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Strategic Central India acquisition to drive scale

* Dalmia Bharat (DALBHARA) has announced the acquisition of Jaiprakash Associates’ (JAL) cement assets located in Central India. The transaction includes 3.3mtpa/2.5mtpa clinker/grinding capacity, 99MW of thermal power plant, and railway siding infrastructure at an enterprise value of INR28.5b. With this acquisition, the company’s total cement capacity will increase to 54.7mtpa from 49.5mtpa. Ongoing expansion projects at Belgaum, Pune, and Kadapa are expected to further increase the total capacity to 66.7mtpa by 3QFY28.

* The acquisition is strategically aligned, as it accelerates the company’s aim to become a pan-India cement player from its currently South- and East-focused regions. It has steadily expanded capacity over the past decade through organic and inorganic expansions. The company is among the lowest-cost producers in the industry, supported by one of the lowest variable costs/t and logistics advantage. The company has prior familiarity with these assets, having earlier operated under a tolling arrangement with JAL as part of a longterm clinker supply agreement. The company had also entered into a framework agreement with JAL in Dec’22 for the acquisition of its cement business; however, the transaction could not be completed following JAL’s admission into insolvency.

* Though, we are not changing our estimates, and look forward to the completion of the transaction. The acquisition is expected to drive EBITDA growth of ~3%/7% for FY27/FY28 (compared to current estimates for FY27/FY28), mainly led by volumes. We estimate capacity utilization at ~50%/62% in FY27/FY28 (for the operational period during the year) and EBITDA/t of INR520/770 for FY27/28 from these assets. Net debt is expected to increase to INR58.5b vs. INR32.2b (Exhibit 1), factoring in ongoing organic expansions.

* The industry is facing near-term challenges due to cost pressures, muted price hikes, and higher capacity additions by industry players amid softer demand. In our recent note, we highlighted the company’s strong growth setup, and as the cycle turns, DALBHARA is well-positioned for a swift re-rating. We value the stock at 12x FY28E EV/EBITDA to arrive at our TP of INR2,230. Reiterate BUY. Key monitorables include the timely completion of this transaction, ongoing organic expansions, and capacity ramp-up.

Valuation and view

* We view the acquisition as a positive development for the company’s pan-India aspiration and long-term growth. The transaction provides immediate scale in attractive Central markets. We are not changing our estimates and look forward to the completion of the transaction.

* Based on our current estimates, revenue/EBITDA CAGR stood at ~9%/11% over FY26-28. We estimate a PAT CAGR of only ~3%, mainly due to an increase in depreciation and interest cost amid aggressive organic expansion. Further, we estimate a volume CAGR of ~8% over FY26-28 (vs. ~2% over FY24-26). EBITDA/t is estimated to decline to INR993/t (due to cost pressure) vs. INR1,015 in FY26, but may improve to INR1,081 in FY28, led by cost-saving measures and an expected decline in fuel prices.

* We project the company’s cumulative OCF to increase to INR57.1b over FY27-28 vs. INR43.9b over FY25-26. However, we estimate a cumulative net cash outflow of INR4.9b over FY27-28 vs. net cash outflow of INR2.7b over FY25-26, driven by aggressive capex. The company’s net debt is expected to rise to INR32.6b by FY28 from INR14.2b in FY26. Its net debt-to-EBITDA ratio is estimated at 1.2x vs. 0.9x in FY26E.

* The stock is currently trading at 10x/9x FY27E/FY28E EV/EBITDA vs. its historical one-year forward average EV/EBITDA multiple of 12x. We value the stock at 12x FY28E EV/EBITDA to arrive at our TP of INR2,230. Reiterate BUY.

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