The completion of takeover of JP Group’s cement plants will allow Dalmia Bharat to foray into Central India with a material capacity share of 10 per cent, said sources. The region has one of the lowest per capita cement consumptions at 170 kg compared to the industry average of 250 kg, while Central India cement demand (54 million tonne) represents 15 per cent of the country’s total cement demand.

The top five cement players occupy a near 70 per cent market share in Central India.

The acquisition will include a clinker capacity of 6.7 mtpa; cement-making capacity of 9.4 mtpa and a captive power plant of 280 MW, respectively. On Monday, Dalmia Bharat entered into a binding framework agreement with JP group for the acquisition which will come at a cost of ₹5,666 crore. However, no timeline has yet been announced for completion of the transaction.

If the acquisition comes through, Dalmia Bharat’s capacity mix will be more diversified — with 52 per cent in the East, 26 per cent in the South, 16 per cent in the central region and 6 per cent in the West; as against its current capacity mix — spread at 59 per cent in the East, 33 per cent in the South and 8 per cent in the West.

Enterprise value

According to an Emkay Global report, at the current enterprise value, “... the transaction is likely to be at 30-40 per cent below the replacement cost” because of vintage assets, lack of interest from peers and due to the “likely need for additional capex to run operations”.

A trade source said the current enterprise value is pegged at an approximate ₹6,000 per tonne (grinding capacity) valuation. This, interestingly, is some 7-8 per cent lower in terms of the average deal values announced so far which were pegged at ₹6,500 per tonne.

The acquisition could push up Dalmia Bharat’s debt in the short run though.

“As of September 2022, net debt stood at ₹25,400 crore and net debt to EBITDA was at 1.2x. The company continues to be cautious about leveraging its balance sheet and targets to maintain net-debt to EBITDA below 2x. However, the management believes that in case of a strategic acquisition, net-debt to EBITDA may exceed 2x for a short period,” Motilal Oswal said in a report.

Why Central India

Analysts and trade sources say the M&A activity in the sector has led to an increased consolidation in Central India. Currently, 76 per cent of capacity share in the region is held by the top five players and capacity utlisation there is around 75 per cent (higher than the pan-India average of 70 per cent).

Central India has witnessed the entry of new players (JK Cement, JK Lakshmi Cement, among others). Among other players, JSW Cement has also acquired limestone reserves from ICEM and announced its plans to set up a grinding capacity of 5 mtpa.

“Central India is estimated to register an effective supply addition CAGR of 9 per cent, while the demand CAGR is expected to be around 7-8 per cent,” the Motilal Oswal report said.