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Growth targets ambitious, capital allocation policy in the right direction

* Dalmia Bharat’s Q1FY22 revenue missed our estimates by 4% due to lower volumes. EBITDA of Rs7bn came in 8% below our estimates. EBITDA/ton stood at Rs1,431.

* The company announced its much-awaited growth strategy and capital allocation policy. Key highlights: 1) aims to become a pure play cement company; 2) ambitious targets of growing cement capacity at a 14-15% CAGR to 110-130mt by 2031; 3) targets 48.5mt/60mt capacity by FY24/FY25 − we estimate 48.5mt capacity by FY26; 4) 10% OCF to be allocated toward increasing shareholder returns; 5) targets net debt-to-EBITDA of less than 2x and RoCE of 14-15% in the next few years; 5) plans to invest 85% of treasury funds in AAA+ rated bonds.

* The stock’s forward EV/EBITDA has re-rated FYTD by >20% vs. its last 5-year average; the stock is up 50% since our initiation in Apr’21, thanks to improving pricing outlook and the company’s attempts to address key investor concerns. In our view, investors would welcome the capital allocation policy and the change in statutory auditor. However, further re-rating would depend on the execution of the capacity expansion plan.

* Factoring in higher realization, we increase our FY22E-23E EBITDA by 9-11%. We raise our target EV/EBITDA marginally to 12.5x from 12.0x. We roll forward to Sep’22E (from Jun’22E) and increase our TP by 20% to Rs2,470. Maintain Buy.

Capital allocation policy announced; focus on predictable, sustainable and profitable growth:

Dalmia targets a 14-15% capacity CAGR in the next decade to reach 110-130mt by 2031. In the first phase, it plans to increase the current grinding capacity from 30.8mt to 48.5mt (including 7.8mt ongoing expansion) by FY24. We believe that the said guidance is very aggressive as we estimate 48.5mt capacity by FY26. On the already expanded capacity, Dalmia is likely to have a CC ratio of around 2.1x (~25% higher than industry average). In the second phase, Dalmia aims to increase the capacity to 60mt by FY25. The company is likely to provide more details in the next 9-12 months. However, the company mentioned that it may include capacity commissioning in the North and Central regions, which will help Dalmia achieve its goal of becoming a pan-India player.

Targeted capex of Rs85-92bn till FY24 includes Rs19.5-20bn for the ongoing expansion (up from ~Rs11bn for augmentation of land for limestone), Rs47-50bn for new capacity, Rs10-12bn for green initiatives, and Rs9-10bn for maintenance and RoI improvements. Management has targeted to spend Rs40bn in FY22 (Rs3bn in Q1FY22) and the balance is likely to be spent in FY23/FY24.

The company targets a net debt-to-EBITDA ration of <2x, with deviation in case of large inorganic opportunities. Dalmia’s gross debt declined by Rs4.8bn QoQ, while net debt increased by Rs1.3bn. The net debt-to-EBITDA stood at 0.08x as of Jun’21.

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