Stock Review: Dalmia Cement

 

 

 

The stock of Dalmia Cement (Bharat), a diversified player, has sharply underperformed the broader market over the past three months. Investors are concerned about the bleak prospects of the company's key businesses. There are no signs of revival in the operating environment in the company's key southern markets. Its sugar division is also hit due to falling sugar prices.

    The stock has declined nearly 5.3% during the said period as compared to the 11% increase in the Sensex. Cement companies operating in the South had reported a fall in their price realisations between 8 and 15% on a per tonne basis in the first quarter, due to rapidly expanding capacities and sluggish demand.

    Cement capacity in the southern region is expected to reach 120 million tonnes by the end of March 2011, a rise of 20% within a year, even as demand in the region is dwindling.

    Analysts point to a significantly better sugar output this year. This is likely to keep sugar prices weak. In addition, concerns are also attributed to higher prices of sugarcane, the major input for the sugar sector.

    Spot sugar prices are currently at Rs 27 per kg levels, as compared to Rs 29-30 at the end of the first quarter. While sugar prices are weakening, they are still higher than the year-ago levels. This may provide some cushion for sugar manufacturers.

    The difficult environment had impacted its June quarter performance. Its operating profit margin plummeted by two-third to 8.5% year-on-year. This was despite the 4% growth in its total operating income of Rs 576.4 crore. Apart from a fall in cement realisations, the company also grappled with an inventory write-down to the tune of Rs 18 crore for the sugar division. As a result, it had a net loss of Rs 19.1 crore in the quarter.

    Dalmia Cement (Bharat) had earlier announced plans to demerge its cement, and certain other businesses into Dalmia Bharat Enterprises (DBE), in a bid to create entities that are sharply focused. The original Dalmia Cement (Bharat) would house the sugar business with crushing capacity of 22,500 tonne per day, coupled with distillery and co-generation business.

    The company is expected to complete the necessary regulatory process shortly. At Thursday's close of Rs 203.5, the stock trades at 12 times on a trailing four-quarter basis (excluding the earlier restructuring plan). It looks expensive at the current valuations given bleak near-term prospects.