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Robust volume growth, but realisation drops.

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. 2,094, considering the positive volume outlook and strong focus on expansion.

* Revenue grew by 10% YoY in Q4FY24, mainly driven by volume growth of 19%YoY. However, operating profit declined by 7.5%YoY due to drop in EBITDA margin (-290bps YoY to 15.2%) as realisation declined.

* 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 (waiting for NoC from lenders). This will give access to the central region.

* DBL is expanding its capacity to reach ~50MT (excluding JP acquisition) by FY25 and has a long-term goal to become a pan-India player with a capacity of 110MT by FY31, which will aid for future re-rating. Towards cost efficiency, DBL has expanded its renewable energy capacity to 185MW in FY24, and targets 350MW by FY25.

* The company has guided for a total capex of Rs.100bn during FY24-FY25 and net debt would peak at ~Rs.50bn by FY25 end with a D/E of 0.4x. Given the GoI's strong emphasis on housing & infrastructure, the demand outlook is favourable. We value DBL at 11x FY26E EV/EBITDA (2Yr Avg=12x).

Capacity expansion will support volume growth.

DBL reported revenue growth of 10%YoY, mainly aided by robust growth in volumes (+19%YoY). However, realisation declined by ~7%YoY and expect improvement in cement prices only in H2FY25 due to ongoing election and monsoon quarter. The ongoing capacity expansion (addition of 8MT by FY24, excluding JP acquisition) and the acquisitions will support future volume growth. The improvement in trade mix (65% in FY24 vs. 63% YoY) will support realisation. We factor in revenue growth of ~10% CAGR over FY24-26E, aided by capacity expansion and acquisitions.

Margins declined mainly due to drop in realisation.

EBITDA declined by 7.5% YoY as EBITDA margin dropped by 290bps YoY to ~15.2% largely due to sharp decline in cement prices (7%YoY). Fuel prices corrected by ~30%YoY, leading to a 24% YoY decline in Power & fuel costs. However, the raw material costs per ton increased by 10%YoY due to an increase in slag and fly ash prices. EBITDA/ton declined to Rs. 743 vs. Rs.955 YoY (Rs. 1,140 QoQ). Fuel prices have almost stabilised. DBL is increasing the green power mix, and the capacity has increased to 185MW as of Q4FY24 from 63MW in FY22 and targets to 350MW by FY25 (expects savings of ~Rs. 5–6 per unit). Cement prices are expected to improve post monsoon along with higher freight costs to normalise in the coming quarters. Expect EBITDA/Ton to improve to Rs. 920/ Rs. 1,040 in FY25E/FY26E (Rs. 901 in FY23).

Valuation & Outlook:

DBL’s strong capacity expansion plans to become a pan-India player (~59MT by FY25E, 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 positive outlook on real estate. The stock currently trades at 1Yr Fwd EV/EBITDA of ~11x. We lower our valuation to 11x FY26E EV/EBITDA (2Yr avg=12x) to factor in current pressure on realisation and arrived at a target price of Rs. 2,094, maintaining our BUY rating due to positive demand outlook and recent correction in stock price.

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