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Prices soft in key markets; but volume growth should be better

* Dalmia Bharat (DALBHARA)’s key markets (the South and East regions) witnessed a higher price correction (down 8-9% QoQ) vs. other regions (down 3-7% QoQ) in 4QFY24. However, the company is likely to report double-digit volume growth in 4QFY24, supported by healthy demand and market share gains. We cut our EBITDA estimates by 4%/8%/8% for FY24/FY25/FY26 due to weak pricing, which was partly offset by higher volume growth and cost reduction initiatives.

* Further, a delay in the acquisition of Jaiprakash Associates (JPA)’s cement assets (announced in Dec’22) remains an overhang on the stock. The approval process from various banks is pending and is taking longer than anticipated. However, DALBHARA’s organic expansion plans are on track. It will add clinker and cement capacities of 4.9mtpa each through a mix of greenfield and brownfield expansions by FY25.

* We believe that cement prices in DALBHARA’s key markets have bottomed out and we expect prices to stabilize or improve from hereon. The company’s strong presence in the East and South regions, along with continuous capacity addition, will help to bolster its position in these markets. Despite a robust expansion, its leverage has remained low (net debt-to-EBITDA stood at 0.16x as of Dec’23).

* The stock has corrected 15% in the last three months due to concerns of lower profitability because of a decline in cement prices. We value the stock at 12x FY26E (earlier 13x) EV/EBITDA to arrive at our revised TP of INR2,500 (earlier INR2,800). The stock offers an upside potential of 25% from current levels. Reiterate BUY

Price corrections will lead to a contraction in profitability

* Our channel checks suggest that the average cement prices in East and South regions have declined sharply by ~8-9% (INR30-35 per 50kg bag) QoQ in 4QFY24. Conversely, the all-India average cement price dipped ~7% (INR25 per 50kg bag). We estimate that a higher decline in cement prices in DALBHARA’s core markets will lead to a higher contraction in the company’s realization.

* However, DALBHARA is estimated to report strong volume growth supported by healthy demand and market share gains in its core markets. The company’s continuous capacity expansion (increased grinding capacity to 44.6mtpa in FY24 from 38.6mtpa in FY23) will help the company strengthen its presence in these markets. We estimate DALBHARA to report 12% YoY volume growth in 4QFY24.

* The company’s focus on cost efficiency, innovation, and sustainability will help it reduce its opex/t. DALBHARA’s average fuel consumption cost (INR/Kcal) in 9MFY24 was the lowest (at INR1.7/kcal) within our coverage universe. The company’s efforts towards improving its C:C ratio, raising its blended cement share, green power, alternative fuels, and use of electric vehicles for transportation will help contain its opex/t and limit the contraction in profitability.

Delay in the acquisition of JPA’s cement assets; organic expansions on track

* DALBHARA proposed to acquire JPA’s cement assets located in Central India, with a significant capacity share (~10%) in the region. However, the deal is taking longer than anticipated. Meanwhile, the company made tolling arrangements (contract manufacturing) with JPA for some of the plants. This will help the company establish a distribution network, build its brand, and gain market share in Central India.

* However, the company’s organic expansions are largely on track. In FY24, the company increased cement capacity by 6mtpa to 44.6mtpa. It will further add a cement capacity of 4.9mtpa through a mix of greenfield and brownfield expansions by FY25E to reach 49.5mtpa through organic expansions.

* The company reiterated its long-term capacity target of 75mtpa/110-130mtpa by FY27/FY31. Currently, it has a major presence in East and South India. DALBHARA intends to establish its presence in West, Central, and North India.

Leverage at a comfortable level; reiterate BUY

* Despite the significant expansion, the company’s leverage remains low aided by strong volume growth (at ~15% CAGR over FY14-24E), improvement in profitability (20% EBITDA CAGR over FY14-24E), and divestment of non-core assets (divested its entire investments in refractory business, retail businesses for all construction and building materials, and partial stake in IEX). Its net debt stood at INR4.3b, and net debt-to-EBITDA ratio was at 0.16x as of Dec’23.

* The company’s net debt-to-EBITDA is estimated to remain below 2x, factoring in the expected cash outflow of INR33b for JPA’s cement asset acquisition, and INR35b for organic growth plans in FY25E.

* The stock currently trades at 11x/9.5x EV/EBITDA and EV/t of USD94/USD92 for FY25E/FY26E. We have cut our EBITDA by 4%/8%/8% for FY24E/FY25E/FY26E, given the drop in realization/t. We value the stock at 12x FY26E (earlier 13x) EV/EBITDA to arrive at our revised TP of INR2,500 (earlier INR2,800). The stock offers an upside potential of 25% from current levels. Reiterate BUY.

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