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Dalmia Cement (Bharat) Limited (DCBL), a wholly-owned subsidiary of Dalmia Bharat Limited (DALBHARA), has entered into a binding ‘framework agreement’ for the acquisition of clinker, cement and power plants from Jaiprakash Associates (JAL) and its associate. As per the agreement, DALBHARA shall acquire 9.4mtpa cement assets (25% of existing capacity) and 6.7mtpa clinker assets besides 280MW thermal power plant at an enterprise value of Rs56.7bn implying a capital cost of ~US$73/te (FY18 UTCEM-JAL deal was at ~US$93/te). On completion of the deal, DALBHARA’s grinding/clinker capacity shall increase to ~46/28mtpa respectively and strengthen its presence in Central India markets. It aims to be a pan-India cement company with capacity of 75mtpa by FY27 and 110?130mtpa by FY31. We await the completion of the deal before factoring-in the acquired capacity; however, we increase our realisation growth assumption for FY23E/FY24E given the healthy price hikes in East and South India (~90% of DALBHARA’s capacity exposure is to these regions) during the current quarter (Q3FY23) (link). We increase our FY23E/FY24E EBITDA estimates by ~5%/6% and raise our target price to Rs2,200/sh (earlier: Rs2,000) based on 11x Dec’24E EV/E on quarterly rollover. Maintain BUY. Key risks: Lower demand/price and higher costs

* Asset acquired at a competitive price. DALBHARA has entered into a binding ‘framework agreement’ with JAL to acquire 9.4/6.7mtpa of the latter’s cement/clinker assets besides 280MW of thermal power plant at a capital cost of ~US$73/te (replacement cost of the cement asset is currently at US$115-120/te). We expect the overall acquisition cost to increase as DALBHARA shall require to incur further capex to standardise these assets to its product quality. However, it is cheaper than the FY18 UTCEM-JAL deal which occurred at a capital cost of ~US$93/te (adjusting for currency depreciation).

* Strengthens presence in Central India. The acquired assets are situated in Madhya Pradesh, Uttar Pradesh and Chhattisgarh. DALBHARA currently operates in these states, but has no manufacturing units there. Consequently, on completion of the said agreement, the acquired assets will not only provide the company a higher market share, but also the ability to sell cement at competitive prices. Further, as per the company filings, Central India has the lowest per capita cement consumption among regions in India at ~170kg and represents ~15% of India’s cement demand (~54mnte from 70- 75mtpa capacity). Management expects Central India demand to register 7% CAGR in the medium term.

* Source of funding of the deal has not been disclosed; However, given DALBHARA’s balance sheet strength (0.32x ‘net debt to EBITDA’ as of Sep’22) and healthy cashflow generation, we estimate minimal proportion of debt funding, if any.

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