Here's why Dalmia Bharat picked up an asset that was rejected by Adani and Birla

The acquisition would help Dalmia Bharat Ltd increase its manufacturing capacity to 45.3 million tonnes per annum (MTPA) from the existing 35.9 MTPA, enabling it to expand its presence in central India, as the company strives to become a pan-India player. It would be a head-start with 10 percent capacity share in the attractive central region. With the deal, the firm also aims at increasing its capacity towards the target 75 MnT by fiscal 2026-27.

HDFC Securities analyst Rajesh Ravi pointed out that the Jaiprakash Associates deal was earlier rejected by other major cement players including UltraTech, Adani and Shree Cement.

“The deal is very attractive from a medium-term perspective because it gives Dalmia access to central India, where limestone availability is not that great, and it is one of the fastest growing regions. So from that aspect, if the deal does go through, it is positive,” Rakesh Arora, Founder, goindiastocks.com told CNBC-TV18.

According to Arora, though the deal is lucratively valued, one of the reasons why others rejected it is probably the need for creditors to give a clean chit.

Ravi noted that Dalmia is aggressively adding capacities, prudently planned expansions and has healthy operating metrics while JP associates has solid distribution networks in the central region.He believes Dalmia's acquisition of JPA’s plants will be cash flow accretive within two to three years.

“We see the operating numbers of JP assets till FY19, at least the 5.5 odd million tonne, which is in the standalone books, were operating at 85 percent utilisation and in the last two to three years, the utilisation has come off to 45 percent. We do not have data for the remaining 4 million tonne, which is under the associates and the subsidiaries,” he said.

Among challenges, he said he doesn’t see any major ones except for working capital and re-onboarding the distribution network to get the assets up and running.

Morgan Stanley too believes that the acquisition will help Dalmia Bharat diversify its geographical footprint and take it a step closer towards achieving its vision of becoming a pan-India player.

Jefferies, however, pointed out that the deal timelines, additional required capital expenditure and the availability of limestone reserves were the key questions that need to be shed light upon. CLSA also said that it awaits clarity on clinker capacity and the company’s expansion potential. The brokerage also noted that the valuation of $73/tonne for JP Associates assets is lower than the new capacity costs.

Arora of goindiastocks.com too said, “need to see what is the quality and availability of limestone at Rewa Plant, which is the main plant, which is currently around 3.3 million tonne capacity of clinker. It's a very old plant. So, how much clinker is still left, how much limestone is still left there is yet to be seen.”

He, highlighted that Dalmia has bought risky assets in the past too, be it Murli Industries or Kalyanpur Cements, which do not have the best assets and there are issues with those assets.