High Conviction Idea : Buy Dalmia Bharat Ltd For Target Rs.1,530 - Religare Broking
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Capacity expansion and focus on carbon negative footprint are a strong growth triggers
Prominent player in cement:
Dalmia Bharat is a fourth largest cement manufacturing company in India with an installed capacity of 35.9 MT. It has 14 manufacturing units and serves customers across 22 states with 32,000+ dealers and sub-dealers. It is a category leader in super-speciality cement used for oil wells, railway sleepers and airstrips and is the country’s largest producer of Portland Slag Cement (PSC).
Demand to drive cement sector growth: Cement sector demand is expected to improve by 8-9% driven by government impetus on spending towards building infrastructure, demand for low-cost housing, improvement in construction activity and revival in the real estate sector.
Capacity expansion, a growth trigger:
Dalmia strategy for the next two years is to expand existing facilities, set up new green-field and brownfield plants and drive its capacity from 35.6 MT in FY22 to 40 MT in FY23E and to 49 MT by FY24E.
Diverse product portfolio:
Dalmia portfolio is diversified amongst Portland Pozzolana (36% of revenue), followed by Portland Composite (25% of revenue), Ordinary Portland (21% of revenue) and Portland slag (18% of revenue). It plans to earn healthy revenue driven by a diversified product mix and improving share of premium products.
Improving Financials:
The company has reduced its debt from FY18-FY22 i.e. from Rs 6,322cr to 3,119cr and its debt/equity have reduced from 0.7x to 0.2x by FY22 which is positive. Also, its return ratios have seen improvement wherein its ROE improved from 3% in FY18 to 7.7% in FY22 and ROCE improved from 5.2% in FY18 to 6.4% in FY22.
Valuations:
Dalmia would continue its focus on expanding capacity, product mix and cost optimisation by using green fuel which would bode well for its future growth. We have initiated coverage on Dalmia Bharat with a buy rating and target price of Rs 1,530 by valuing at 18x EV/EBITDA FY24E.
Key Risks:
i) Rising commodity prices ii) Capacity addition and consolidation of large players.
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