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Expansion plans to Pan India player…

Maintain Buy Dalmia Bharat Ltd (DBL) is the fourth largest cement company in India with a capacity of ~30.7MT, focusing in South with 12.1MT and East & North-East with 18.6MT.

* We maintain our Buy rating with a revised Target of Rs.2,350 (earlier Rs.1,770) considering strong margins and improving demand outlook.

* Q1FY22 revenue grew by 31%YoY (-21%QoQ) aided by 34%YoY growth in volumes (low base, -20%YoY in Q1FY21). EBITDA grew by 14%YoY while EBITDA margin declined by 410bps YoY (+340bps QoQ) to 27.0%.

* DBL has been on capacity expansion through organic & inorganic routes. Post completion of the ongoing expansion (8MT in East) and acquisition of 3MT (West), total capacity would be at 38MT (12MT in FY14).

* Now, DBL has announced additional capex plans to reach 48.5MT by FY24 with Rs.5,000cr capex and outlined a long-term plan to reach 110- 130MT by 2031 while maintaining a strong balance sheet.

* Despite expansion, debt repayment was strong (Rs.2,224cr in FY21 & Rs.476cr in Q1FY22). Current net Debt/EBITDA is at 0.08x & D/E at 0.1x.

* Barring near-term uncertainty, demand outlook is positive in the longterm, given GoI’s strong focus on infra & housing. Currently DBL trades at 1Yr Fwd EV/EBITDA of 12.5x, we value at 12x FY23E EV/EBITDA.

Volumes growth on a low base and strong realisation maintains

DBL reported revenue growth of 31%YoY mainly aided by strong volume growth of 34%YoY supported by low base (-20% in Q1FY21) and strong realisation (+4% YoY), but de-grew by 21%QoQ impacted by second wave. The ongoing capacity expansion and the ramp up in recent acquisitions will support future volume growth. Out of the ~8MT ongoing expansion, 3.2MT has already been completed, 2.2MT by next month and balance within 18 months. The additional capex is for Rs.50bn to reach 48MT by FY24. We factor revenue growth of ~17% CAGR over FY21-23E supported by capacity expansion/acquisitions and improvement in premium/trade mix.

EBITDA margin declines on cost surge but above pre-covid levels

EBITDA grew by 14%YoY while EBITDA margin declined by 410bps YoY from record high margin of 31% in Q1FY21. Steep surge in fuel prices and gradual increase in discretionary spending, margins are impacted but is partially offset by stable & strong realisation. On a per ton basis, Power & Fuel cost increased by 52% YoY due to sharp increase in pet coke prices ($130 Vs $70 YoY). Freight/Other expenses increased by 11%/28%YoY.The company has reduced pet coke mix to 46% (70%/54% in Q3/Q4FY21). DBL is also setting up 30MW Waste Heat Recovery (WHR) by FY23, which will reduce fuel cost.

Alternate & green fuel mix now improved to 9% & 14%, respectively and the company target green fuel mix to 20% by FY22 end. DBL’s capex plans include Rs10-12bn towards green initiatives over the next 3 years. Additionally, the ramp up in the new clinker capacity will reduce raw material cost (cost advantage of ~Rs.70-75 per ton of clinker). Expect EBITDA/Ton to improve to Rs.1,297 in FY23 Vs Rs.1,092 in FY20. Reduction in debt will add to earnings growth. Any adverse movements in cement, fuel and RM prices are the key risks.

Valuation & Outlook: Strong plans for pan India player leads to re-rating

DBL’s strong capacity expansion plans to become a pan India player with ~110-130MT by 2031 (48MT by FY24) while maintaining a strong balance sheet (target Net Debt /EBITDA <2x) supports valuation re-rating. Barring near-term uncertainty, demand outlook is positive given GoI’s strong focus on infra & housing. The stock currently trades at ~11x 1Yr Fwd EV/EBITDA. We value DBL at 12x FY23 EV/EBITDA to arrive at a revised Target of Rs.2,350 (Rs1,770 earlier), and maintain Buy rating.

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