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Strong performance continues…

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.1,770 (earlier Rs.1,650) considering strong volumes.

* Q4FY21 revenue grew by 32%YoY mainly aided by 24%YoY growth in volumes partially supported by low base. EBITDA growth was robust at 53%YoY as EBITDA margin grew by 320bps YoY to 23.7%.

* Out of 8MT capacity expansion in East, 3.35MT completed, and the balance to complete within 12-24 months. Total capacity would be ~38MT post expansion.

* For Murli Industries (acquisition-3MT in Maharashtra), commercial production is expected in 2HFY22.

* Despite expansion, debt repayment was strong at Rs.2,224cr in FY21 and currently it is net cash. DBL has plans to expand to ~55-60MT over next three years, but has put on hold due to current situation.

* Barring near-term uncertainty, demand outlook is positive in the longterm, given GoI’s strong focus on infra & housing. We value DBL at 10x FY23E EV/EBITDA.

Strong volumes amidst challenges

DBL reported revenue growth of 32%YoY mainly aided by strong volume growth of 24%YoY partially supported by low base (volume growth -7% in Q4FY20) and 6.4% YoY growth in realisation. For FY21, DBL’s volume growth was 7%YoY against 10-14% de-growth in industry volumes indicating market share gains.

The ongoing capacity expansion and the ramp up in recent acquisitions will support future volume growth. Out of the 8MT ongoing expansion, 3.35MT has already completed and balance within 12-24 months. The company has improved its sales mix with improvement in trade sales and premium products which supports realisation. We factor revenue growth of ~12% CAGR over FY21-23E supported by capacity expansion/acquisitions and improvement in premium/trade mix.

Strong EBITDA margin due to cost reduction and better realisation

Controlling discretionary spending coupled with better realisation resulted in EBITDA margin improvement of 320bps YoY to 23.7%. EBITDA growth was robust at 53%YoY and on a per ton basis improved to Rs.1,209 Vs. Rs.983 YoY. Power & Fuel expenses increased by 18.5% YoY due to increase in pet coke prices ($87 Vs $66 YoY). Freight expenses increased 7%YoY due to surge in diesel prices. Pet coke prices started to increase since Q1FY21, which along with normalisation of discretionary spends is likely to impact the margins negatively in the coming quarters. Currently pet coke prices are at $130 levels.

The company has reduced pet coke mix to 54% Vs 70% QoQ. DBL is also setting up of Waste Heat Recovery (WHR)-30MW by FY23, which will reduce fuel cost. 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.1,236 in FY23 Vs Rs.1,092 (FY20). Reduction in debt will add to earnings growth. Any adverse price movements of cement, fuel and RM are the key risks.

Valuation & Outlook

Barring near-term uncertainty, demand outlook is positive given GoI’s strong focus on infra & housing. DBL’s capacity expansion will support to continue its volume growth above industry. The stock currently trades at ~11x 1Yr Fwd EV/EBITDA. We value DBL at 10x FY23 EV/EBITDA to arrive at a revised Target of Rs.1,770 (Rs1,650 earlier), and maintain Buy rating.

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