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Mutual fund units restored

* The Supreme Court has passed an interim order directing restoration of mutual fund units to Dalmia Bharat (DBEL) from the depository and clearing agent IL&FS Securities Services (ISSL). DBEL will, however, have to furnish a bank guarantee (of ~INR3.5b) as security for the undergoing trial.

* The value of frozen mutual fund units stood ~INR3.8b as of Dec’20. These units are now at DBEL’s discretion and the company will decide whether to dispense or hold them based on its capital allocation policy.

* While it is directionally a positive development, uncertainty on this issue will remain till we get a final resolution/judgment, which may take a long time. Given the expected strong volume growth, we retain Buy.

Background to the case

* In FY19, certain mutual fund units of Dalmia Cement (Bharat) (DCBL) valued at INR3.44b were fraudulently transferred by its broker Allied Financial Services (Allied) to its own account. These units were then used by Allied and its directors as margin with ISSL, the clearing agent of Allied, for F&O trades.

* DCBL subsequently filed a complaint with the SEBI and the Economic Offenses Wing (EOW), Delhi on 8th Feb’19 and 15th Feb’19, respectively, against Allied and others for cheating and forgery.

* The EOW, vide its orders dated 28th Feb’19, 18th Mar’19, and 29th Mar’19, directed ISSL and others not to deal with the disputed units. Similarly, SEBI, vide its order dated 27th Feb’19, observed that Allied had misappropriated the securities and directed Allied and others not to dispose of or alienate these units except with prior permission of SEBI/NSE.

Expect 15% volume CAGR in FY21-23E; Buy

* With ~30% capacity growth over the next 12 months, DBL is well placed to gain market share in East and West India. We estimate 15% volume CAGR in FY21- 23E, which should drive 22% EPS CAGR.

* Led by strong FCF, we expect net debt to decline further. Valuation is also reasonable at 8.9x FY23E EV-to-EBITDA and USD98.7/t of EV/capacity.

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