Nomura Research downgraded Dalmia Bharat to "neutral" from "buy," citing limited upside due to lower industry volume growth and uncertainty surrounding Jaypee deal. Despite the downgrade, the brokerage house has maintained the target price for Dalmia Bharat at Rs 2,600 per share, indicating a 12 percent increase from its present market price.
During the second quarter of FY24, Dalmia experienced a continuation of the market share loss in north Bihar and West Bengal, which had begun in the first quarter of the fiscal year. This was attributed to pricing decisions that did not yield the intended outcomes. However, the company has taken corrective measures to address this issue and expects improved results in the fourth quarter. Dalmia's primary objective is to optimise resource utilisation and outperform industry growth benchmarks.
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The company's volume declined 20 percent year- on-year (YoY) in the east compared to a 7 percent a year ago total volume growth. Nomura predicts Dalmia will face challenges in regaining market share in FY24. However, Dalmia maintained strong growth in the northeast and south regions, which are more profitable in terms of unitary EBITDA than the east. Nomura expects Dalmia to record 8 percent y-y ex-central volume growth in FY24F, less than the industry average.
Read: Dalmia Bharat Q2 net profit jumps 162% at Rs 123 crore on lower fuel prices
Management remains confident about finalising the Jaypee deal by the end of FY24, even though there hasn't been much progress sequentially. Nomura has adjusted its modeling for Jaypee's 9.4 million tons cement and 1.0 million tons clinker capacity (excluding Dala) to start from 1HFY25, instead of 4QFY24 as previously anticipated. Nomura has also lowered its FY24 volume estimate to 29 million tons. For FY25 and FY26, Nomura now assumes 40 percent and 60 percent utilisation of Jaypee assets, respectively.
Nomura has revised its FY24F-end net debt estimate to Rs 4,200 crore, up from the previous Rs 3,700 crore. This change is due to increased capital expenditure and reduced working capital release. It includes a payment of Rs 3,500 crore for Jaypee assets as part of the FY24F capital expenditure.
" We raise our EBITDA estimate by 2 percent for FY24/FY25 (each) and PAT estimate by 3 percent for FY24/FY25 (each), given the higher cost savings. We have not yet factored JP asset acquisition into our assumptions", said Motilal Oswal in its note. Motilal reiterates its buy rating with a revised target price of Rs 2,800 from Rs 2,760 a share.
Analysts predict that Dalmia will see a 3 percent increase in cement prices in 3Q, thanks to the industry's pricing discipline. However, rising prices for other raw materials may offset the savings from lower power and fuel costs. Overall, analysts expect the combined cost of raw materials and power/fuel to remain stable in 3Q. Dalmia should also benefit from higher fixed-cost absorption due to a 12 percent year-on-year volume growth in 3QFY24.
Read: As cement industry sees surge in demand, which stock can deliver maximum returns?
Meanwhile, Dalmia Bharat's net profit for the quarter ending in September jumped by 161.7 percent compared to the same period last year, reaching Rs 123 crore. This increase was mainly due to reduced power and fuel expenses. The company's sales volume for Q2 FY24 was 6.2 million tonnes, a 6.6 percent increase from the 5.8 million tonnes in Q2 FY23. The revenue for the quarter reached Rs 3,149 crore, marking a 6 percent YoY growth.
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