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Strong margin & volumes amid challenges

Dalmia Bharat Ltd (DBL) is the fourth largest cement company in India with a capacity of ~28MT, focusing in South with 12.1MT and East & North-East with 15.9MT.

* We upgrade to Buy rating with a revised Target of Rs.1,650 (earlier Rs.1,000) considering strong performance and positive demand outlook.

* Q3FY21 revenue grew by 18%YoY mainly aided by improvement in volumes (+14%ToY). EBITDA growth was robust at 51%YoY due to sharp improvement in EBITDA margin by 530bps YoY to 24%.

* Out of 8MT capacity expansion in East, 1.1MT completed, 2.25MT under trial run and balance would be completed within 12-24 months. Total capacity would be ~37MT post expansion.

* For Murli Industries (acquisition-3MT), commercial production is expected in Q2FY22, will strengthen DBL’s presence in Western region.

* Debt repayment was strong (Rs.1,379 in 9MFY21) along with ongoing expansion and net Debt to EBITDA stands at comfortable level of 0.56x. DBL also has plans to double its capacity to ~55-60MT.

* Demand outlook is positive given GoI’s strong focus on infra & housing in the Union budget. We value DBL at 10x FY23E EV/EBITDA.

Strong volumes amidst challenges…

DBL reported revenue growth of 18%YoY mainly aided by volume growth of 14%YoY (better than industry) on the back of demand from rural and pick up in government infra and low cost housing projects. Demand in the East region continued while demand revival were visible in South region also. Blended realisation grew by ~5% YoY. The ongoing capacity expansion and the ramp up in recent acquisitions will support future volume growth. For Kalyanpur cement (acquisition), capacity utilization improved to 62% Vs 35% QoQ. We increase our volume assumptions and factor revenue growth of ~13% CAGR over FY21E-23E supported by capacity expansion/acquisitions and improvement in premium mix.

Strong EBITDA margin aided by cost reduction

Controlling discretionary spending coupled with benign fuel costs resulted in EBITDA margin improvement of 530bps YoY to 24%. EBITDA growth was robust at 51%YoY and on a per ton basis improved to Rs.1,191 Vs. Rs.896 YoY. Power & Fuel expenses and Other expenses declined by -4%YoY each and employee expenses by -8%YoY. Freight expenses was flat though slight increase in lead distance due to sales in new region. Pet coke prices started to increase since Q1FY21 (after declining ~20% from the peak in June 2019), which along with normalisation of discretionary spends is likely to impact the margins negatively in the coming quarters. However, setting up of Waste Heat Recovery (WHR)-30MW by FY23 and green power will reduce fuel cost. Additionally, the ramp up in the new clinker capacity (at 70% utilization now) will reduce raw material cost (cost advantage of ~Rs.70-75 per ton of clinker). The improvement in premium mix (grew by 60%YoY to 18%) will support realisation. Expect EBITDA/Ton to improve to Rs.1,235 Vs Rs.1,092 in FY20. Reduction in debt will add to earnings growth. Any adverse price movements of cement, fuel and RM are the key risks.

Valuation & Outlook

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 ~10x 1Yr Fwd EV/EBITDA. We value DBL at 10x FY23 EV/EBITDA to arrive at a revised Target of Rs.1,650 (Rs1,000 earlier) and upgrade to Buy rating.

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