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Inflation drives acceleration in efficiency improvement programs

We analysed Dalmia Bharat’s FY22 annual report. Operational cash flow declined by 46%, primarily led by lowering profitability and accretion in working capital (rise in inventory and receivables). EBITDA (-12% YoY) and EBITDA/t (-18% YoY) witnessed a significant decline driven by material rise in power/fuel costs (continued rise in fuel prices), and rise in fixed costs (normalisation of discretionary spends and commissioning of new capacities) partially offset by better pricing. The company is expanding its capacity to 48MTPA (30.8MTPA currently) by FY24 and expected to be amongst top 4 players by capacity by FY24 (after Ultratech, Adani and Shree), with exposure across South, East, North East and West. Dalmia also rolled out formal Capital Allocation policy during FY22. Dalmia will spend INR 90bn on the capacity expansion plans and sustainability initiatives over FY23-24E. Going forward, we expect the ramp up in new capacities will help fund expansion keeping the leverage in check (net debt to EBITDA capped at <2x). Outlook for cement volumes remains strong, led by housing and infrastructure segment. We continue to value the stock at 12x EV/EBITDA to arrive at a TP of INR 1,850 (Mar’23). Maintain BUY.

* Decline in profitability and expansion in working capital drove the cash flow deterioration: The Company reported a sharp decline in operating cash flow from INR 36bn in FY21 to INR 19.4bn in FY22. The decline was led by both lowering profitability (reported EBITDA of INR 24.3bn in FY22; -12% YoY and 582bps margin expansion) and accretion in the working capital (from decline seen last year). Deterioration in profitability was led by sharp rise in the commodity prices (pet-coke, coal and diesel) led to adverse movement in the direct costs and rise in the inventory levels. Further, commissioning of capacities during the year led to increase in overheads. Blended EBITDA/t at INR 1,093/t (- 18% YoY); led by rising overall costs partially offset by improvement in realisations. Blended realisations were up 4% during FY22 driven by better prices during the first half of the year. Company has increased the proportion of AFR usage (13% of thermal energy), reduced energy usage (729Kcal/kg of clinker) and has one of the best cement to clinker ratio (1.63x). Company is taking steps to improve efficiency further through implementation of WHR/RE capacity.

* Becomes net cash; demand outlook strong in FY23: Company spent INR 17.6bn in FY22 on projects currently under implementation. Further, management has indicated an aggressive capex of INR 90bn over next three years – capacity addition, sustainability initiatives and maintenance spend. Net debt stood at negative of INR 14bn as on Mar’22 (net debt to EBITDA at -0.6x). The company is expected to add nearly 13MTPA of capacity over FY23-24E across South, East, West and North East. However, despite strong capex spending over next two years, we believe the leverage will continue to be in comfortable range (capped at <2x). Demand outlook for sector remains strong driven by housing and infra spending by the government in FY23.

* Maintain BUY: We continue to value the company at 12x EV/EBITDA to arrive at a TP of INR 1,850 (Mar’23). Maintain BUY

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