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Cost pressure continues in Q2; Revival likely in 2HFY23

Strong revenue YoY while muted QoQ growth: Dalmia posted revenue of Rs 2,971cr, up by 15.3% YoY driven by improvement in sales volume which grew by 14% to 5.8MT and realizations grew by 1% YoY. Comparing QoQ numbers, revenue witnessed de-growth of 10% impacted by decline in volumes and realization by 6% and 4%, respectively. Overall, Q2 remains muted for cement companies as demand, realization and construction activity is largely impacted by monsoon season.

RM cost still remained a concern in Q2: Gross profit grew by 12.8% YoY on the back of better sales volumes however margins declined by 188bps YoY due to rise in raw material cost by 32%. Further, EBITDA declined by 39% YoY while margins dropped by 1,141bps and PAT declined by 76% YoY and margin was down by 662bps impacted by rise in power and fuel cost by 76.6% YoY. Comparing QoQ, Gross margins, EBITDA and PAT declined by 212bps/515bps/401bps, respectively. Going ahead, we believe with easing of raw material prices, cost optimization measures and focus on carbon negative footprint (using more renewable resources) will aid margin improvement.

Aggressive capex expansion: Along with other cement players Dalmia too has aggressive plans for expansion. The company is well on track to expand its capacity to 49MT by FY24 via green-field and brownfield expansion as well as debottlenecking of current facilities. Besides, in the Q2 concall, the management announced that it has plans to further increase capacity to 70-75MT by FY27.

Concall highlights: 1) The company’s added Renewable power capacity of 24 MW, in-line with its motive of being carbon negative by 2040. 2) Net debt/EBITDA stood at 0.3x. 3) Management remains positive on the long term growth prospects of the cement sector given the government push towards infrastructure and strong revival in demand.

Valuation: In the near term, Dalmia’s top-line remains stable while it is facing cost pressure. Going ahead, positive sector growth, capacity expansion plans, improving utilizations levels would bode well for the growth. Meanwhile, its cost optimization measures and focus on product mix as well as declining raw material price trend will help in improving margins. Further, its long term vision of using green fuels and being carbon negative is positive and would help growth. On a financial front, we have estimated its revenue/EBITDA growth of 25.4% and 27.8% CAGR over FY22-24E. We recommend a buy on Dalmia Bharat with a target price of Rs 1,968.

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