Dalmia Bharat set to go national with acquisition of JAL’s cement business

The acquisition will allow Dalmia Bharat to expand into the central region and will represent a significant step towards realising its vision of becoming a pan-India cement company.

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Dalmia Bharat’s acquisition of the cement business of JP Associates Ltd. marks a big step in its attempt to shed its image as a regional company, widening its geographical presence beyond the eastern part of the country.

The company will acquire JAL’s clinker, cement, and power plants for Rs 5,666 crore, which works out to an attractive valuation of $73 per tonne and is cheaper than setting up new capacity, experts said.

The company outbid stronger suitors including UltraTech Cement and the Adani Group, which reportedly looked at an enterprise value of about Rs 5,000 crore for the businesses. Earlier this year, the Adani Group emerged as India’s second largest cement manufacturer after taking control of Holcim’s cement businesses in India.

Dalmia Bharat has been able to grab a good deal at an “attractive valuation,” said analysts from Sharekhan by BNP Paribas.

“More importantly, the acquisition will enable the company to expand its footprint into the central region and will represent a significant step towards realisation of its vision to emerge as a pan-India cement company with a capacity of 75 mtpa (million tonnes per annum) by FY27 and 110-130 mtpa by FY31,” Sharekhan by BNP Paribas said in a note.

Central presence

Completion of the acquisition will enable the company to enter central India with a material capacity share of about 10 percent, based on current installed capacities in the region.

Industry data shows the central Indian cement market has one of the lowest per capita cement consumption of about 170 kg. Cement demand in central India is estimated at 54 mtpa, which constitutes 15 percent of total domestic demand.

“The central region’s cement demand is expected to grow at 7 percent CAGR in the medium term and the region has good market structure, with top five players in the region holding ~75 percent of the market while the capacity utilisation in the region of ~75 percent is much higher compared to pan-India utilisation levels of ~65-70 percent,” the analysts at Sharekhan by BNP Paribas said.

The acquisition will help Dalmia Bharat get a head start in the region. The business being acquired includes clinker capacity of 6.7 million tonnes; cement capacity of 9.4 mtpa and a power plant with a generating capacity of 280 MW.

The company management did not provide a timeline for completion of the transaction.

“The deal timelines, additional capex required and limestone reserves are the key questions which still need to be answered,” global brokerage firm Jefferies said in a note.

The Dalmia Bharat management indicated earlier that its target was to reach a cement capacity of 49 mtpa by FY24 and 70-75mtpa by FY27, while its clinker capacity target was 23.7 million tonnes by FY24.

Following the acquisition, Dalmia Bharat’s cement capacity will increase to 46.4 mtpa from its current capacity of 37 mtpa. Its clinker capacity would jump to 27.6 million tonnes, enabling the company to achieve its capacity targets for FY24 much earlier.

Brokerage views

Domestic and global brokerages are optimistic about Dalmia Bharat’s growth prospects.

Morgan Stanley has an ‘overweight’ call on the stock with a target price of Rs 1,900, while Jefferies has a ‘buy’ call with a target price of Rs 2,060.

CLSA has assigned an ‘outperform’ rating and raised its share price target to Rs 2,100.

“The deal, once consummated, would address geographical concentration risk but we await clarity on limestone availability, clinker capacity and expansion potential,” it said in an update.

Motilal Oswal Financial Services has a ‘buy’ rating on the stock with a target of Rs 2,000.

“The stock trades at 13x/10.4x FY24/FY25 EV/EBITDA and EV/ton of $89 for FY24 $86 for FY25 and it has traded at an average EV/EBITDA of 10.4x/9.3x over the last 5/10 years,” Motilal Oswal said in a report.

Its net debt stood at Rs 2,540 crore (excluding MTM value of IEX investment) and net debt to EBITDA is at 1.2x (on 12-m trailing EBITDA). The company remains cautious about leveraging its balance sheet and targets to maintain net-debt to EBITDA below 2x. However, the management believes that in case of a strategic acquisition, net-debt to EBITDA may exceed 2x for a short period.

“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,” the analysts at Sharekhan by BNP Paribas said.

Currently, the brokerage does not factor in the acquisition in its estimates, awaiting closure of the deal and further details.

“We retain a ‘buy’ with a revised price target (PT) of Rs 2,250 per share increasing our valuation multiple to factor in faster capacity additions and its strong growth potential led by capacity expansions.”

The stock traded Rs 53.3 lower at Rs 1,853 in a volatile session on the National Stock Exchange at 11:45 am.

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