This Mid Cap Stock Grew 58.88% In 3 Years, Buy For 22% Robust Gains, Recommends Sharekhan

Sharekhan in its recent report on Dalmia Bharat Ltd (Dalmia), published on December 12, 2023, has given a "buy" call to the stock of the company for an estimated target price of Rs 2,250 per share. According to the given target price to the stock, it is likely to give a potential return of up to 22% if purchased at the current market price. Dalmia is a mid-cap Cement sector company engaged in the business of Manufacturing and Selling Cement. It has a market cap of Rs 34,795.12 crore.

Dalmia took a key step towards realising its pan-India cement player target by entering into a binding framework agreement with Jaiprakash Associates for the acquisition of 9.4mtpa cement capacity (along with 6.7mtpa clinker capacity and 280MW thermal power plants), according to the brokerage.

Stock Outlook & Returns Over The Years

The Current Market Price (CMP) of Dalmia's stock on NSE is Rs 1,856.05 per share, down 2.64% from its previous close.  The stock touched its 52 week high at Rs 2,104.15 on 17 January 2022 and its 52 week low at Rs 1,212.50 on 20 June 2022, respectively. The stock made its debut on the stock exchange on 22 January 2019.

Since the date of its listing, it has given 64.24% positive returns. In the last 1 month, the stock surged 11.28% and in the last 3 months, it surged 11.8%, respectively. However, in the last 1 year, it fell by 1.34%. It has given a multibagger return of 128.62% in the last 3 years. 

Acquisition of assets at an attractive valuation of $73/tonne

The company's acquisition of the Cement, Clinker and Power Plants from Jaiprakash Associates and its associate having a total cement capacity of 9.4mtpa (along with Clinker capacity of 6.7mtpa and Thermal Power plants of 280MW) at an EV of Rs. 5000 crore, values the assets at an attractive EV/tonne valuation of $73/tonne. Moreover, it has been able to outpace a couple of other large bidders viz. Ultratech and Adani group, which as per media reports, have been eyeing the assets at a valuation of Rs. 5000 crores. We believe that considering the interest from large buyers, the company has been able to grab a good deal at attractive valuation.

Head-start in Central region with ~10% capacity share

As per the company, the Central cement market is having one of the lowest per capita cement consumption in India at ~170kg. Central region demand is estimated at ~54mtpa, which comprises ~15% of domestic cement demand. The central region's cement demand is expected to grow at 7% CAGR in the medium term. The central region has good market structure, with top five players in the region holding ~75% of the market. The said region has capacity utilisation of ~75%+ compared to pan-India utilization levels of ~65-70%. The acquisition of the assets would help the company in getting a head-start with ~10% capacity share.

A key step towards realising Pan-India cement player target

Post-acquisition, Dalmia Bharat's cement and clinker capacity would increase to 46.4mtpa and 27.6mtpa from 37mtpa and 20.9mtpa respectively as on Q2FY2023. The company had earlier targeted cement and clinker capacities of 49mtpa and 23.7mtpa by FY2024 which would be achieved much earlier. More importantly, the acquisition will enable the company to expand its footprint into the central region and will represent a significant step towards realization of its vision to emerge as a pan India Cement company with a capacity of 75mtpa by FY2027 and 110-130mtpa by FY2031.

Valuation & Key Risks - Maintain Buy with a revised PT of Rs. 2250/share

Dalmia Bharat is expected to benefit from the recent acquisition which gives it a good head-start in the central region at attractive valuation. The company's planned capacity by FY2024 would be achieved much earlier while it focuses to reach 75mtpa and 110- 130mtpa capacities by FY2027 and FY2031. The acquisition would lead to an increase in leverage in the near term. However, it would still remain within its comfort zone, considering its under-leverage balance sheet and strong OCF generation capabilities. Currently, we do not factor in the said acquisition in our estimates awaiting closure of the deal and further details on the acquired assets. "We retain a Buy with a revised price target (PT) of Rs. 2,250, increasing our valuation multiple to factor in faster capacity additions and its strong growth potential led by capacity expansions: the brokerage has said.

Key Risks 

Pressure on cement demand and cement prices in the East, North-east, and South of India can affect financial performance; and Macroeconomic challenges leading to lower government spending on infrastructure and housing sectors can also impact performance

Disclaimer

The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.