Renewable Energy Shift Will Reduce Costs As Cement Capacity Expands

Key Takeaways

• The company's strategic cement capacity and renewable energy expansions aim to enhance long-term revenue growth, market share, and efficiency.
  
• Cost reduction measures focusing on renewable energy usage are expected to improve net margins and operational efficiencies over time.
  
• Economic challenges, competitive pressures, and increased debt levels could constrain Dalmia Bharat's financial flexibility and impact future revenue and earnings growth.

Catalysts

Manufactures and sells clinker and cement products primarily in India.

• Dalmia Bharat is optimistic about future cement demand growth, particularly in Q4, with expectations of a 6% to 7% year-on-year growth driven by increased government capital expenditure and seasonal construction activities. This could positively impact revenues.
  
• The company plans to expand its cement capacity to 49.5 million tonnes by the end of FY '25 and further to 75 million tonnes by FY '28. This strategic expansion is likely to support long-term revenue growth and market share.
  
• Dalmia Bharat is working on cost reduction measures to achieve a savings of ₹150 to ₹200 per tonne by FY '27. This focus on internal efficiencies aims to improve net margins over time.
  
• The company is increasing its reliance on renewable energy to reduce power costs, targeting a 40% to 45% share in its power mix by the end of FY '25. This shift is expected to lower energy costs, boosting net margins.
  
• The execution of signed renewable power agreements and ongoing project completions, such as the 2.4 million tonne grinding unit in the Northeast, suggest improved operational efficiencies and potential earnings growth in the medium to long term.

Dalmia Bharat Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dalmia Bharat's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.0% today to 8.6% in 3 years time.
• Analysts expect earnings to reach ₹16.4 billion (and earnings per share of ₹87.25) by about January 2028, up from ₹5.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹8.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.4x on those 2028 earnings, down from 61.8x today. This future PE is lower than the current PE for the IN Basic Materials industry at 35.5x.
• Analysts expect the number of shares outstanding to grow by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.87%, as per the Simply Wall St company report.

Dalmia Bharat Future Earnings Per Share Growth

Risks

• General elections, heavy monsoons, and unseasonal rains have impacted overall economic activities, leading to a 7-quarter low GDP growth of 5.4% in Q2, which could affect future revenues and earnings.
  
• Lower-than-expected government spending and delayed CapEx have resulted in only low single-digit cement demand growth, potentially impacting future revenue growth.
  
• The company's Q3 volumes decreased by 2% year-on-year, with revenues declining by 12% due to a sharp decline in cement prices year-on-year, impacting revenue and net margins.
  
• Increasing competitive intensity in the cement market may cap significant gains in pricing, potentially affecting net margins and earnings.
  
• Gross debt and net debt have increased, leading to a higher net debt-to-EBITDA ratio, which could constrain financial flexibility and impact future earnings.

Valuation

• The analysts have a consensus price target of ₹1925.97 for Dalmia Bharat based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2300.0, and the most bearish reporting a price target of just ₹1478.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹191.4 billion, earnings will come to ₹16.4 billion, and it would be trading on a PE ratio of 32.4x, assuming you use a discount rate of 13.9%.
• Given the current share price of ₹1856.45, the analyst's price target of ₹1925.97 is 3.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.