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Growth insights are in place; valuations attractive

DALBHARA is a dominant player in East India with a clinker/grinding capacity share of 18%/17%. The company will be a beneficiary of: 1) improved consolidation in the region, which should aid an improvement in Cement prices and 2) recent increase in Cement prices in East India.

The management has set yet another aggressive capacity addition target to emerge a pan-India player and achieve a grinding capacity of 110-130mtpa by CY31 (at a 14-15% CAGR). In the first phase, it will expand its capacities to 48.5mtpa from 35.9mtpa at present.

DALBHARA is a long-term play, backed by: a) robust growth plans, along with diversification in its market presence; b) locational advantages in East India (having clinker facilities in Odisha and Bihar), and c) its commitment to ESG, which will aid cost reductions.

We expect DALBHARA to clock a revenue/EBITDA/PAT CAGR of 11%/18%/21% over FY22-24. Its net debt/EBITDA ratio is estimated to stay below 1x by FY24.

Improving regional dynamics; well placed with a leadership position in East India

Our channel checks indicate that Cement demand improved in East India in 4QFY22, with an improvement in sand, labor availability, and revival in construction works.

Cement prices declined by 15% over Apr-Dec’21 in East India. However, prices rose 14% over Jan-Mar’22, with further price increase of 7-8% in Apr’22.

The region witnessed increasing consolidation after the acquisition of Emami Cement by Nuvoco. The higher consolidation will help improve pricing power in the region in the medium term. Capacity share of the top five players in the region now stands at 72% v/s 63% in FY20.

Accelerates growth with an aim to become a pure-play Cement company

DALBHARA through its capital allocation policy outlined its aims to: a) increase capacities by 14-15% CAGR over the next decade to clock 110-130mtpa capacity by CY31, b) emerge a pan-India company with a focus on the Cement business, c) improving shareholders’ return: 10% of OCF to be returned to shareholders through a mix of dividends and share buybacks, d) maintain its strong Balance Sheet with a target net debt/EBITDA ratio of sub-2x (any deviation will be only in exceptional cases for large inorganic opportunities).

It plans to increase its grinding capacities to 48.5mtpa/60mtpa by FY24/FY25 from 35.9mtpa at present. Though the company has not yet revealed its roadmap of increasing capacities to 60mtpa (from 48.5mtpa), we believe it may enter into the North and Central markets in this phase of expansion. We expect a 10% sales volume CAGR over FY22-24.

Focus on cost efficiencies and sustainable growth

DALBHARA is focused on sustainable growth and has taken several initiatives (increase in sales of blended Cement, higher usage of a Waste Heat Recovery System/solar power, and greater use of alternative fuel) to reduce its carbon footprint. These initiatives will help to improve the company’s cost structure, apart from achieving its aim to become carbon negative by CY40.

The management has committed to become a 100% blended Cement manufacturer (v/s 80% at present) over the next five years. Increase in capacities in East India will help the company to further improve its mix of blended Cement sales.

The management plans to raise its WHRS/solar power capacity to 72MW/87MW by FY23 from 22MW/10MW in FY21 (9.4 MW/37.7MW commissioned in 3QFY22). This will result in incremental cost savings of ~INR50/t for the company.

It aims to become carbon negative by CY40. It has reduced its carbon emissions by 9% over FY18-3QFY22 and aims to reduce it further by 24% by CY30E.

Valuations attractive; reiterate Buy

The stock trades at 12.8x/10.3x FY23/FY24 EV/EBITDA ratio and an EV/t of USD108/USD88. It traded at an average EV/EBITDA ratio of 10.1x/9x in the last five/10 years. With an expected improvement in earnings (21% CAGR over FY22- 24E) and its focus on continuous capacity expansions, without leveraging its Balance Sheet, we expect the stock to trade at higher multiples.

The stock has corrected 28% from Aug’21 to Mar’22 due to weak demand and pricing in the industry and a sharp rise in fuel prices. The latter remains at an elevated level. However, Cement demand and pricing has started to improve.

We value DALBHARA at 12.5x FY24E EV/EBITDA to arrive at our TP of INR2,000, an upside of 25% from current levels. We maintain our Buy rating on the stock.

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