Published on 11/07/2020 12:02:30 PM | Source: Motilal Oswal Financial Services Ltd

Buy Dalmia Bharat Ltd For Target Rs.705 - Motilal Oswal

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Balance sheet discipline in focus; Capex to continue

3.0mt clinker line commissioned; Emphasis on cost reduction

* COVID-19 impact lowers 4QFY20 volumes by 0.8mt: DBL lost 0.8mt volume in Mar’20, which led to INR1.5b EBITDA loss in 4QFY20. The company drew down additional debt of INR6b in Mar’20 and raised cash balances further amid uncertainties related to COVID-19. Subsequently, INR3.5b gross debt repayment has been made in 1QFY21.

* East – least impacted; West – worst hit; DBL operating at 50-60% utilization: Regionally, due to COVID-19, East India was the least impacted while West India was the worst hit market. Demand in the East is driven by the IHB segment and resumption of highway projects. However, DBL remains cautious on the sustainability of this demand and is evaluating the situation on an ongoing basis. West India has been the worst hit in terms of demand as migrant labor issues continue. Also, urban real estate is likely to remain a drag on demand as it has much unsold inventory. The company is currently operating at 50-60% utilization across geographies and is not facing any production or logistical challenges. Industry is operating at ~50% utilization.

* Capacity expansion to continue even in FY21: DBL has commissioned its new 3.0mtpa clinker line at Rajgangpur (Odisha). However, commissioning of 4.5mt grinding units in Bihar and Orissa has been pushed ahead by 3-6 months (to Dec’20) due to labor issues. Mr. Doshi has informed that DBL would continue adding capacity while maintaining balance sheet strength. The company has guided for capex of INR12.0b for FY21, including INR4.0b to be paid in Jul-Aug’20 for the acquisition of Murli Industies. Capex in FY20 stood at INR16.0b.

* Guides for Net Debt/EBITDA of <1.5x: FY20 Net Debt stood at INR28.3b, implying Net Debt/EBITDA of 1.34x. DBL has guided for maintaining Net Debt/EBITDA below 1.5. Scheduled debt repayment for FY21 is INR11.5b; of this, DBL has already paid INR7.0b in 1QFY21 (partly through refinancing).

* Premium cement accounts for 13% of trade sales, targeted to reach 25%: Dalmia DSP and composite cement accounts for 13% of trade sales; DBL is targeting to achieve 25% of trade sales for the premium segment. Dalmia DSP has seen good traction in the East while it’s trying to establish itself in the South. The price differential between Dalmia DSP and Konark stands at INR30-40/bag. DBL has launched one more brand of the Konark range in Odisha in 1QFY21.

* Cost reduction in focus: DBL is focused on fixed cost reduction; it will save on traveling expenses while marketing budgets will be restructured. Full impact of the cost reduction measures is expected to occur from 4QFY21. DBL expects to benefit from lower pet coke prices, which should range between USD60-70/t, while slag prices should remain stable (currently at INR900-1,000/t).

* Murli to be operational from Jul’21: With the company receiving approval for acquisition of Murli Industries, it expects to pay INR4.0b in Jul-Aug’20 to acquire the business. It expects Murli to be operational from Jul’21. Murli Industries has cement capacity of 3mt in Maharashtra, which would give DBL an exposure in the West India market.

* Expect to receive INR3.0-4.0b each in incentives over FY21-22E: DBL received INR4.1b incentive in FY20 and has outstanding incentive receivables of INR7.0b. In FY20, the company booked incentive income of INR1.25b and expects to book a similar amount even in FY21 and FY22. At the same time, it expects to receive INR3.0-4.0b each in FY21 and FY22. DBL also expects to book incentives of INR11.0b over the next 10 years for the acquired Murli plant.


Other highlights

* Divestment strategy for the non-core stake in IEX will be finalized by Dec’20.

* Refractory business will be hived off by Dec’20.

* The mutual fund issue is under resolution and timeline of the same is uncertain.

* Kalyanpur plant is currently operating at 55-60% utilization and is expected to achieve its full potential over the next 6 months.


Valuation and view

* DBL with its recent clinker expansion in East India is well placed to gain market share in the region. We estimate DBL’s volume at 6% CAGR over FY20-22E, much higher than the industry’s growth rate.

* We expect this growth to, however, come at the cost of lower price and margins, resulting in lack of EBITDA growth during this period.

* DBL should, however, still be able to generate strong FCF (in FY22E) and reduce its net debt substantially from ~INR28b currently. The stock trades at an attractive valuation of 5.5x FY22E EV/EBITDA and USD53/t of EV/capacity. Thus, we rate it a Buy and value the stock at 7.5x FY22E EV/EVITDA to arrive at a target price of INR705 (implied EV/t of USD60 on FY21E capacity).


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