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Our Take:

Dalmia Bharat is a 4th largest cement producer in India with a capacity of 26.1 MTPA. It has a 5% market share in India and ~15% market share in East, 19% in Tamil Nadu and 13% market share in North East India. The company has grown from 5 plants with 12mnT of capacity in 2014 to currently 13 plants with 26.5mnT of capacity. Higher consistent growth has been driven by both organic as well as inorganic expansion. It has 54% capacity located in East India followed by 46% capacity in South India as on FY20. We expect that Covid-19 led lockdown and slowdown in the economy will lead to subdued growth in volumes for Dalmia Cement for FY21.

The industry has a high dependence on real estate and infra sector which is expected to be impacted due to expected slowdown in the economy. Going forward, we expect, a gradual recovery in cement demand and volumes are likely to pick-up from H2FY21 onwards. In the case of Dalmia Bharat, incremental volumes from the commencement of additional capacities will result in a lower decline in volumes compared to the industry.

DBL is in a transition phase whereby it plans to augment its current capacity by 40% in tranches over next 2-6 quarters (including acquisition of Murali Industries 3 mntpa awarded under NCLT proceedings) from 26.5 mntpa to 38 mntpa. Large part of these incremental capacity is going to come on stream (7.8 mntpa) in the eastern region which is the key market for DBL. It aims to further consolidate presence and increase its market share in the eastern region where it’s a dominant player. Eastern Indiaregion is largely underpenetrated and thus has high growth potential compared to the rest of our country, where the company having a 54% of capacity FY20.

Valuations & Recommendation:

Going forward, the company is likely to get benefits from the strong market share gains in Southern India and Eastern India. Also, incremental cement capacity and better utilization’s to fuel further growth. We expect, 10% CAGR growth in top-line and 55% EPS CAGR growth over FY20-23E. At the LTP, the company is trading at FY23E EV/T of $110.8/T, 10.7x FY23E EV/EBITDA. We feel the base case fair value of the stock is Rs.1480 (FY23E EV/T of $111.1/T, 10.7xFY22E EV/EBITDA) and the bull case fair value is Rs.1590 (FY23E EV/T of $118.5/T, 11.5x FY23E EV/EBITDA). Investors can buy the stock on dips to Rs.1370 (FY23E EV/T of $103.6/T, 10x FY23E EV/EBITDA) and add more on dips to Rs.1260 (FY23E EV/T of $96.2/T, 9.3xFY22E EV/EBITDA).

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