Government Infrastructure Spending And Capacity Expansion Will Drive Cement Demand And Boost Earnings Growth

Key Takeaways

• Anticipated government spending and real estate upswing may boost cement demand, positively impacting future revenues.
  
• Strategic expansions in capacity and cost leadership initiatives aim to enhance long-term growth and improve net margins.
  
• Competitive pressure and regional strategies may cap revenue growth despite anticipated demand, with high CapEx posing risks to cash flow and profitability.

Catalysts

Manufactures and sells clinker and cement products primarily in India.

• The expectation of substantial government infrastructure spending in the second half of FY '25 is likely to increase demand for cement, which may positively impact future revenues.
  
• The anticipated real estate upswing and a multi-year cycle in construction activity suggest increased cement consumption, potentially boosting sales volumes and revenues.
  
• The focus on expanding Dalmia Bharat's capacity to 75 million tonnes by FY '28 and the implementation of new projects could support long-term revenue and earnings growth.
  
• Cost leadership through strategic initiatives like renewable energy adoption and logistics improvements aims to reduce expenses by ₹150 to ₹200 per tonne, potentially enhancing net margins.
  
• The company's strategy to grow at 1.5x the industry growth rate, by deepening distribution and enhancing brand positioning, could drive higher earnings and market share, supporting long-term financial strength.

Dalmia Bharat Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dalmia Bharat's revenue will grow by 9.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 8.4% in 3 years time.
• Analysts expect earnings to reach ₹16.1 billion (and earnings per share of ₹74.53) by about December 2027, up from ₹7.6 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹10.8 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.0x on those 2027 earnings, down from 46.1x today. This future PE is greater than the current PE for the IN Basic Materials industry at 25.5x.
• Analysts expect the number of shares outstanding to grow by 4.89% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.77%, as per the Simply Wall St company report.

Dalmia Bharat Future Earnings Per Share Growth

Risks

• The decline in cement prices, particularly in the South and Eastern markets, led to a decrease in revenues despite volume growth, which could pressure the company's net margins and profitability.
  
• The muted demand environment in the first half of the fiscal year led to lower industry capacity utilization rates and a weak pricing environment, potentially affecting future earnings if the trend continues.
  
• The company is undertaking significant capital expenditures to reach 75 million tonnes by FY '28, but high CapEx levels could strain cash flow and impact net debt levels, especially if revenue growth does not meet expectations.
  
• Competitive intensity in the market may cap any significant gains on pricing, which could limit revenue and margin expansion despite anticipated demand recovery in H2.
  
• Increased non-trade mix and regional sales strategies may impact overall pricing power and profitability, as non-trade sectors typically have lower margins compared to trade segments, affecting earnings sustainability.

Valuation

• The analysts have a consensus price target of ₹1977.9 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 ₹2500.0, and the most bearish reporting a price target of just ₹1490.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹193.1 billion, earnings will come to ₹16.1 billion, and it would be trading on a PE ratio of 39.0x, assuming you use a discount rate of 13.8%.
  
• Given the current share price of ₹1879.3, the analyst's price target of ₹1977.9 is 5.0% 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.