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Capacity expansion on track…margins improve

Dalmia Bharat Ltd (DBL) is India’s fourth largest cement company, with a capacity of ~37MT; focusing on South (12.1MT), East & North-East (21.7MT) and West (2.9MT).

* We maintain Accumulate rating with a revised target price of Rs.2,214, factoring the strong performance in the quarter and ease in costs.

* Revenue growth was strong at 23% YoY in Q3FY23, aided by 11%YoY growth in both volumes and realization. Operating profit grew by 58%YoY due to 420bps YoY improvement in EBITDA margin. Margins will improve further as the input prices have begun to decline.

* DBL is expanding its capacity to reach ~49MT by FY24. DBL also has longterm plans to become a pan-India player with a capacity of ~70-75MT by FY27 and 110-130MT by FY31, which could become a strong support for re-rating.

* DBL has signed a definitive agreement with Jaiprakash Associates for acquisition of cement capacity of 5.2MT, clinker 3.2MT and thermal power -280MW at an attractive EV of Rs 32.3bn. This will provide entry into the central region.

* Demand outlook is positive given GoI’s strong focus on infra & housing. We value DBL at 10.5x FY25E EV/EBITDA (2Yr Avg=11.5).

Healthy topline growth aided by volumes

DBL reported strong revenue growth of 23%YoY, aided by 11%YoY growth in both volume and realisation. The ongoing capacity expansion (addition of 13MT by FY24) and the ramp up in the recent acquisitions (Murli Industries, 2.9MT in Maharashtra) will support future volume growth. Cement prices are stable post Q3FY23 and any further improvement in the premium segment mix (22% of trade segment vs. 20% QoQ) will support realisation. We factor a revenue growth of ~14% CAGR over FY22E25E, supported by capacity expansion and ramp up in recent acquisition.

Input prices started to stabilize, margins to improve further.

EBITDA grew by 58%YoY as the EBITDA margin improved to ~19% from 15%YoY (13%QoQ), aided by higher realization and volumes. EBITDA/Ton improved to Rs. 1,022 Vs Rs. 718 YoY (Rs.653 QoQ). On a per ton basis, total expenses increased by ~6%YoY, however, realization improved by 11%YoY. Power & Fuel cost increased by 31% YoY due to elevated pet coke/coal prices. Average cost of fuel was at $195/ton (Vs $216 QoQ / $141in FY22 / $78 in FY21), started to ease and currently at $185 which will reflect in future quarters. DBL is focusing on increasing the green power mix to reduce the costs and capacity has increased to 154MW, with targets of 169MW and 324MW in FY23 and FY24 respectively. The green mix would improve to ~36% by FY24 and targets 100% by FY30 (Savings would be ~Rs.5-6 per unit). EBITDA/Ton is expected to decline in FY23 but will improve to ~Rs.1,110 in FY24E. Any adverse movements in cement, fuel, and RM prices are the key risks.

Valuation & Outlook:

DBL’s strong capacity expansion plans (~49MT by FY24E and a long-term target of ~70-75MT by FY27, 110-130MT by FY31) while maintaining a healthy balance sheet should support a re-rating in valuation. Demand outlook is positive given GoI’s strong focus on infra & housing. The stock currently trades at 1Yr Fwd EV/EBITDA of ~12x. We value DBL at 10.5x (2Yr avg=11.5x) FY25E EV/EBITDA and arrived at a target price of Rs. 2,214, maintain Accumulate rating.

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