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Well-placed to gain market share

Sharp price hikes improve margin visibility

* Dalmia Bharat (DBL) continued to post market share gains in 4QFY21, as volumes grew 24% YoY (despite weak demand in South India), supporting 53% growth in EBITDA.

* Cost is expected to rise in the near term due to higher cost of steel slag and energy. On the other hand, the industry has taken a sharp 20% price hike in East India (~50% of DBL’s volumes) in the last 2M, which would expand margins.

* We expect market share gains to continue, supported by ~25% capacity expansion over the next year. We raise our FY22E EPS by 13% to factor in price hikes in East India in the last 2M. Valuations are also attractive at 7.7x FY23 EV/EBITDA. Reiterate Buy.

4QFY21 EBITDA up 53% YoY on strong volumes and margins

* Revenue/EBITDA rose 32%/ 53% YoY to INR32.8b/INR7.8b and was in line with our estimate. Adj. PAT, however, was up 4.2x YoY to INR1.4b.

* While volumes were up 24% YoY to 6.42mt (est. 6.61mt), EBITDA/t rose 23% YoY to INR1,209/t (+1% QoQ), beating our estimate by ~7% – on betterthan-expected realizations (INR5,111/t; +6% YoY / +4% QoQ).

* Similar to ACC and Ambuja, power and fuel cost per ton surprised positively, rising only 3% QoQ despite the sharp inflation in petcoke prices. Total cost/t was up 4% QoQ to INR3,902/t (+2% YoY), driven by a 4% QoQ increase in freight cost (due to higher diesel prices) and an 8% QoQ rise in other expenses.

* Tax reversal of INR4.9b was seen in the quarter (INR2.7b for 9MFY21 and INR2.2b for the prior year) as subsidiary DCBL opted for the new tax regime.

* FY21 revenue / EBITDA / adj. PAT was up 9%/32%/4.5x YoY to INR105.2b/INR27.8b/INR12.3b as volumes grew 7% YoY to 20.7mt.

* FY21 OCF/capex/FCF stood at INR37.8b/INR10.4b/INR25.6b, against INR24.6b/INR13.5b/INR9.9b in FY20.

Highlights from management commentary

* The company has postponed the announcement of the much-anticipated capital allocation policy due to the pandemic. It would now do so only once the current situation normalizes, including taking a call on the IEX stake sale.

* Commercial operations at the Odisha grinding unit, Murli Industries, and the Bihar grinding unit is guided would commence in 2QFY22, 2HFY22, and FY23, respectively.

* The company repaid gross debt of INR8.5b/INR22.2b in 4QFY21/FY21. Net debt now stands at only INR1b, implying net debt/EBITDA of 0.04x.

Expect 16% volume CAGR over FY21–23E; reiterate Buy

* 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 becomes a net-cash company (including the value of its 20% stake in IEX), growth plans and the capital allocation policy hold the key.

* Valuations are attractive at 7.7x FY23E EV/EBITDA and EV/capacity of USD91/t. Reiterate Buy, with TP of INR1,905/sh (at 10x FY23E EV/EBITDA).

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