmia Bharat intends to reinforce this sectoral status through a planned increase in installed capacity by 40% to 37 MTPA by FY21E (brownfield and acquisitions). This expansion is likely to enhance the Group’s market share to an estimated 7% of the total cement capacity in the country at that time.

Dalmia Bharat strives to reinforce its sectoral position by strengthening its supply chain, automating plants, and deploying best-in-class business analytics, mobility, and cloud solutions to enhance real-time information availability. Several related initiatives were taken to forge stronger ties with talents, partners, dealers, and customers.

Dalmia Bharat intends to increase cement realisations through a multi-pronged strategy encompassing the introduction of value-added products, adding premium product brands, strengthened efficiency in trade and non-trade pricing and targeted discounts, among others. It continues to optimise fixed and variable costs through a low-cost fuel mix, increasing the share of alternative fuels, moderating cost centres and encouraging the use of lateral alternatives. Restructuring the business units into a continued corporate structure has enhanced tax efficiency, accounting for intangibles like goodwill and assimilating technical know-how. It has also resulted in concessional agreements while procuring resources like raw material, fuel, and other assets. The consequent knowledge-sharing across different sites has led to cost optimisation.

The result is that during FY19, Dalmia Bharat’s revenues increased by 11% from Rs 8,580 crore to Rs 9,484 crore, while the net debt-to-EBITDA ratio declined from 1.73 to 1.61. During FY19, the Group generated an EBITDA/tonne of Rs 1,009 and strengthened its PAT by 20% to Rs 349 crore.

Dalmia Bharat has significantly reduced its net debt from Rs 6,020 crore in March 2016 to Rs 2958 crore in December 2019. Its net debt-to-EBITDA dropped from 3.8x to 1.32x over the same period. By repaying a large portion of the high-cost debt, the company also successfully brought down its interest cost down to 8% in Q3FY20.

A gradual recovery for different segments as lockdown measures ease is expected to revive demand. With segregated cement demand into 3 segments such as premium housing and private sector CAPEX, affordable housing, and government-led low-cost housing and infrastructure. There could be a lot of pent-up demand for cement, which would lead to a sharp recovery in volumes once the nationwide lockdown is lifted and normalcy returns.

The decline in pet-coke and coal prices coupled with better pricing has helped cement companies achieve robust profitability in FY20. The lower costs will help cement companies conserve margins partially in FY21E. Further, players who are focusing on deleveraging also should benefit Dalmia as its focus on the scale of operations is widening without addition in debt, owing to likely market share gain due to consolidation in markets in eastern regions.

Dalmia acquired Murli Industries (3MTPA in Chandrapur) and Kalyanpur Cement (1.1MTPA in Bihar) through an auction under Insolvency & Bankruptcy Code (IBC) proceedings. The company acquired these assets at a relatively low valuation of USD 55 per tonne for Kalyanpur and USD 20 per tonne for Murli Industries. Management is confident that these acquisitions will be EBITDA positive from the first year of operations.

The significant free cash flow generation will further help fund the expansion and de-lever the balance sheet. Recently in March 2020, the board of directors approved buying back the company's 0.71 crore shares for an aggregate amount of up to Rs 0.5 crore at a price of up to Rs 700 per share through open market Mechanism.

The company’s 7.8MTPA of the expansion project in the east is expected to be completed by FY21E. Additionally, Murli’s acquisition and refurbishment are expected to be complete by H2FY21E.

Key Risks:

A slowdown in the economy could reduce infrastructure investments, decelerating growth

Increasing costs could adversely impact margins

Intensifying competition could reduce the market share

The inability to secure CAPEX funding at competitive rates could be a threat to growth

Final Thoughts:

The decline in pet-coke and coal prices coupled with better pricing has helped cement companies achieve robust profitability in FY20. The lower costs will help cement companies conserve margins partially in FY21E.

The company’s 7.8MTPA of the expansion project in the east is expected to be completed by FY21E. Additionally, Murli’s acquisition and refurbishment are also expected to be completed by H2FY21E.

There could be a lot of pent-up demand for cement, which would lead to a sharp recovery in volumes once the nationwide lockdown is lifted and normalcy returns. Thus the future outlook looks positive as the concerns over asset quality were eased after a Rs 20 lakh crore package was announced to tackle the impact of the COVID-19 pandemic and would aid in extending support to rural and urban including various industries and individuals would revive demand.

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