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Margin improves…capacity expansion on track…

Dalmia Bharat Ltd. (DBL) is India’s fourth largest cement company, with a capacity of ~44MT; focusing on South (14.1MT), East & North-East (26.7MT) and West (2.9MT).

* We maintain our BUY rating with a revised target price of Rs. 2,416, considering the positive volume outlook and strong focus on expansion.

* Revenue grew by 6% YoY in Q2FY24, mainly helped by volume growth. However, operating profit increased by 55% YoY due to 590bps improvement in EBITDA margin, largely aided by fall in fuel costs.

* Towards cost efficiency, DBL has expanded its renewable energy capacity to 170MW (from 17MW in FY19), and targets 328MW by FY25.

* Ongoing expansion is on track to reach ~47MT by FY24. DBL has a longterm goal to become a pan-India player, with a capacity of 70 -75 MT by FY27 to 110-130 MT by FY31. This could be a major factor for re-rating.

* Additionally, DBL has signed a definitive agreement with Jaiprakash Associates for the acquisition of 9.4 MT of cement at an alluring EV of Rs 56.5 billion. This will give access to the central region.

* The company has guided for a capex of Rs.100bn during FY24-FY25 and net debt would be at Rs.30-40bn by FY24 with a D/E of 0.4x.

* Given the GoI's strong emphasis on housing & infrastructure, and preelection spending, the demand outlook is favourable. We value DBL at 12.5x FY25E EV/EBITDA (2Yr Avg=12x).

Capacity expansion will support volume growth.

DBL reported revenue growth of 6%YoY, mainly aided by growth in volumes. The ongoing capacity expansion (addition of 8MT by FY24, excluding JP acquisition) and the ramp up in the recent acquisitions will support future volume growth. Recently, DBL has taken a price hike of Rs. 40-50 per bag in the east and ~Rs. 30 per bag in the south which will support revenue growth. Further, the premium segment mix improved to 22% vs. 21% QoQ. We factor in revenue growth of ~14% CAGR over FY23- 25E, aided by capacity expansion and ramp up in recent acquisitions.

Margins improved due to fall in fuel price.

EBITDA grew by robust 55% YoY as the EBITDA margin improved by 590bps YoY to ~18.7% on account of fall in fuel price. Fuel prices corrected by ~$60 per ton YoY, leading to a 26% YoY decline in Power & fuel costs. However, the raw material costs per ton increased by 13%YoY due to an increase in slag (+10%YoY) and fly ash (+5%YoY). EBITDA/ton improved to Rs. 950 vs. Rs.653 YoY (Rs. 871 QoQ). However, fuel prices have resurged again recently, but the company has taken price hike recently to mitigate the margin pressure. Further, DBL is increasing the green power mix and the capacity has increased to 170MW as of Q2FY24 from 63MW in FY22 and targets to 328MW by FY25 (expects the green mix to ~36% by FY24 from current 29% and target 100% by FY30 and savings would be ~Rs. 5–6 per unit). We expect EBITDA/Ton to improve to Rs. 1,060 in FY24 (Rs. 901 in FY23).

Valuation & Outlook:

DBL’s strong capacity expansion plans to become a pan-India player (~56MT by FY24E, including JP acquisition, and a long-term target of ~70-75MT by FY27) while maintaining a healthy balance sheet should support a re-rating in valuation. The demand outlook is positive given GoI’s strong focus on infra & housing and pre-election spending. The stock currently trades at 1Yr Fwd EV/EBITDA of ~12x. We value DBL at 12.5x (2Yr avg=12x) FY25E EV/EBITDA and arrived at a target price of Rs. 2,416, maintaining our BUY rating.

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