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Mutual fund recovery – a much-awaited respite

Dalmia Bharat (DBEL) reported that Supreme Court has restored its siphoned mutual fund units (INR 3.8bn currently) to the company. While the amount is relatively small (2% of its consolidated net worth), the ruling broadly casts off any doubt on DBEL’s corporate governance (post this event came to light in Feb’19). Given that the company continues to deliver robust earnings and has managed its balance sheet well despite major expansion, this ruling should drive valuation rerating. We maintain BUY with a revised TP of INR 1,770 (12x its consolidated Mar’23E EBITDA).

* The siphoned mutual fund units recovered: DBEL informed that the Supreme Court has allowed the siphoned mutual fund units to be restored to the company. The value of the same currently stands at about INR 3.8bn (vs INR 3.44bn at the time of the fraud reporting in Feb’19). With the units fully restored, the management will consider the usage of this liquidity under its capital allocation plans. The recovered amount comprises 2% of its consolidated net worth. As criminal proceedings against Allied Financials, ISSL and their officials are still on in trial court, DBEL needs to furnish a bank guarantee of INR 3.44bn to the court. Thus, a similar amount will now be reflected as contingent liabilities on its books.

* Boost to DBEL’s corporate governance image: In our view, this is a positive development for DBEL. While the cash involved is small from its balance sheet perspective, the SC verdict broadly casts off any doubt on its corporate governance since this case came to light in Feb’19.

* Upgrade valuation multiple; maintain BUY: We maintain our earnings estimate. However, as we ascribe full value to the recovered mutual fund units, our cash balance estimates are increased by a similar amount. We continue to like the company for its continued strong volume and margin performance. Despite major ongoing expansion, DBEL’s balance sheet remains well under control. The company will soon be announcing its next round of expansions (~10-15mn MT), which would be commissioned over the next 3-5 years. DBEL expects to fund these largely through internal accruals. It will mark DBEL’s entry into newer markets (north/central), where it is not present currently. Given these tailwinds (including a clean chit on the mutual fund unit case), we increase our EV/EBITDA valuation multiple to 12x (from 10.5x earlier, and in-line with our valuation for its closest peer – Ramco Cements) and roll forward valuations to Mar’23E (vs Dec’22E). Thus, we maintain BUY with a revised TP of INR 1,770.

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