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Buy Dalmia Bharat Ltd For Target Rs.1,905

Dalmia Bharat (DBL) is the fifth largest cement manufacturer by installed capacity in India (30.75mtpa), with a presence in the eastern and southern regions of India.

Sharp price hikes improve margin visibility:

DBL continued to post market share gains as FY21 volumes grew 7% YoY (9% YoY including volumes sold in the trial runs at new plants) despite the pandemic. Cost is expected to rise in the near term due to higher cost of steel slag and energy. However, the industry has taken a sharp 20% price hike in eastern India (~50% of DBL’s volumes) in the last 2M, which would lead to margin expansion. In the near term, supplies are expected to be impacted by logistic issues, which would support prices. We expect market share gains to continue, supported by ~25% capacity expansion over the next year.

Capacity additions to drive volume growth:

The commercial production of Line II (2.25mt) at Bengal Cement Works has commenced recently, taking the installed grinding capacity to 30.75mt. Commercial operations at the Odisha and Bihar grinding units are expected to commence in 2QFY22 and FY23, respectively. Thus, with ~35% capacity growth over FY20–22E, focused on eastern India, DBL is well-placed to gain market share. The company has also acquired Murli Industries – which has cement capacity of 3mt in Maharashtra and should be operational by Dec’21. As a result, DBL would gain exposure in western India. We expect a 16% volume CAGR over FY21–23E.

Plan to double capacity provides long-term volume growth visibility:

The management has announced plans to double capacity to 56mtpa over the next three years (i.e., by FY25). While plans are still being firmed up, we expect to see the next leg of capacity growth mostly in the southern and north-eastern regions, wherein the company has the potential for brownfield expansions. DBL also has available limestone leases in the northern and central regions, which should be developed beyond FY25.

Deleveraging continues:

DBL has repaid its gross debt of INR22.2b in FY21 from operating cash flows, working capital release, and the dilution of the disputed mutual fund units – which were credited back to the company in the last quarter. Net debt/EBITDA now stands at 0.04x. Net debt at INR990m includes the value of DBL’s 20% equity stake in IEX. Average cost of debt declined to 6.5% p.a. in FY21 v/s 8.1% in FY20. Despite the ongoing expansion, the balance sheet remains well under control.

Valuation and view:

With ~35% capacity growth over FY20–22E, DBL is well placed to gain market share. We estimate a strong 16% CAGR in volumes over FY21–23E. As DBL turns net-cash (including the value of its 20% stake in IEX), growth plans and the capital allocation policy hold the key. The company has postponed the announcement of its capital allocation policy due to the pandemic. While ongoing capex plans would continue, the decision on any new expansion capex would be taken post the formation of the capital allocation policy. Divestment of 5% stake in IEX is a positive. Company would also take a call on divestment on the remaining stake in IEX. We remain positive on DBL given the price hike in eastern India and major expansions coming on board. Valuations are reasonable at 10.4x FY23E EV/EBITDA and EV/capacity of USD112/t. We reiterate Buy, with TP of INR1,905/sh (at 10x FY23E EV/EBITDA).

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