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Margin pressure to ease as input prices has peaked out…

Dalmia Bharat Ltd (DBL) is the fourth largest cement company in India with a capacity of ~35.9MT, focusing in South with 12.1MT and East & North-East with 20.8MT and West with 2.9MT.

* We downgrade to Accumulate rating with a revised Target of Rs. 2,200 (Rs. 2,350 earlier) factoring margin pressure in the short-term.

* Q3FY22 revenue de-grew by 4%YoY due to 1.7%YoY decline in volumes impacted by unseasonal rains. Realisation de-grew by 3.5%YoY.

* EBITDA de-grew by 41%YoY as EBITDA margin declined to 15.0% from 24.2%YoY due to sharp increase in fuel costs. Pet coke prices have peaked out in recent months and expect to benefit from Q1FY23.

* Murli Industries (acquisition of 2.9MT in Maharashtra) started commercial production in Jan 2022 which will provide presence in West.

* DBL’s cement capacity would be 38.5MT post the ongoing expansion. DBL has announced additional capex plans to reach ~48.5MT by FY24 (Rs.50bn capex). Despite major expansion, net Debt/EBITDA is at 0.6x.

* Demand outlook is positive given GoI’s strong focus on infra & housing. Currently DBL trades at 1Yr Fwd EV/EBITDA of 12.9x, we value at 11x FY24E EV/EBITDA.

Volumes impacted by unseasonal rains

DBL reported revenue de-growth of 4%YoY due to 1.7%YoY decline in volumes impacted by unseasonal rains in East region and 3.5%YoY decline in realisation. The company has taken price hike of ~Rs10-20/bag in January. DBL has commercialized 2.9MT Murli plant in Maharashtra (recent acquisition) in Jan 2022. The ongoing capacity expansion and the ramp up in acquisitions will support future volume growth. The additional capex is for Rs.50bn to reach 48.5MT by FY24. We factor revenue growth of ~14% CAGR over FY22E-24E supported by capacity expansion/acquisitions and improvement in premium/trade mix.

Margin pressure in the near-term, likely to ease from Q1FY23

EBITDA de=grew by 41%YoY as EBITDA margin declined sharply to 15.0% from 24.2%YoY due to steep surge in fuel prices and de-growth in realisation. EBITDA/Ton declined to Rs.718 Vs Rs.1,191 YoY. On a per ton basis, Power & Fuel cost increased by 36% YoY due to sharp increase in pet coke prices ($160 & $130 QoQ per Ton). Spot Pet coke price is at $180, eased from peak of $240 which is expected to reflect from Q1FY23. Freight/Other expenses increased by 3%/4%YoY. The company is focusing on increasing the green power mix and is setting up ~40MW Waste Heat Recovery (WHR) and ~40MW solar by FY23, which will reduce fuel cost. Total WHR/Solar capacity would be 72MW/87MW by FY23E Vs 22MW/10MW in FY21. 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 decline to Rs.1,041 in FY22 from Rs.1,346 (FY21) due to current margin pressure but will improve to Rs.1,152 in FY23E. Any adverse movements in cement, fuel and RM prices are the key risks.

Valuation & Outlook:

DBL’s strong capacity expansion plans (~48MT by FY24E) while maintaining a strong balance sheet should support valuation. Demand outlook is positive given GoI’s strong focus on infra & housing. The stock currently trades at 1Yr Fwd EV/EBITDA of ~12.9x. We value DBL at 11x FY24E EV/EBITDA to arrive at a revised Target of Rs. 2,200 (Rs. 2,350 earlier), downgrade to Accumulate factoring short-term pressure on margins.

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