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Capacity expansion on track

Dalmia Bharat Ltd. (DBL) is India’s fourth largest cement company, with a capacity of ~41MT; focusing on South (12.1MT), East & North-East (25.85MT) and West (2.9MT).

• We upgrade our rating to BUY with a revised target price of Rs. 2,234, considering the healthy volume growth and strong focus on expansion.

• Revenue grew by 10% YoY in Q1FY24, mainly helped by volume growth of 13%. However, operating profit increased by only 4% YoY due to a 90bps decline in EBITDA margin. As fuel prices have declined, margins are likely to improve in future.

• To reduce costs, DBL has expanded its renewable energy capacity to 170MW (17MW in FY19), and targets 328MW by FY24.

• Ongoing expansion is on track to reach ~47MT by FY24. DBL has a longterm goals to become a pan-India player, with a capacity of 70 -75 MT by FY27 to 110-130 MT by FY31. This could be a major factor for re-rating.

• DBL has signed a definitive agreement with Jaiprakash Associates for the acquisition of 9.4 MT of cement at an alluring EV of Rs 56.5 billion. This will give access to the central region.

• Given the GoI's strong emphasis on housing & infrastructure, and preelection spending, the demand outlook is favourable. We value DBL at 12x FY25E EV/EBITDA (2Yr Avg=12x).

Healthy volume growth

DBL reported revenue growth of 10%YoY, aided by 13%YoY growth in volumes. The ongoing capacity expansion (addition of 5MT by FY24, excluding JP acquisition) and the ramp up in the recent acquisitions will support future volume growth. The company has guided ~15-17% volume growth for FY24. Cement prices witnessed some decline in the current month but are expected to recover post monsoon. Premium segment mix was at 21% of the trade segment (20% QoQ), which will support realisation. We factor in revenue growth of ~14% CAGR over FY23-25E, aided by capacity expansion and ramp up in recent acquisitions

Fuel prices decline, will reflect in margin in the coming quarters.

EBITDA grew by only 4% YoY, despite healthy volumes, as the EBITDA margin declined by 90bps YoY to ~16.8%. The cost increase was mainly on account of higher raw material prices (slag & fly ash), busy season surcharge by railways, higher inter regional clinker movement and higher other expenses due to plant shut downs. On a per ton basis, EBITDA declined to Rs. 871 vs. Rs. 945 YoY and realisation declined by 2.8%YoY. However, the decline in fuel costs will be reflected in the margins in the coming quarters. To reduce costs, DBL is increasing the green power mix and the capacity has increased to 170MW as of Q1FY24 from 63MW in FY22 and targets to 328MW by FY24 (expects the green mix to ~36% by FY24 from current 27% and target 100% by FY30 and savings would be ~Rs. 5–6 per unit). Expects EBITDA/Ton to improve to Rs. 1,050 in FY24 (Rs. 901 in FY23). Any adverse movements in cement, fuel, and RM prices are the key risks.

Valuation & Outlook:

DBL’s strong capacity expansion plans to become a pan-India player (~56MT by FY24E, including JP acquisition, and a long-term target of ~70-75MT by FY27, and 110–130 MT by FY31) while maintaining a healthy balance sheet should support a rerating in valuation. The demand outlook is positive given GoI’s strong focus on infra & housing and pre-election spending. The stock currently trades at 1Yr Fwd EV/EBITDA of ~12x. We value DBL at 12 x (2Yr avg=12x) FY25E EV/EBITDA and arrived at a target price of Rs. 2,234, upgrade to BUY rating.

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