Volumes surprise; margins in-line
Dalmia Bharat’s (DALBHARA) Q2FY20 EBITDA increased 22% YoY to Rs4.8bn vs our estimate of Rs4.4bn owing to higher volumes which surprised positively with 8% YoY growth (I-Sec: flat volumes YoY). Total cost/te declined 4.8% YoY (I-Sec: 3.3% YoY decline); while cement realisation declined 7.4% QoQ vs our estimate of 6.6% QoQ decline. Blended EBITDA/te increased 13% YoY to Rs1,063/te, in-line with our estimates. Consolidated EBITDA to OCF conversion was better at 80% in H1FY20 vs 30% in H1FY19 with FCF of Rs1.2bn post capex spend of Rs7bn in H1FY20. Factoring higher volumes, we increase our FY20E-FY21E EBITDA by 1- 2% and raise our target price to Rs910/share (earlier: Rs890/share) based on 8XFY21E EV/E. Maintain ADD.
* Revenue grew 7% YoY to Rs22.4bn (I-Sec: Rs20.9bn): Cement volumes surprised positively with 8% growth YoY to 4.47mnte aided by acquisition of Kalyanpur Cements and better demand in key markets of Tamil Nadu and Odisha. Cement realisation declined 7.4% QoQ (flat YoY) to Rs4,716/te (I-Sec: Rs4,758/te) owing to sharp price correction in its key markets of South and East. Management expects demand to strengthen in H2FY20 post festive season and pricing to improve. Refractories and other business revenue declined 16% YoY to Rs1.3bn.
* Blended EBITDA/te increased 13% YoY to Rs1,063/te, in-line with our estimates. Total cost/te declined 4.8% YoY/ remained flat QoQ in Q2FY20. Raw material plus power & fuel cost/te declined 5% YoY led by 21% YoY decline in slag and petcoke prices partly offet by 12% YoY increase in fly ash prices. Freight cost/te declined 3% YoY with lower diesel prices and lead distance remaining <300kms. Reported PAT stood at Rs270mn, in-line with our estimates.
* Consolidated EBITDA to OCF conversion stood strong at 80% in H1FY20 vs 30% in H1FY19. DALBHARA generated consolidated FCF of Rs1.2bn post capex spend of Rs7bn in H1FY20. DALBHARA’s net debt increased Rs470mn QoQ to Rs33.7bn as of Sep’19-end. We expect net debt to increase over FY20E-FY21E and peak out at Rs34bn by FY21E. The matter pertaining to third-party fraud for Rs3.4bn MF units is currently under investigation by SEBI and EOW. The management expects to recover full amount over next 6-9 months.
* Expansion / strategic acquisition to support volume growth: Management has guided to commission 3.1mnte clinker unit and 3.5mnte grinding capacity at West Bengal and Bokaro by Mar’20. The remaining grinding units are likely to be commissioned by H2FY21E. NCLT approved the company’s resolution plan for revival of Murli Industries in Jul’19. Management is in discussion with the government for approval of two conditions (relating to reviving limestone mines and incentives) and expects to get possession of Murli by Dec’19 and to operationalise the plant by Q3FY21E.
* We factor-in 9% volume CAGR over FY19-FY22E and expect blended EBITDA/te to increase to Rs1,244/te by FY22E from Rs1,040/te in FY19 (Rs1,263/te in H1FY20). Pricing may remain volatile in the company’s key market of South (lowutilisation) and East (more capacity additions) over the next few years, in our view.
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