How Jaypee deal will impact Dalmia

If the deal fructifies, it will enable Dalmia to expand its footprint into the central region and boost its capacity share by around 10% on the current installed capacities in that region. These assets are in Madhya Pradesh, Uttar Pradesh and Chhattisgarh. Dalmia currently operates in these states, but has no manufacturing units there. A successful completion of the deal would mean that Dalmia would get a better handle on the selling price.

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These assets have a total cement capacity of 9.4 million tonne (mt) along with clinker capacity of 6.7mt and thermal power plants of 280 megawatt. Diversifying from the East into different regions is expected to reduce earnings volatility for Dalmia, giving its long-term volume and market share outlook more visibility. The company aims to reach a capacity of 75 mtpa by FY27 and 110-130mtpa by FY31.

This transaction with Jaiprakash Associates will be done at an enterprise value of ₹5,666 crore. While the move is directionally positive for Dalmia, investors weren’t impressed, with the company’s falling by 2.6% on Tuesday.

There is some nitty-gritty on which clarity is awaited, and that is bothering investors, said analysts. This includes, plant-wise break-up of the acquired assets and availability of limestone reserves. “The acquisition also includes the 2.3mt Dalla Super clinker plant in UP, which is yet to receive long-pending forest clearance,” said Rajesh Ravi, institutional analyst, cement, at HDFC Securities. A worry is that additional capex to restart the plant post getting the forest clearance would inflate the total acquisition cost.

Importantly, the funding route for the transaction is not clear yet. “Prior to the announcement, we estimated the company’s net debt at ₹2,000 crore and consolidated Ebitda at ₹2,930 crore for Mar-24E. Assuming no change in the company’s ongoing expansions, this acquisition would increase net debt to approximately ₹7,700 crore,” Ravi said. This would result in a net debt/Ebitda ratio slightly above 2x, assuming total Ebitda of about ₹3,000 crore after the acquisition of JPA’s assets, he added.

Also, this transaction is subject to due diligence, requisite approvals from lenders and joint venture partners of Jaiprakash Associates, and regulatory authorities. The company has said it would endeavour to complete the transaction in 12 months in phased manner.

Meanwhile, due to its favourable demand-supply dynamics, central India has garnered interest among cement manufacturers. According to Dalmia, the central region’s cement demand at around 54mt represents around 15% of the country’s total demand.

“Merger & Acquisition activity in the sector has led to increased consolidation in central India. Central India has witnessed the entry of new players (Sagar Cements Ltd, JK Cement Ltd, JK Lakshmi Cement, etc.) in the recent past,” said analysts at Motilal Oswal Financial Services Ltd. The domestic brokerage house estimates central India to register an effective supply addition CAGR of around 9% over FY22-25, while demand CAGR is expected to be 7-8% over the same period. Although the demand outlook for the region remains robust, it remains to be seen how the medium-term pricing trend pans out given the increasing number of cement manufacturers entering the region.