Dalmia Bharat shares: Nomura slashes price target by 35% as Jaypee assets move to NCLT

Nomura India has cut its rating on Dalmia Bharat Ltd to 'Reduce' from 'Buy' and slashed its target price on the cement stock to Rs 1,700 from Rs 2,600 earlier amid limited growth catalyst. Nomura said its change in stance reflects the uncertainty over the Jaypee deal as the binding agreement does not hold anymore. It cited limited capacity expansion at Dalmia Bharat, and loss of share in core markets among reasons for the downgrade.

"We exclude Jaypee assets from our estimates implying: (1) lower volume growth resulting in lower fixed cost absorption, and (2) reduced earnings as the Central region was relatively better priced. As a result, we lower our FY25/26F Ebitda estimates by 31 per cent/30 per cent to Rs 2,800/Rs 3,100 crore," Nomura said. 

Stripping out Jaypee assets, the foreign brokerage sees limited potential for re-rating for Dalmia Bharat. It cut its target EV/Ebitda multiple for the stock to 11 times against 13 times earlier. Nomura's target implies 6.5 per cent potential downside.

The NCLT has directed to initiate insolvency proceedings against Jaiprakash Associates, effectively replacing the board of JAL with Interim Resolution Professionals (IRP). This implies Dalmia will have to rebid for JAL’s assets as all binding agreements with the now suspended JAL board, in practical terms, are null and void. 

"We see increased competition from companies such as Adani and JSW that have the resources to buy the entire JAL group. We exclude JAL assets from our estimates, resulting in declines in both volume growth and earnings of Dalmia," Nomura said.

It noted that Dalmia has no capacity expansion after the ongoing 4.9MT capacity. On the contrary, the industry will witness capacity addition at a CAGR of 7 per cent (over FY24-26). 

In Dalmia’s core market of the Eastern region, planned cement capacity is expanding at a CAGR of 11 per cent (FY24-26). Dalmia lost market share in early FY24 in the East, and with limited capacity expansion plans, Nomura believes it is at risk of losing further market share. 

"In the Southern region, competitive intensity has increased after Ambuja’s acquisition of Penna. Margins should come under pressure as Ambuja increases utilization of both Sanghi and Penna. Ultratech is also adding 10MT capacity in the region by FY26F. With increased volumes from category A brands, Dalmia might find it difficult to maintain its dominance in the South, in our view," it said.