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S. Vaidya Nathan

Cement being packed in bags at Dalmia Cement's Dalmiapuram unit... Firm prices will bolster profits.

SHAREHOLDERS of Dalmia Cement can retain their holdings as there appears scope for gains over a one-two-year time-frame. Strong fundamentals, space for reduction in interest cost and an improvement in price of cement in its key markets that started towards the end of 2003 are likely to positively influence the stock valuation. The stock trades at a price-earnings multiple of 10 times.

Business Line has buy recommendations outstanding on the stock at prices ranging between Rs 160 and Rs 205. At Rs 275, the price of the Dalmia Cement stock fell by about 20 per cent from the high of Rs 353. This is in line with the downtrend in a swathe of mid- and small-cap stocks over the past month. Fresh exposures can, however, be avoided at the prevailing price levels.

The higher level of volatility over the past month and the slew of imminent offers-for-sale of equity by the government could weigh on equity prices. Dalmia Cement would be no exception. Any decline in the stock price linked to weakness in the broad market may provide an entry point at a more attractive level.

Scaled-up earnings: Dalmia Cement appears set to close FY 04 with earnings growth of 35-40 per cent. If the cement prices stabilise at higher levels in the key markets of Tamil Nadu and Kerala, the earnings level for FY 05 may scale up. The earnings card for the year, which may provide a clearer picture of the profitability of sugar business as a sizeable portion of sales, may only be reflected in the January-March quarter.

For the first there quarters, the sales of the sugar business was lower by about 40 per cent compared to last year; the trend during this period, however, points to a higher level of contribution by the sugar business to earnings despite the likely softening of prices in the homestretch to the parliamentary elections, which is likely in the April-June period.

Relying on cement: The company's performance and the valuation of its stock hinges on the cement business that accounts for between 85-90 per cent of the earnings and provides a healthy cushion to absorb losses of the businesses of magnesite and other businesses; this is despite the deployment of less than half the resources in this line of business.

Dalmia Cement has a capacity of about 1.5 million tonnes and has consistently operated it in excess of 100 per cent. In the absence of room for volume growth, it is relying on higher price levels to drive earnings growth. Dalmia Cement caters to the Tamil Nadu and Kerala markets and its location ensures lower freight costs. The effect of the higher price levels in these two markets may be reflected in the earnings over the next couple of quarters.

Diversified profile, a drag: Dalmia Cement is a diversified company with presence in sugar, magnesite, wind farms and other smaller businesses. Only the wind farms business has been a consistent and healthy contributor to the earnings stream. The magnesite and other business continue to be in the red, A spurt in the losses of the magnesite business in the October-December quarter is a cause for concern; the losses for the year are likely to substantially higher than those in FY 03.

This may be offset partially by a reduction in losses in small businesses, classified as others, that have witnessed a 17 per cent decline in revenues.

There has been a scaling down of resources committed to these businesses by about 35 per cent. But there are no clear signs that this is part of a phase-out of these businesses. As for the sugar business, its contribution has not yet matched the investments made over the years.

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