Escalating cost pressures and inadequate price hike have led to the fall in cement stocks. Dalmia Bharat Ltd shares are no exception, falling 32% so far in CY22. The underperforming trend is likely to continue in the stocks in the near future due to margin challenges.
“In the short term, increased fuel costs will keep Ebitda per tonne low 1,037 for FY23E,” said a report by Yes Securities on June 22. It was 1,093 per tonne in FY22, representing a year-on-year (YoY) decline of 18%. Prices of key inputs for cement manufacturers such as petroleum coke and coal remain high. In FY23, investors will see if there is a significant drop in costs, leading to better earnings prospects.
see full image
Meanwhile, Dalmia is excited about India’s capacity expansion plans. “Continuing a step forward towards our vision of achieving 48.5 MTPA (million tonnes per annum) capacity by 2024 and 130 MTPA capacity by 2030, we have committed 1,988 crore towards capital expenditure during this year,” the company said in its latest annual report. In FY22, Dalmia Bharat increased its capacity by 5.15 MTPA to 35.9 MTPA.
Over the next few years, the company will spend 9,000 crore on capacity expansion and sustainability initiatives. “Despite strong capex spending over the next two years, we believe leverage will remain at a comfortable range (<2x)," analysts at JM Financial Institutional Securities Ltd said in a report on June 15. Negative 1,400 crore (net debt on Ebitda -0.6x) by March 2022,” it said. However, Dalmia Bharat is not the only cement company adding capacity. “When top cement companies are also expanding capacity, investors should Volume growth is expected to be faster than capacity growth for individual companies. However, this is difficult to achieve when many companies are on expansion mode. Also, if demand is lower than expected, companies may give up on pricing, which will impact margins,” said Mangesh Bhadang, analyst at Nirmal Bang Institutional Equities. How this plays out will also depend on the future. How strong is the demand?
However there is a ray of hope. Dalmia has a wide presence in the East. “If the eastern region shows higher growth in FY23, helped by a favorable base, these eastern proxies should see more than a growth in industry volumes,” said Satyadeep Jain, analyst at Ambit Capital. However, the former is also witnessing the highest capacity addition across all sectors and hence, increased competition in India poses a risk to earnings, he said.