Dalmia Bharat

With the government’s emphasis on developing infrastructure and growth in the commercial sector, cement manufacturer Dalmia Bharat is in an enviable position of making the best use of its planned expansion

Dalmia Bharat is in the cement manufacturing and selling business. The company was founded in 1939 and has a capacity of 37 MT, focusing on the South (12.1 MT), East and North East (21.2 MT) and West (2.9 MT). The company is a market leader in South and East India, and it is aggressively expanding its presence throughout the country. Its goal is to become a pan-India cement manufacturer with a cement manufacturing capacity of 130 MTPA by 2030. It expects to increase capacity over the next decade from 35.9 MTPA in FY22 to around 110-130 MTPA with an interim target of 48.5 MTPA by March 2024. The company is also engaged in the refractory business through Dalmia Cement (Bharat) Limited. During the year, it has been transferred to an independent entity.

Recently, Dalmia Bharat inked a binding framework agreement for acquiring clinker, cement and power plants from Jayprakash Associates, the flagship company of Jaypee Group and its associates. The acquisition will have a total cement capacity of 9.4 MT along with a clinker capacity of 6.7 MT and thermal power plants of 280 MW. These assets are situated in the states of Madhya Pradesh, Uttar Pradesh and Chhattisgarh. Dalmia Bharat will acquire the cement assets from Jaypee Associates at an enterprise value of ₹5,666 crore. The company stated that the acquisition will enable the company to expand its footprint into the central region and will represent a significant step towards the realisation of its vision to emerge as a pan-India cement company with a capacity of 75 million tonnes by FY27 and 110‐130 million tonnes by FY31.

Sector Highlights

By FY 2027, India’s cement demand is expected to reach 419.92 MT. The cement industry has enormous growth potential since India has a large quantity and quality of limestone deposits throughout the country. The country has 210 large cement plants with 77 located in the states of Andhra Pradesh, Rajasthan and Tamil Nadu. South India accounts for nearly 33 per cent of India’s cement production capacity while North India accounts for 22 per cent, Central and West India account for 13 per cent and East India accounts for the remaining 19 per cent. Cement production in India is expected to grow at a CAGR of 5.65 per cent between FY16 and FY22, driven by the demand for roads, urban infrastructure and commercial real estate.

The consumption of cement in India is expected to have grown at a CAGR of 5.68 per cent from FY16 to FY22. According to Crisil Ratings, the Indian cement industry is expected to add 80 million tonnes capacity by FY24, the most in the last 10 years, due to increased spending on housing and infrastructure. India produces more than 7 per cent of the world’s installed cement capacity, making it the world’s second-largest cement producer. At its installed capacity of 500 MTPA, India currently produces 298 MT of cement per year. According to Fortune Business Insights, the market value has risen from USD 326.81 billion in 2021 to USD 340.61 billion in 2022. 

It is expected to reach USD 481.73 billion by 2029. Overall cement production in India was 263.12 million tonnes in 2021, and it is expected to increase to 404.11 million tonnes by 2029, with a CAGR of 5.51 per cent over the forecast period. The total installed capacity of the India cement sector is over 545 million tonnes per year with 337 million tonnes of cement produced in 2021-22, indicating capacity utilisation of around 62 per cent. The Indian cement industry, which is dominated by domestic market players, has taken the first step toward adapting to changing socioeconomic and environmental paradigms, whether through the adoption of new technology, stricter environmental regulations or repurposing waste from other industries. 

Financials

It was a very tough quarter for the Indian cement industry but at the same time for the quarter ended September 30, 2022, Dalmia Bharat reported a consolidated total income of ₹3,009 crore, up 14.76 per cent from last year’s same quarter’s total income of ₹2,622 crore and down 9.48 per cent from the last quarter’s total income of ₹3,324 crore. During the quarter, it has witnessed significant margin compression due to steep energy inflation. The EBITDA for the quarter stood at ₹379 crore. The company reported net profit after tax of ₹41 crore in the latest quarter.

For the rest of the year, the company expects profitability to rebound due to combined favourable effect of sales volume, prices and then cost. With a sharp management focus, it has remained one of the lowest total cost producers in the industry. Globally, the company is in the midst of some uncertain times with a mixed bag of news flowing in from across the globe. Even after the unrest, the company’s management keeps faith and optimism in the prospects of the Indian economy to be very strong. It remains committed to continuously exploring levers of long-term cost savings and is implementing suitable measures to retain cost leadership

During the quarter it has commercialised 4 megawatts of waste heat recovery system and 20 megawatts of solar power which takes its total renewable energy capacity to 129 megawatts and which constitutes 24 per cent of its power mix. The company has now taken the Board of Directors’ approval to further add 155 megawatts to renewable power. This is beyond 173 megawatts of renewable power, which is on track to implement by March 2023. With this, its total renewable energy estimation would be expected to reach 328 megawatts by FY 2024. On the capex front, it is on track for addition of 49 million tonne by March 2024.

Of the total capex of ₹3,000 crore planned for FY23, it has so far spent about ₹1,200 crore in H1 and is on track to spend the planned capex in H2 as well. With respect to incentives, the company has accrued ₹61 crore in Q1 and ₹119 crore in H1. The company’s Managing Director Puneet Dalmia is very committed and bullish on the long-term prospects of the sector and is firm about the long-term goal of achieving production of 110-130 million tonnes by 2031. The company has committed to an interim milestone of 9 million tonnes by March 2024 and is on track to deliver it on time. This has given it the confidence of setting another interim milestone of 70-75 million tonnes by FY 2027.

Outlook

The Indian government has emphasised its commitment to infrastructure development by launching numerous projects in manufacturing, housing and education. The cement industry is central to all planned infrastructure development and as one of the country’s eight essential industries it provides a unique value proposition for laying the groundwork for a new India. The cement industry has extensive forward and backward links to the economy of the country. Given the huge infrastructural requirements of an expanding and urbanising country, as well as its contributions in terms of direct and indirect jobs, the value proposition of the cement industry is even greater for a rising and transitioning economy like India. Despite the challenges, India’s cement sector is poised for rapid growth.

This is due to the robust growth expected in the individual housing segment, which is buoyed by rising rural income and the government’s emphasis on affordable housing. The government’s infrastructure push as well as a surge in industrial sector demand driven by increased warehouse requirements for e-commerce and data centres for back offices is expected to boost cement demand in the country. Given a combination of factors such as demographic construct, a very large consumer base, the state of organisation in the country and the China Plus One policy, various cement manufacturers strongly believe in India taking advantage of this opportunity that lies ahead of it. 

It also bodes well for the government to generate employment opportunities for millions of people who are getting added to the workforce every year. The value-additions are in the form of the thrust on infrastructure development, increased public spending by the government and augmentation of private capex. And rightly so, the government has recognised this. Over the years it has increased its allocation towards infrastructure and also created an enabling environment for private investment. Jaypee Group cement plants have been acquired in Madhya Pradesh, Uttar Pradesh and Chhattisgarh. Dalmia Bharat is currently present in these states but there are no manufacturing facilities.

When the aforementioned agreement is completed, the acquired assets will not only provide the company with a larger market share but also the ability to sell cement at competitive prices. Furthermore, according to company filings, Central India has the lowest per capita cement consumption among Indian regions at 170 kg and accounts for 15 per cent of India’s cement demand. The management anticipates that demand in Central India will grow at a 7 per cent CAGR in the medium term, allowing it to strengthen its presence in the region, which it lacked prior to the acquisition. Hence, we recommend BUY.