Prabhudas Lilladher has maintained its Accumulate rating for Dalmia Bharat with a revised target price of Rs 2,073, implying a potential upside from the current market price of Rs 1,831. This recommendation comes despite a challenging Q2FY25, where weaker realizations and higher maintenance costs weighed on profitability. The company’s renewable energy initiatives and strategic cost-cutting plans are expected to yield long-term benefits, and with growing cement demand anticipated in the second half of the fiscal year, Dalmia Bharat is poised for a recovery in performance. Investors are advised to accumulate the stock for medium- to long-term gains.

Challenging Q2FY25 Results Due to Pricing Pressure

Decline in Average Realization (NSR)
Dalmia Bharat faced significant pricing pressure in Q2FY25, particularly in its key markets of the East and South. The company reported a 6% quarter-over-quarter (QoQ) drop in average NSR as cement prices declined sharply by 5-7% QoQ in these regions. The trade mix also decreased to 63%, further affecting the revenue, which declined 2% year-over-year (YoY) to Rs 30.9 billion. This pricing weakness, coupled with a reduction in trade volumes, resulted in a 15% QoQ revenue decline.

Volume Growth Offers Resilience
Despite the pricing challenges, cement volumes grew by 8.4% YoY, reaching 6.72 million tonnes. However, this was offset by a 9% QoQ decline, reflecting seasonal weakness in demand. The company managed to partially offset the pricing pressures by supplying material from its eastern plants to the fast-growing central region through its established dealer network.

Cost Pressures Impact EBITDA and Profitability

Higher Maintenance Costs Drag EBITDA
Dalmia Bharat’s profitability was negatively impacted by higher operating costs, particularly related to maintenance shutdowns and fixed costs. As a result, EBITDA declined by 26% YoY to Rs 4.34 billion, with a 35% QoQ decline. This sharp drop in profitability was driven by lower realizations and an increase in operating expenses, including power and fuel (P&F) costs, which rose 3% QoQ.

EBITDA Per Tonne Drops Sharply
Dalmia Bharat’s EBITDA per tonne fell by 32% YoY, reaching Rs 646. This sharp decline reflects the combined effect of weak cement pricing and elevated costs, including freight and other operating expenses, which increased by 13% QoQ due to higher maintenance and fixed costs.

Renewable Energy and Cost Efficiency Plans

Renewable Energy (RE) Expansion to Lower Costs
A key focus for Dalmia Bharat’s long-term cost-saving strategy is its increased reliance on renewable energy. The company’s RE share stood at 39% in Q2FY25, and management aims to raise this to 45% by FY25 and 50% by FY26. This shift towards renewable energy is expected to generate Rs 50 per tonne in cost savings by FY27, helping mitigate rising energy expenses.

Logistics and Captive Coal to Drive Savings
Dalmia Bharat is also targeting additional cost savings from logistics efficiencies and its captive coal mines. The management has outlined potential savings of Rs 50 per tonne from improved logistics and Rs 100 per tonne from captive coal block operations. These measures are part of a broader cost-saving strategy aimed at reducing operating expenses by Rs 150-200 per tonne by FY27.

Near-Term Challenges and Growth Catalysts

Weak NSR and Competition Could Delay Growth
While Dalmia Bharat’s long-term outlook remains positive, potential delays in executing its capacity expansion plans, particularly due to competitive pressures and possible delays in the Jaypee Group acquisition (JPA assets), could weigh on near-term performance. Management has reiterated its medium-term target of 75 million tonnes per annum (mtpa) capacity by FY28, but competitive pricing in the market could create short-term margin pressures.

Positive Outlook for H2FY25
Despite the near-term challenges, Dalmia Bharat is expected to benefit from an improvement in cement demand in H2FY25. Management anticipates 8% demand growth for the second half of FY25, driven by infrastructure projects and rising construction activity. Additionally, the company’s capacity utilization remains below 60%, indicating ample room for volume growth without significant near-term capital expenditure.

Valuation and Financial Projections

Revenue, EBITDA, and PAT Growth Projections
Prabhudas Lilladher forecasts a 11% CAGR in revenue over FY24-27, with EBITDA expected to grow at 14% CAGR and PAT at 21% CAGR. By FY26, Dalmia Bharat’s revenue is projected to reach Rs 177.1 billion, while EBITDA is expected to climb to Rs 35.4 billion. The company is also expected to achieve an EPS of Rs 71.4 by FY26, with a consistent improvement in margins as cost-saving initiatives take effect.

Valuation and Target Price
At its current market price of Rs 1,831, Dalmia Bharat is trading at 10.4x FY26E EBITDA and 9.3x FY27E EBITDA. With Prabhudas Lilladher’s target price of Rs 2,073, the stock presents a potential upside of 13.2%, making it an attractive option for medium- to long-term investors. The stock’s valuation reflects its strong growth prospects and improving cost structure, though near-term challenges remain a key risk.

Investor Recommendations

Accumulate for Long-Term Gains
Given Dalmia Bharat’s focus on renewable energy, cost efficiencies, and capacity expansion, the company is well-positioned for long-term growth. While near-term performance may be affected by pricing pressures and competitive challenges, the long-term outlook remains favorable. Investors are advised to accumulate the stock, particularly during market corrections, to capitalize on its growth potential.

Short-Term Volatility Expected
In the short term, Dalmia Bharat may experience volatility due to weak pricing in key markets and rising costs. However, with demand expected to improve in H2FY25 and ongoing cost-saving measures, the company is likely to see a recovery in performance by FY26.

Conclusion

Dalmia Bharat’s Q2FY25 performance was impacted by weak pricing and higher costs, but the company’s long-term growth strategy remains intact. With a strong focus on renewable energy, cost-saving initiatives, and capacity expansion, Dalmia Bharat is poised for steady growth over the next few years. Prabhudas Lilladher’s Accumulate rating and target price of Rs 2,073 reflect confidence in the company’s ability to deliver long-term value for investors.